Reference no: EM132005462

AUDITING ASSIGNMENT - ECOCHEMICALS LTD

SECTION I - PLANNING THE AUDIT

Your audit firm has been successful in a recent tender for the audit of Ecochemicals Ltd (ECL). ECL is a closely held company that has existed since 1960. The tendering process was very aggressive, and the previous auditors have so far not allowed you access to their working papers for last year. The previous year's audit report gave an unqualified opinion. Your team has been assigned to the 30 June 2018 audit of ECL and has gathered the following information:

• ECL operates in a highly regulated and competitive industry and is a small manufacturer of chemical products. Its head office and factory are in Queensland, but it has sales branches and warehouse facilities all over Australia.
• The company's five principal officers (the managing director, the chief financial officer, the sales manager, the product development manager, and the factory manager) own substantially all its shares and manage the company in a highly individualistic manner.
• The company products are divided into two categories - 'Type X' and 'Type Y'. The products compete with several locally produced and imported products. Due to extensive competition, the products are subject to a substantial obsolescence risk. If a product becomes obsolete, the company is often able to offload the chemicals to other manufacturers for reprocessing; however, they will generally only receive 30c in the dollar for the product.
• The company's accounting functions are concentrated at the head office; the sales branches and warehouses maintain only payroll, petty cash, and inventory records, which are subject to review by the head office.
• ECL is currently under investigation by the Environmental Protection Agency for a significant spill of toxic chemicals into the nearby river. The media have also reported that senior employees were allegedly responsible for this large spill.
• Management informs you that during the year the internal auditors discovered that a substantial amount of stock had disappeared from a small warehouse of your client. A number of local managers have subsequently resigned, although there were no prosecutions. The losses equalled 2 per cent of ECL's operating profit.
• A new bank loan of ECL for $50 million is contingent on it producing at least break- even results.
• Financial statements for the years ended 30 June 2018, 2017 and 2016. (The 2017 and 2016 figures were those reported in the audited financial report, but the 2018 figures were as prepared by the chief accountant prior to the audit.) (ECL_FinST.xls)

You are required to:

a) Draft an audit planning memorandum highlighting:

i) The legal and other considerations that need to be considered by your firm as the new auditor of ECL;

ii) The major risk areas to be addressed in the audit of ECL for the year ended 30 June 2018. Give reasons why the identified areas are considered to be high risk. Support your answer by calculation of appropriate ratios and/or comparisons. The use of Microsoft Excel to calculate ratios is encouraged.

SECTION II - PURCHASES AND PAYMENTS SYSTEM

As part of your interim review of ECL you have completed a 'walk-through' of the procedures involved in the purchases and payments cycle. The following is a summary of the procedures you have documented on your file:

1. The warehouse manager is responsible for placing orders for chemical 'ingredients'. Because of the bulk quantity discounts, he will usually place an order for three months' ingredients when there is one month of ingredients left. He is able to determine how much the company uses in manufacture each month by reviewing the inventory records held at the warehouse.

2. To order, the warehouse manager contacts any of the approved suppliers and places an order over the phone. No record is kept of the conversation, nor does the warehouse manager require any approval. To make sure he doesn't reorder in error he 'ticks' the inventory ledger and writes the date of order next to the product number.

3. When goods are received the warehouse assistants check the delivery note against the ingredient coming in and then let the deliverer pump the ingredient into the company's storage tank. At no point do they check the actual quantity received. The warehouse assistant then gives the delivery note to the warehouse manager. The warehouse manager will then post a journal entry to the inventory system by keying the entry to the terminal.

4. When the journal is accepted, the computer will generate a journal number. (Note: the journal posted by the system is Dr Raw materials inventory; Cr Creditor.) The warehouse manager writes the journal number onto the delivery note and sends it to the accounts payable clerk at head office. The accounts payable clerk files the note by supplier.

5. The accounts payable clerk at head office receives all supplier invoices. On receipt of the invoice the clerk checks the details to the delivery note received from the warehouse. If there are no discrepancies she will prepare a cheque requisition for the invoice and forward the cheque requisition, with the invoice and delivery note attached, to the financial controller for authorisation. If the payment is over $20000 the financial controller must forward the requisition to the MD for authorisation.

6. The financial controller and/or MD signs the cheque requisition to indicate authorisation and forwards the documentation to the banking clerk who keys the payment into the general ledger (the journal posted by the system is Dr Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the cheque requisition. She then files the cheque requisition together with supporting documentation by cheque requisition number.

7. All cheques are printed and signed (counter stamped) by the computer. When they have been printed they are returned to the banking clerk who checks the details and then sends them to the supplier.

You are required to:

b) Discuss the strengths and weaknesses of the purchases and payments system of ECL.

c) For each strength identified in (b), indicate tests to be performed to test the controls.

d) For each weakness identified in (b), indicate the likely impact of the weakness on the audit risk and test(s) which can be used to minimise this risk.

SECTION III - CASE STUDY USING ACTIVE DATA FOR EXCEL

John Alexander, the financial controller of Ecochemicals Ltd (ECL), has provided you with the following computerised data files:

• Authorised Suppliers (ECL_Supplier.xls)
• Random sample of ECL's purchases (extracted under the supervision of a member of your team; ECL_Purch_Trans.xls)

You are required to:

e) Assume that your audit team has assessed the control risk pertaining to the purchases and payments system of Ecochemicals Ltd (ECL) to be high.

Use the Active Data for Excel to conduct a CAAT interrogation of the ECL's purchase transactions.

Submit the following documentation:

• all Active Data sheets generated,
• a report summarizing the interrogation and further implications for the audit of purchases and payments system of ECL.

Attachment:- Assignment Files.rar