Reference no: EM132826305

Chris has a great passion for fashion and so set up a clothing business in July 2019, with his two friends (Rebecca and Justine) who also have nice fashions. They have named the business 'Street Appeal Ltd' and they are the three Directors of this business.

• Justine was previously the marketing executive for a clothing manufacturer and has worked in the retail sector in America and the UK. Rebecca has worked as an accountant for a medium-sized family taxation practice and has a creative arts degree.
• To help establish the business 'Street Appeal Ltd', they had a friend develop a website which has a number of photos showing fashion designs, fashion materials and fashion accessories for inclusion in Street Appeal's fashion designs. The website allows potential customers to request a quote for a custom made fashion item or a fashion line item through their online store. The website collects prospective customer details and allows customers to make online deposits for their orders and make final payment prior to the despatching of the fashion items.
• There have been many enquiries through the website between July and October, and 1,000 new fashions have been ordered to be made by March 2020. Rebecca has recorded all monies received as revenue in the current year. Rebecca considers all fashions ordered will be made during the current financial year. Also as Rebecca is expecting to help with making the clothing items fashions, she has completed as much of the accounting recording to allow more time for working building fashions. She has calculated the cost of all fashion items, both clothing and accessories, and has recorded this as cost of sales based on the current cost of fashion items ordered. This includes the cost of the materials and labour based on pattern designs. These entries are based on her calculations.
• Street Appeal Ltd stores all fashion materials and equipment in a Factory. In July materials were stored as received from suppliers and thus all goods received from a supplier were stored together and then goods received from another supplier were then stored separately. To locate goods required staff to be aware of the suppliers name and when goods had been received. This storage caused great difficulty in locating materials and at times materials were ordered and received as staff thought there was no stock on hand. It was later found there were materials on hand, they just had not been found by staff. This has resulted in some materials being in greater supply than possibly required. The cost price of these were found to vary depending on when the goods were ordered. Due to these problems, all materials are now stored based on type of material and colour of the item, making it easier to find materials required. This improved storage system was introduced in November 2019.
• Due to the high number of orders of custom made fashion items, Street Appeal staff have been very busy making these items. The making of only commonly sold fashion line items has been limited and the stock on hand of these items has reduced and in many cases staff need to make these items when customers place orders. Chris sees this as a positive situation as he feels that this will reduce levels of out of date fashions on hand.
• As Street Appeal Ltd is so busy, they have approached their bank to borrow $1,000,000 to expand the business further. The bank has requested a qualified auditor to provide an opinion on the financial statements to support the loan application.

Required:

Problem 1: Identify two inherent risks facing Street Appeal Ltd and briefly explain why you consider these to be risks for this business.

Problem 2: Identify two financial report items which based on these case facts, are at a material risk of misstatement and briefly explain why.

Problem 3: Identify for each of the two report items identified in part 2, which assertions are most at risk and why you consider these to be at risk.

Problem 4: Discuss two audit procedures you will include in your audit plan to test for the possible material misstatement for each of the report items listed in part 3

Problem 5: Evaluate Street Appeal Ltd's internal controls and how this would impact on this audit approach.

Problem 6: Make recommendations for four internal control improvements which you feel will make the largest improvement to this business and why they will improve the business.