SCENARIO-2
You are an audit supervisor of Star & Co, planning the finalaudit of a new client, Franker Construction Co, for the year ending31 December 2019. The company specializes in property constructionand providing ongoing annual maintenance services for propertiespreviously constructed. Forecast profit before tax is RO 46 millonand total assets are expected to be RO 53 million which is muchhigher than the balance of previous years. The company has recentlyupgraded their website during the year at a cost of RO 1·1 million.Franker Construction Co’s Finance director has provided you withthe following notes regarding the company -- A full year-endinventory count will be undertaken on 30 September at all the 15building sites where construction is in progress. There is notsufficient audit team resource to attend all inventory counts.Franker Construction Co has also insisted on completing theinventory count as well as the audit work as early as possible sothat they can release their audit report well before time. In themonth of October, the company had installed a new software and hadmigrated the entire pay roll from the old system to new one. Inline with industry practice, Franker Construction Co. offers itscustomers a fiveyear building warranty, which covers anyconstruction defects. Customers are not required to pay anyadditional fees to obtain the warranty. The finance directoranticipates this provision will be lower than last year as thecompany has improved its building practices and therefore thequality of the finished properties. Franker Construction had fewwarranty complaints with customers whose cases come for hearing inthe next week. Franker is confident that they would win the case ifthe audit partner represents as the audit team had earlier helpedin few compliance and internal control implementation and was wellfamiliar with the case details. Star & Co is put in a dilemmaas the audit fees and other consultation fees for the last 2 yearsis overdue.
The finance director has informed you that although an allowancefor receivables has historically been maintained, it is anticipatedthat this can be significantly reduced this month. Information fromlast year’s management accounts of Franker Construction Co’s showsa material overdraft balance. The finance director has confirmedthat there are minimum profit and net assets covenants attached tothe overdraft. A review of the management accounts shows thepayables period was 49 days for November 2019, compared to 92 daysin December 2019. The finance director anticipates that things willimprove, and the number of days will become less.
Question 3: - (based on Scenario 2) As an audit supervisor ofStar & Co, Identify the ethical threats and risk associatedwith the client Franker Construction & Co. and suggestappropriate responses / safeguards
