Both questions are compulsory.
Total marks for Section 3 is 40 marks.
Recommended time for the section is 72 minutes
Question 06
You are the audit senior for the audit of Auto Mart PLC (AM) for the year ended 31 March 2020. You have gathered the following information during the planning stage of the audit.
AM is engaged in assembling motor cars for the domestic market under the brand name of “Saga”. AM imports more than 60% of it’s vehicle parts from China. The balance 40% is imported from a company in Bangladesh that is owned by a Director of AM.
The company in Bangladesh also imports most of its raw materials from China. Due to the COVID-19 pandemic which began in early-January 2020, the company had brought in restrictive measures when trading with China. This has resulted in a shortage of raw material causing low production during the last quarter of the year ended 31 March 2020.
AM sells its vehicles through a dealer network spread across the country. A significant drop in sales has been experienced during 31 March 2020 due to an increased supply of low-priced imported second hand vehicles.
AM runs three service stations at which Saga vehicles are serviced and repaired. These service stations accumulate large quantities of used oil which is disposed into adjacent bare lands. During a discussion with the Factory Manager you have realised that AM has been sued by the Environmental Authority for breach of legislation regarding the disposal of harmful waste. The law requires AM to clean up the contaminated lands.
AM has a significant amount of plant and machinery which is used to assemble its products. These machines have been used in the operation for more than 10 years. During the year, a comprehensive review of each component of plant and machinery has been performed in order to check how the efficiency can be improved. During this review an assessment was made as to whether a minor repair, extensive refurbishment or a complete replacement is required. The review report has revealed that AM had incurred Rs. 2 billion as expenses for plant and machinery. You have noted that Rs. 2 billion has been capitalised under property, plant and equipment.
You have also gathered the following information during the execution of the audit.
Legal cases
AM has been sued by a number of customers because of a brake failure in vehicles that they have sold during 31 March 2019. This has occurred due to a substandard part imported from the Bangladesh company. AM is trying to settle these claims out of court to avoid bad publicity. As per the correspondence with the customers who have lodged claims, the estimated claim expenses would amount to Rs. 150 million.
Rebate expenses
AM is giving rebates to their dealers. Your team is analysing the current year revenue and rebate expenses. The company policy from the year 2015 onwards is to limit the rebate expense to 5% of the invoice value. During the risk assessment process, your team has not identified any reason for change in the rebate percentage during the year from the past years. However, your team considered that some variation is possible due to the nature of that expense.
The following information in respect of the rebate expense for the year ended 31 March 2020 and previous four years have been gathered by your team.
Year ended 31 March | 2016 | 2017 | 2018 | 2019 | 2020 |
| Rs. million |
Gross revenue | 8,790 | 9,870 | 10,230 | 10,480 | 9,560 |
Rebate expense | 440 | 486 | 512 | 532 | 480 |
Required:
(a) Recognise four (04) key business risks that existed at AM during 31 March 2020. (6 marks)