You are an audit senior of Amarapala Associates (Chartered Accountants) and are planning the audit of Never Give Up PLC(NGP) for the year ending 31 March 2021. The company is a manufacturer of portable music players and your audit manager has already had a planning meeting with the finance director on 6 March 2021. Forecasted revenue is Rs 14,000 Mn and profit before tax is Rs.800 Mn.
She has provided you with the following notes of the meeting:
Audit Planning meeting notes
Inventory is valued at the lower of cost and net realisable value. Cost is made up of the purchase price of raw materials and costs of conversion, including labour, production and general overheads. Inventory is held in three warehouses across the country. The company plans to conduct full inventory counts at the warehouses on 2, 3 and 4 April, and any necessary adjustments will be made to reflect post year-end movements of inventory. The internal audit team will attend the counts.
During the year, NGP paid Rs 210 Mn to purchase a patent which allows the company the exclusive right for three years to customise their portable music players to gain a competitive advantage in their industry. The Rs210 Mn has been expensed in the current year statement of profit or loss.
In November 2020, it was discovered that a significant teeming and lading fraud had been carried out by four members of the sales ledger department who had colluded. They had stolen funds from wholesale customer receipts and then to cover this, they allocated later customer receipts against the older receivables. These employees were all reported to the police and subsequently dismissed. As a result of the vacancies in the sales ledger department, NGP decided to outsource its sales ledger processing to an external service organisation. This service organisation handles all elements of the sales ledger cycle, including sales invoicing and chasing of receivables balances and sends monthly reports to NGP detailing the sales and receivable amounts. NGP ran its own sales ledger until 31 January 2021, at which point the records were transferred to the service organisation.
In December 2020, the Financial Controller of NGP was dismissed. He had been employed by the company for nine years, and he has threatened to sue the company for unfair dismissal. As a result of this dismissal, and until his replacement commences work in April 2021, the financial controllers’ s responsibilities have been adequately allocated to other members of the finance department. However, for this period no supplier statement reconciliations or purchase ledger control account reconciliations have been performed.
In January 2020, a receivable balance of Rs 260 Mn was written off by NGP as it was deemed irrecoverable as the customer had declared itself bankrupt. In February 2021, the liquidators handling the bankruptcy of the company publicly announced that it was likely that most of its creditors would receive a pay-out of 40% of the balance owed. As a result, NGP has included a current asset of Rs 104 Mn within the statement of financial position and other income in the statement of profit or loss.
(a) Describe Amarapala Associate’s responsibilities in relation to the prevention and detection of fraud and error. (4 marks)