Reference no: EM132950039

Question - Teds Ltd is a private limited company that manufactures cuddly teddy bears. The company was established in 1985 and was until recently owned and managed by the Rufus family. In 2016 the Rufus family sold 60% of their shareholding to an outside investor; Mark and Janet Rufus remain 40% shareholders and continue to manage the company. As a condition of the sale the company must now be subject to an annual external audit.

Since 2010 the company has been outsourcing its manufacturing to China in order to cut costs and ensure its products remain competitively priced on the global stage. The product range has expanded since the decision to outsource and the company has successfully launched its products in the US and in China. The decision to outsource the manufacturing was difficult for the Rufus family who had prided themselves on being British manufacturers but it was encouraged by their bank manager and other advisers owing to the considerable cost savings to be made. Mark and Janet Rufus visited China in 2010 in order to inspect the two companies involved in their manufacturing, but have not visited since. They communicate quarterly with the companies and are reassured by their reputation and the fact they have had few issues in terms of customer complaints over product quality. Sales to UK retailers are distributed from the UK warehouse but sales to the US and China are distributed direct from China.

Product sales are primarily to large retail stores and sales executives are required to build close relationships with the stores in order to ensure continued business. All executives are authorised to offer large discounts to secure sales although these should be on the condition of payment in advance of distribution. The sales team is based primarily in the UK, although there are and two employees in the US and one located in China. Teds Ltd offers members of the sales team competitive terms with large bonuses based on sales figures offered each year.

The sale of 60% of the company's shares in 2016 was in order to bring in much needed funds. The Rufus family had been relying on bank loans and a generous overdraft facility prior to this. However, the bank had begun to restrict and tighten their borrowing terms and so were no longer prepared to offer long term finance to Teds Ltd. As at 31st December 2017 the company has an outstanding bank loan of £500,000 and a £300,000 bank overdraft facility with an interest rate of 14% per annum. The outside investor who purchased the shares is not taking any part in the management of the company but has insisted on an annual external audit.

Required - Identify potential audit risks associated with the audit of Teds Ltd and detail the additional information you would require as auditors in order to assess these risks.