Reference no: EM133247244
You are the audit supervisor of Snake and Sons and are currently planning the audit of an existing client, Daniel Moore Co (Danmoore), whose year end was 30 April 2020. Danmoore is a pharmaceutical company, which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of £39.16 million and profit before tax of £6.49 million.
Danmoore's previous finance director left the company in December 2019 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A Modern finance director was appointed in January 2020 who was previously a financial controller of a bank, and she has expressed surprise that Snake & Sons had not uncovered the fraud during last year's audit.
During the year Danmoore has spent £1.8 million on developing several Modern products. These projects are at different stages of development and the draft financial statements show the full amount of £1.8 million within intangible assets. In order to fund this development, £2.0 million was borrowed from the bank and is due for repayment over a ten-year period. The bank has attached minimum profit targets as part of the loan covenants.
The Modern finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of May over £0.55 million of goods sold in April were returned.
Snake & Sons attended the year-end inventory count at Danmoore's warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled.
During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of £231,000.
(1) State Snake and Sons' responsibilities in relation to the prevention and detection of fraud and error.
(2) Describe SIX audit risks, and explain the auditor's response to each risk, in planning the audit of Daniel Moore Co.
(3) Analyse the following components of audit risk
i. inherent risk
ii. control risk
iii. detection risk