West Swan Manufacturing Ltd
You are an Audit Senior currently planning the 30 June 20X2 audit of West Swan Manufacturing Ltd (WSML). WSML uses specialised machines to custom design and manufacture lifting, handling and associated equipment for the Mining, Oil and Gas, Military and Construction Industries. You are aware that WSML made a large investment in a new manufacturing process in January 20X2 to place itself in a more competitive position. Your analytical procedures indicate a significant increase in acquisitions of machinery. 70% of the suppliers from which WSML sources components and parts to manufacture its hydraulic mining shovels are owned by US firms, which demand payment in $US prior to the parts being supplied. In January, WSML 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. The human resources department at WSML is responsible for selecting and appointing employees, approving pay rates and promotions, and processing employee terminations. The payroll department is responsible for preparing the weekly wages based on the information from the human resources department and according to hours worked by each employee. WSML has a number of long-term contracts to deliver goods throughout Australia. The company operates a fleet of large trucks and has a number of permanent drivers who are assisted by other drivers on short-term contracts during busy times of the year (such as the three months prior to Christmas). Drivers work long shifts and most of the driving is done at night. During busy times the human resources department falls behind with processing paperwork related to the short-term contract drivers. In particular, there are constant complaints from the drivers that they have to wait several weeks after they start work for their first pay. When testing the payroll process you discover that the complaints from the drivers are justified; it takes on average three weeks from the date the driver starts work for the relevant authorization for the driver’s pay to be received by the payroll department. However, you also find that on average drivers are paid for one additional week after they actually leave the company because the human resources department does not record the termination date accurately. The payroll department tells you that, because of the confusion, no provision is made for accrued wages at year-end. WSML exports large dozers to mining firms in China. Tight checks by Australian custom officials have delayed several shipments of dozers. These delays have angered Chinese customers who are threatening to deduct 40% from the amounts owing as compensation for lost time. WSML’s main competitor, Complete Manufacturing Limited (CML) has taken advantage of this and started supplying dozers to the Chinese market from its New Zealand branch for quicker deliveries and at prices lower than those offered by WSML. During the period, the Australian dollar has remained steady against the Chinese Yuan, although it fell by about 5% 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 four weeks for the charter vessels to travel from WSML’s shipyard at Westmantle Bay to China. A recent downturn in the Chinese economy is affecting forward orders, which have fallen by 15%. Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to WSML. When making your risk assessment:
(a) Identify four (4) key accounts from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the four (4) accounts identified. In your explanation, please mention the key assertion(s) at risk of material misstatement for each of the accounts identified.