Reference no: EM133042506
Question - Great Story Sdn Bhd is a new audit client, a limited liability company selling books through mail order and online ordering on the Internet. As the audit manager for Great Story Sdn Bhd, you are preparing the audit planning of the company for the year ended 31 December 2020. The meeting held with the directors during the audit preliminary stage has brought the following information into account:
Sales generated by the company are in excess of RM85 million with net profits of RM4 million. The total profits are currently earned in the mail order division, even though the Internet division is expected to return a small net profit next year. Sales revenue is growing at the rate of 20% p.a. while the net profit has remained almost the same for the last four years.
The directors propose to expand the range of goods sold through the Internet division to include toys, garden furniture and fashion clothes for the next year. They believe that once a product has been sold on the Internet, then it will be a way for the other products to be known as well.
The accounting system used by the mail order division in recording sales is quite old and relies on extensive manual inputs to generate the order information received. Recently, there were some errors related to the orders input and the invoicing of goods following dispatch. The directors remain with the vies that the accounting system produces materially correct figure and no need to waste time in identifying the minor errors. The directors' best friend who was appointed as the company's accountant even without proper qualification, agrees with this view.
As related to the expansion plan, the directors estimate that approximately RM30 million of bank loan is required to partly finance the enhanced website as well as to serve as working capital to increase the stocks level. A meeting with the bank has been scheduled for three months after the year end. The directors expect an unmodified auditor's report to be signed prior to this time.
Required -
a) Briefly describe THREE (3) individual components of audit risk as prescribed under International Standards on Auditing (ISA) 200.
b) Based on the case, critically evaluate any FOUR (4) circumstances that give rise to audit risks associated with Great Story Sdn Bhd.
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