Question

You are an Audit Senior currently planning the 30 June 20X8 audit of Steel Limited, an Australian-owned company that produces and exports steel to India. At a recent planning meeting with Steel Limited’s senior staff, you obtained the following overview of this year’s operations:

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

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

70% of the suppliers from which Steel Limited sources it’s iron ore stock are owned by US firms, which demand payment in $US prior to the iron ore being supplied. In January, Steel Limited upgraded its accounts payable system to a fully integrated package that automatically updates the general ledger when creditor entries are made. Some problems have been experienced 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-end rollovers have also proved problematic, with creditor balances being incorrectly re-set to zero at the first of every month. This has required each creditor’s history to be re-entered manually each month, a time-consuming process that is taking accounting staff away from their normal duties.

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

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

(a) Identify three (3) key account balances from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the three (3) accounts identified. In your explanation, please mention the key assertion(s) at risk of material misstatement and the components of the audit risk model affected for each account identified.

(b) Identify how the audit plan will be affected and recommend specific audit procedures to address the risks associated with each account identified

Answer 1