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Roadster Ltd: Auditing Risk, Accounts Affected, and Audit Plan

Roadster Ltd operates a road maintenance company. Consider the following information.
1. Your firm has just been appointed as the auditor of Roadster at its annual general meeting. During your planning of the audit, you notice that Roadster is an unlisted public company and its directors do not consider it to be a reporting entity. Roadster has prepared special-purpose financial reports for the past 5 years. It has significant bank debts and is required to lodge audited financial statements with its bankers within 90 days of year-end.
2. Roadster recently won a substantial contract to perform road maintenance work for the Queensland government for the next 3 years. As a result of winning the contract, to meet the increased demands and satisfy the specialised nature of the work for the government, Roadster purchased additional machineries. These new machineries have an expected life of 10 years.
3. Roadster is also involved in the manufacturing of backyard water tanks. A revolutionary process developed 5 years ago has enabled Roadster to build a tank far superior to any of its competitors, at half the price. It has therefore dominated the market over the past few years. However, you recently read a weekend newspaper in which you saw an article previewing Roadster's main competitor's new tank. It is made of a new material called Lycrafon, and it will be superior to Roadster's tanks and cost 25% less.

Required
For each of the situation above,
(a) Identify and discuss why it represents a risk.
(b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan.
(c) Identify how the audit plan will be affected by the risk/s and recommend specific audit procedures to address these risks.

Solution Preview

Roadster Ltd operates a road maintenance company. Consider the following information.

1. Your firm has just been appointed as the auditor of Roadster at its annual general meeting. During your planning of the audit, you notice that Roadster is an unlisted public company and its directors do not consider it to be a reporting entity. Roadster has prepared special-purpose financial reports for the past 5 years. It has significant bank debts and is required to lodge audited financial statements with its bankers within 90 days of year-end.

(a) Identify and discuss why it represents a risk.

Directors does not consider the firm as reporting entity (so won't take it seriously)
Unlisted public company (less sophisticated business and risky market)
No prior GAAP audit (first year audit)
Experienced only with special purpose financial reports (may be inexperienced with full GAAP requirements)
Quick year end turn around (time pressure)
High debt (risk of business failing due to high cost of debt and need to repay)
All of these are factors that indicate high inherent risk. That is, the aspects of the firm, its history, its condition and its management create audit risk.

(b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in ...

Solution Summary

Your tutorial is 436 words and gives a bullet list of ideas for risk and a few sentences of commentary about how the audit plan would be adjusted for these risks.

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