You are an audit supervisor of Tom & Tommy and are planning the audit of your client, Smart Clean Co. which manufactures cleaning products. Its year end was 31 July 2021 and the draft profit before tax is $33·6 million. You are supervising a large audit team for the first time and will have specific responsibility for supervising and reviewing the work of the audit assistants in your team.
Smart Clean Co. purchases most of its raw materials from suppliers in Africa and these goods are shipped directly to the company’s warehouse and the goods are usually in transit for up to three weeks. The company has incurred $1·3 million of expenditure on developing a new range of cleaning products which are due to be launched into the marketplace in November 2020.
In September 2020, Smart Clean Co. also invested $0·9 million in a complex piece of plant and machinery as part of the development process. The full amount has been capitalised and this cost includes the purchase price, installation costs and training costs. This year, the bonus scheme for senior management and directors has been changed so that rather than focusing on profits, it is instead based on the value of year-end total assets. In previous years an allowance for receivables, made up of specific balances, which equaled almost 1% of trade receivables was maintained. However, the finance director feels that this is excessive and unnecessary and has therefore not included it for 2021 and has credited the opening balance to the profit or loss account. A new general ledger system was introduced in May 2021; the finance director has stated that the data was transferred, and the old and new systems were run in parallel until the end of August 2021.
As a result of the additional workload on the finance team, a number of control account reconciliations were not completed as at 31 July 2021, including the bank reconciliation. The finance director is comfortable with this as these reconciliations were completed successfully for both June and August 2021. In addition, the year-end close down of the purchase ledger was undertaken on 8 August 2021.
Required:
i. Describe SIX audit risks you could identify with Smart Clean Co.
ii. Explain the auditor’s response to each risk, in planning the audit of Smart Clean Co