You are an Audit Senior currently planning the 30 June 20X8audit of Steel Limited, an Australian-owned company that producesand exports steel to India. At a recent planning meeting with SteelLimited’s senior staff, you obtained the following overview of thisyear’s operations:

Tight checks by Australian custom officials to halt thesmuggling of scrap steel have delayed several shipments of steel.These delays have angered Indian customers who are threatening todeduct 20% from the amounts owing as compensation for lostproduction time.

One of Steel Limited’s customers, Construction Limited, isclaiming that the latest batch of steel it received was found tohave very high levels of cheap additives such as boron. Suchadditives used to reinforce concrete can affect the metal’sstrength when it is welded. Boron can make welds more likely tocrack, weakening structures. Construction Limited is refusing topay its account, which is allegedly five months overdue. SteelLimited has claimed to have launched an investigation into theallegations, but as yet not been able to substantiate them.

70% of the suppliers from which Steel Limited sources it’s ironore stock are owned by US firms, which demand payment in $US priorto the iron ore being supplied. In January, Steel Limited upgradedits accounts payable system to a fully integrated package thatautomatically updates the general ledger when creditor entries aremade. Some problems have been experienced with the creditorsledger, which is split into $US and $AUD amounts. In some cases,$US amounts have been recorded as $AUD, resulting in inaccuratecreditor balances. Month-end rollovers have also provedproblematic, with creditor balances being incorrectly re-set tozero at the first of every month. This has required each creditor’shistory to be re-entered manually each month, a time-consumingprocess that is taking accounting staff away from their normalduties.

During the period, the Australian dollar has remained steadyagainst the Indian Rupee, although it fell by about 3% against theUS dollar. Debtors are invoiced in $US at the time of shipment, andpayment is received in $US one month after the shipment isdelivered. It takes around six weeks for the charter vessels totravel from Steel Limited’s shipyard at Ausfold Bay to India. Arecent downturn in the Indian economy is affecting forward orders,which have fallen by 15%.

Required: Prepare a memorandum to the audit manager, outliningyour risk assessment relating to Steel Limited. When making yourrisk assessment:

(a) Identify three (3) key account balances from the informationprovided that are subjected to an increase in audit risk. Brieflyexplain what factors increase the audit risk associated with thethree (3) accounts identified. In your explanation, please mentionthe key assertion(s) at risk of material misstatement and thecomponents of the audit risk model affected for each accountidentified.

(b) Identify how the audit plan will be affected and recommendspecific audit procedures to address the risks associated with eachaccount identified.