Recorder Communications Co （Recorder) is a large mobile phone company which operates a net
Recorder Communications Co (Recorder) is a large mobile phone company which operates a network of stores in countries across Europe. The company’s year end is 30 June 2014. You are the audit senior of Piano & Co. Recorder is a new client and you are currently planning the audit with the audit manager. You have been provided with the following planning notes from the audit partner following his meeting with the finance director.
Recorder purchases goods from a supplier in South Asia and these goods are shipped to the company’s central warehouse. The goods are usually in transit for two weeks and the company correctly records the goods when received. Recorder does not undertake a year-end inventory count, but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month.
During the year the company introduced a bonus based on sales for its sales persons. The bonus target was based on increasing the number of customers signing up for 24-month phone line contracts. This has been successful and revenue has increased by 15%, especially in the last few months of the year. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some customers.
Recorder has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings.
During the year the directors have each been paid a significant bonus, and they have included this within wages and salaries. Separate disclosure of the bonus is required by local legislation.
Required:
(a) Describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the audit of Recorder Communications Co. (10 marks)
(b) Explain the audit procedures you should perform. in order to place reliance on the continuous (perpetual) counts for year-end inventory. (3 marks)
(c) Describe substantive procedures you should perform. to confirm the directors’ bonus payments included in the financial statements. (3 marks)
The finance director of Recorder informed the audit partner that the reason for appointing Piano & Co as auditors was because they audit other mobile phone companies, including Recorder’s main competitor. The finance director has asked how Piano & Co keeps information obtained during the audit confidential.
Required: (d) Explain the safeguards which your firm should implement to ensure that this conflict of interest is properly managed. (4 marks)
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