Question

Zoot Ltd is a national fashion retail chain with stores located throughout New Zealand. The company specialises in expensive women’s summer wear. Garments are designed in New Zealand and manufactured in China, using European-sourced fabrics. The availability of competitor products on low-price internet shopping sites, combined with a strong New Zealand dollar, have resulted in several fashion companies closing down.

In preparation for the current year audit, you have ascertained the following information from a phone call to the financial manager:

1. There has been considerable staff turnover in the accounts payable department, including the resignation of the accounts payable manager early in the year. This has caused some delays in processing payments.

2. The company will be switching to a new accounting software system two months before year end.

Required:

a) Identify and explain three industry specific factors that are important to properly understanding Zoot Ltd and its environment and assessing risk.

b) Briefly explain how matters 1 and 2 above will affect your overall planning of the audit.

Answer 1

The answer is required two parts:

a).

The question requires you to identify three industry specific factors important to understanding Zoot Ltd and explain considering its environment while assessing risk.In this case ,Zoot Ltd is a fashion retailer specializing in expensive womens suumer clothing which is a specific product line.Therefore the factors must be specific to the fashion industry and take into account the business environment including internetr shopping sites besides supply chains that depend on conditions in New Zealand,Europe and China.

1. Raw material costs: It should be noted that the fabrics being used in Zoot products is sourced from Europe.While this may ensure a higher quality,the cost involved in processing this fabric from cotton,linen and silk maintains the same or is likely to increase which means Zoot will be unable to completitively price its products to match low cost online retailers whose products are increasingly preferred by consumers.
2. Logistics: The manufacturing of the final product occurs in china which means the raw material must be transported to China and the finished product must be transported to New Zealand.This supply chain is exposed to risks such as the fluctuating price of oil which directly impacts the transportation charges. Which means Zoot not only takes time respond to change in market demand and arrange supply for a new product or more of an existing product,it can also be more expensive since Zoot manages its own supply chain unlike the online retailers who likely have different partnerships that reduce product delivery expenses both to them and the customer
3. Sustainability: The fashion industry in general has been blamed for the use of chemicals dangero7us to the environment,use of manufacturing methods that harm society and the environment.Consumers are more aware of these issues which affect their decisions to purchase from Zoot.Unlike online retailers with greater flexibility to cater to market demand and change in currency value,zoot is not able to sustain its business.

b) Overall planning of audit

While planning an audit,every company requires it to be efficient and useful.it is a practice to train employees in auditing practices but with the constant burden of daily operations,doing a proper audit is likely not a priority in the employees mind.So it is most likely that a haphazard audit which may be erroneous will occur and its results will be unsuitable for any practical purpose but just a waste of time and money.

In the case of Zoot,the considerable staff turnover means there is likely to be staff shortage for an audit and the resigination of the accounts payable manger is a crictical factor when it comes to financial auditing since that mangers inputs are very much required.The precise data about the delayed payments must be carefully checked during the audit in order to get a clear status of the companys standing.

Given that the new accounting system will need verified data to properly function ,I would plan to bring in external auditing team whose sole task would be to conduct a proper audit of the company.This would ensure transparency while allowing business operations to run smoothly and ensure the proper data is available for input to the new accounting system and making crucial business management decisions.