Apricot Company sells all of it IT equipment to multinational clients, with 75% being sold
to a multi-million IT dealer. The company has a one-year contract to be the sole supplier
of IT equipment. In order to secure the contract, the company reduced prices and offered
100 days credit period, while its normal credit period is 28 days, which is an equivalent of
month.
Currently, Apricot Company has strategically reduced the level of products directly
manufactured and rather started to import significant amount of its IT equipment from
India. Nearly 65% of the IT equipment is imported and 35% manufactured. Purchase ordersfor imports are
made five months in advance and goods can be in transit for up to three
months. Apricot Company accounts for the inventory when it receives the goods.
An assessment show that Apricot Company has an equipment manufacturing plant which
is now redundant and also assessed to have minimal scrap value.
To avoid the disruption of a year-end inventory count, Apricot Company has this year
introduced a continuous inventory counting system. Apricot Company divided the
warehouse into 12 areas, and each of these are to be counted once within the year. At the
year-end, it is proposed that the inventory will be based on the underlining records.
Traditionally, Apricot Company has maintained an inventory allowance based on 2% of
the inventory value, but management feels that as inventory is being reviewed more
regularly, it no longer needs this allowance.
In January 2019 Apricot Company had a dispute with its finance director (FD) and he was
forced to immediately leave the firm. In his place, the company has asked the financial
controller to take over the role temporarily, while they recruit a permanent replacement.
The old FD has notified Apricot that he has intentions of suing for unfair dismissal. The
company is not proposing to make any provision or disclosure for this, as they are confident
the claim has no merit.
You are required to:
i. Explain the audit risks identified at the planning stage of the audit of Apricot
Company. 4 marks
ii. Discuss the importance of assessing risks at the planning stage of an audit.
3 marks
iii. Describe THREE substantive procedures the auditor of Apricot Company
should perform at the year-end in confirming each of the following:
(1) The valuation of inventory
(2) The completeness of provisions of contingent liabilities