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Please someone should help me identify the risk and the audit response.
You are the audit supervisor of Melue & Co and are currently planning the audit of your existing client, Jaspar Heating Co (Jaspar), for the year ending 31 December 2018. Jaspar manufactures and sells heating and plumbing equipment to a number of home improvement stores across the country.
Jaspar has experienced increased competition and as a result, in order to maintain its current levels of sales, it has decreased the selling price of its products significantly since September 2018. The finance director (FD) has informed your audit manager that he expects increased inventory levels at the year end. He also notified your manager that one of Jaspar’s key customers has been experiencing financial difficulties. Therefore, Jaspar has agreed that the customer can take a six-month payment break, after which payments will continue as normal. The FD does not believe that any allowance is required against this receivable.
In October 2018 the financial controller of Jaspar was dismissed. He had been employed by the company for over 20 years, and he has threatened to sue the company for unfair dismissal. The role of financial controller has not yet been filled and so his tasks have been shared between the existing finance department team. In addition, the purchase ledger supervisor left in August and a replacement has been appointed in the last week. However, for this period no supplier statement reconciliations or purchase ledger control account reconciliations were performed.
You have undertaken a preliminary analytical review of the draft year to date statement of profit or loss, and you are surprised to see a significant fall in administration expenses.