Identify and describe the inherent risk

Reference no: EM132738882

Question - You are the Audit Senior at Australian Accountants and have been assigned to the audit of New Wallets Limited (PML) for the year ending 30th June 2020. NWL manufactures and sells wallets for both men and women. NWL manufactures all its products at its Malaga factory in Perth and sells via its retail outlet located in Osborne Park. 45% of NWL's sales are to contractors selling fashion accessories in three West Australian cities, namely, Kalgoorlie, Leinster and Margaret River. NWL is listed on the Australian Securities Exchange and Australian Accountants has been its auditor for several years.

In recent years, NWL has been finding it difficult to meet its projected profit forecasts due to increased competition from new local competitors, imported products and online shopping; the increasingly high Australian dollar; and the impact of the COVID-19 induced global economic crisis on consumer spending.

During the planning and risk assessment phase of the audit you become aware of the following matters relating to NWL:

1. The aged trade accounts receivable listing indicates that the percentage of accounts receivable exceeding 90 days has jumped from 15 per cent to 42 per cent during the last 12 months. The credit manager has indicated that this is because some of NWL's customers are currently experiencing financial difficulty.

2. In order to reduce costs, NWL changed one of its major suppliers of leather in February 2020 to a cheaper overseas supplier. However, the number of product returns has increased significantly since April 2020, and your discussions with management have indicated that the increased returns have involved customer complaints concerning the quality of the product.

3. Your review of NWL's payroll system has indicated that when an employee is hired or terminated, the payroll clerk immediately prepares the paperwork and enters the information into the master file of the payroll computer system.

Required -

(a) Identify and describe the inherent risk, control risk and fraud risk factors affecting NWL.

(b) Identify how the audit plan will be affected for sales/accounts receivables. Recommend specific audit procedures to address the risks identified in the sales/accounts receivables area.

Reference no: EM132738882

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