Appliance Central PLC is a listed company which markets and sells a variety of electrical equipment including, but not limited to: television and audio equipment; laptops; iPads and tablets; storage devices; printers and scanners; phones; iPads and varied electrical accessories. Most of this equipment is sourced from the far East. The company was founded in 1988 and is based in Oxford, United kingdom. It owns and operates over 25 retail stores countrywide but also sells its product via an e-commerce website.
The company is audited by Mcknee and Associates, a firm of Chartered Certified Accountants. The audit manager for Appliace Central Plc is Emmanuel Stevens who has been the lead auditor for this client for the last three years. The team is under pressure to complete this year’s audit before March 15, 2013
The following matters have arisen during the audit of the financial statements for the year up to 31 December 2012, which is ongoing.
a) The company has an overdraft facility with the Beardsley Bank Plc of £10 million. The overdraft in the financial statements to 31 December 2012 is £8.5 million. The facility is due to expire on 31 March 2013 and the directors of Appliace Central have started negotiations with their bankers for a renewal of the facility and to increase the amount to £15 million. The bank has indicated that it is awaiting the outcome of the financial statement audit as well as a 12 month cash flow forecast before making its decision.
b) Due to worsening economic conditions and the bankruptcy of Appliace Central’s main competition. High-Street Electricals Plc in October 2012: the company restructured the retail shops, such that they are now grouped regionally and report into seven newly appointed regional managers. The regional managers have been set challenging sales and profit targets and have been offered substantial bonuses should they achieve (or even exceed) the set targets.
c) the e-commerce system was upgraded I June 2012, in order to reach a wider clientele by making online easier. The upgrade was done in-house, by the IT department of Appliace Central Plc. However, there have been concerns about how it links to the warehouse and payment systems. A manual work-around is currently being used to reconcile online orders and sales to the main finance systems.
d) The procurement team of eight, based at the end office on Oxford, has been recently suspended, after allegations of incomplete payments where brought against the company by one of the suppliers from Taiwan. The Taiwanese company is suing Appliace Central for £7.5 million (including interest ) on the grounds of breach of credit terms and outstanding payment for six months. However, company records show that all payments to date have been made fully, and within the agreed credit limits. The procurement team were suspended in order to allow the internal audit team carry out thorough investigation.
e) The draft accounts (unaudited ) for the year bellow: 1. Sales= £450 million (2011: £390 million), 2. Profit before tax= £44 million (2011: £28 million), 3. Inventory = £285 million (2011 : £211 million), 4. Trade debtors = £56 million (2011:£ 37 million), 5. Trade creditors = £120 million (2011: £80 million)
(Note: comparative figures for the prior year are shown are shown in brackets).
Acting as the lead auditor , Emmanuel Stevens, prepare a report to the Audit Engagement partner in which you address the following:
1. Define fraud ( in the auditing context) and discuss the auditor’s responsibilities with regard to fraud during the annual audit of financial statements of a company.
2. Identify and explain the fraud risk factors that the audit team should consider when conducting the audit of Appliance Central Plc.
3. Discuss the audit enquiries you would make of senior management at Appliace Central regarding the procurement cycle and the likelihood of a successful outcome of the lawsuit from the Taiwanese company.
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