Your name is Thom Croft and you are a recently-promoted audit manager in Cup & Co, a firm of Chartered Certified Accountants. Richard Hill is a senior partner in the firm. You have just received the following email from him.
To: Thom Croft From: Richard Hill Subject: Matthew Manufacturing audit
Thom
As you know, we have only recently been appointed to the audit of Matthew Manufacturing (MM), a limited liability company. It is a glass business with 100 employees, manufacturing glasses, jugs and vases.
I would like you to prepare a memorandum for me setting out the business and audit risks relating to this client, and the kind of audit strategy you feel should be adopted in the audit, stating why you have chosen that strategy, and why you have not chosen other possible strategies.
MM sells glassware predominantly to a large high street retailer, but also sells directly to a number of local, cheaper retailers. The glassware sold to the high street store must be designed to their specification, and cannot be sold to anyone else. In recent years MM has made a small but increasing number of sales from its website, which was set up but an external consultant but is now run internally.
The company has a small accounting function which consists of the chief accountant Mr Crow, who reports directly to the managing director and major shareholder, Mr Lofthouse, and an accounts clerk, Debbie. There is a small, PC based accounting system. Debbie enters invoices into the computer and maintains the manual cash book. Mr Crow is in charge of preparing management accounts on a monthly basis; the payroll, which is approved monthly by Mr Lofthouse; the tax affairs of the company; and the tax affairs of Mr Lofthouse. Mr Lofthouse controls purchasing and sales, although he has an assistant who produces the paperwork and liaises with Debbie in accounts.
The previous auditors did not offer themselves for re-election due to disputes with Mr Lofthouse, but have stated that they are aware of no ethical reason which bars your firm from acting. They have passed some relevant working papers over to your firm, and have met with you to give you some background information on the audit. One of the things which they mentioned about the audit was that they have always assessed internal control as poor.
I would also like you to include in your memorandum an explanation of the term 'professional scepticism', and a brief discussion of its role in the detection of fraud.
Please get to work on this for me straight away. I look forward to reading what you have to say. Thanks,
Rich
Required
Respond to Richard Hill's email. The following marks are available.
(a) Identify and explain, from the information given, the key:
(i) Audit risks
(ii) Business risks
(b) Discussion of the audit strategy which you feel should be adopted, and the reasons why you have chosen that strategy and not another.
(c) Explanation of the term 'professional scepticism' and comment on its role in the detection of fraud.
Professional marks will be available for the format and the clarity of the answer.