PROFESSIONAL AUDITING SECTION I PLANNING THE AUDIT Identification of main risk areas and reasons thereof: · Business Risk · Inherent Risk ECOCHEMICALS LTD SECTION I PLANNING THE AUDIT Your audit firm...

see attached file.


PROFESSIONAL AUDITING SECTION I PLANNING THE AUDIT Identification of main risk areas and reasons thereof: · Business Risk · Inherent Risk 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 breakeven 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 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.