You are an Audit Senior currently planning the 30 June 20X8audit of Almond Limited, an Australian-owned company that producesand exports Almond milk to China. The milk is subjected toultra-high temperature (UHT) pasteurization processing before beingpackaged in cartons so that it can last six months at ambienttemperatures if unopened. At a recent planning meeting with AlmondLimited’s senior staff, you obtained the following overview of thisyear’s operations: Tight checks by Australian custom officials havedelayed several shipments of Almond milk. These delays have angeredChinese customers who are threatening to deduct 20% from theamounts owing as compensation for lost production time. AlmondLimited’s main competitor, Tasty Milk has taken advantage of thisand started supplying to the Chinese market from its New Zealandbranch for quicker deliveries and at prices lower than thoseoffered by Almond Limited. One of Almond Limited’s customers, SuperDairy Limited (SDL), is claiming that the latest batch of milk itreceived was found to have very high levels of carrageenan, aseaweed derivative commonly used as a stabilizer in beverages. Thepresence of carrageenan has been widely associated withgastrointestinal inflammation. SDL is refusing to pay its account,which is allegedly six months overdue. Almond Limited has claimedto have launched an investigation into the allegations, but as yetnot been able to substantiate them. 60% of the suppliers from whichAlmond Limited sources it’s almonds are owned by US firms, whichdemand payment in $US prior to the almonds being supplied. InJanuary, Almond Limited upgraded its accounts payable system to afully integrated package that automatically updates the generalledger when creditor entries are made. Some problems have beenexperienced with the creditors ledger, which is split into $US and$AUD amounts. In some cases, $US amounts have been recorded as$AUD, resulting in inaccurate creditor balances. Month-endrollovers have also proved problematic, with creditor balancesbeing incorrectly reset to zero at the first of every month. Thishas required each creditor’s history to be re-entered manually eachmonth, a time-consuming process that is taking accounting staffaway from their normal duties. During the period, the Australiandollar has remained steady against the Chinese Yuan, although itfell by about 3% against the US dollar. Debtors are invoiced in $USat the time of shipment, and payment is received in $US one monthafter the shipment is delivered. It takes around four weeks for thecharter vessels to travel from Almond Limited’s shipyard atDockland Bay to China. A recent downturn in the Chinese economy isaffecting forward orders, which have fallen by 15%. A team ofinternal auditors was hired 10 months ago by Almond Limited toimprove on its existing internal control. The process of revampingthe internal control has been dragging because the CEO has kept ondeclining the internal auditors’ suggestions for improvement. Theaccountant of Almond Limited has been notorious for finding gaps inthe legislations in order to make its clients’ financial statementslook presentable as desired by the clients themselves. In the pastfew years, Almond Limited has always been required by theAustralian Tax Office to provide additional supporting informationafter the lodgement of its tax returns.
Required: Prepare a memorandum to the audit manager, outliningyour risk assessment relating to Almond 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.
