Westinghome Ltd is a large listed company which specialises in the manufacture of whitegoods and other electrical appliances. It is late April 2012 and you are currently planning the 30 June 2012 audit. The auditor's report is due to be signed on 20 July 2012. During your planning, the following independent and material situations come to your attention:
1.On 1 January 2012, Westinghome signed a 3-year contract with KP Pty Ltd for the supply of cardboard packing boxes for its entire range of products. KP was selected as an exclusive supplier after an exhaustive tender process. One of KP's two directors is Ms M, the wife of one of Westinghome's directors, Mr M. Company minutes reveal that Mr M did not take part in either the preparation of the tender documents or the selection of the successful tenderer. You note that details of this contract were omitted from the preliminary list of related party transactions supplied to you by the financial controller.
2.Westinghome introduced a new system for the control of inventory on 1 January 2011. The company performed extensive testing on this new system and management was convinced that it was operating effectively. This system has a utility that can produce many specialised reports for internal use by management. The system is a perpetual inventory system; management decided that a year-end stock take would no longer be required and instead decided to perform monthly cyclical counts to ensure the system was functioning correctly.
3.During the year ended 30 June 2011, Westinghome changed several of its accounting policies. One of the policies changed was accounting for employee entitlements. The effect on the 30 June 2011 financial statements was immaterial and so it was not disclosed, although it was expected to have a material effect in subsequent years. The financial controller is new to the company and appears to be unaware that recent changes have occurred in accounting policies.
4.In 2010, Westinghome introduced a 'budget buster' range of small electrical appliances. The range was introduced to recapture the lower end of the appliance market, which Westinghome was slowly losing to cheaper imported products. Over the last 3 years, Westinghome began receiving reports that some budget buster electric kettles had been giving their users small electric shocks. Some of these kettles are still covered by warranty.
Required:
a.Discuss how your audit plan and audit approach would be affected as a result of each item.
b.Where possible, relate the effects noted in (a) to specific financial statement assertions.