Q1 :

Briefing Notes

To : Audit Engagement Partner, Peter Chung

From : Audit Manager

Subject : Audit Planning – Archer Co.

Introduction

These briefing notes will outline the audit risks to be considered along with recommendation of
additional information relevant for audit risks, audit procedures for WIP & Government Grant,
Quality Control & Ethical and professional issues.

(A) Audit Risk

(I) Evaluation

Foreign Suppliers

Most of the components used in Archer Co manufacturing process are imported from foreign
suppliers.

As per the standard the transactions should be initially recorded using the spot rate and monetary
items such as trade payables should be retranslated at the year end using the closing rate and any
exchange gain or loss arising due to the interest rate differences should be recorded in the Profit and
Loss (PNL).

The audit risk is that the management may not have translated the transactions using the correct
interest rate in order to appear in a profitable position resulting in exchange gain or loss and may
have incorrectly recorded them in the other comprehensive income (OCI) in order to improve their
profits resulting in misstatements in the assets and expenses.

Customer Specific Order

The machines and equipment made are specific to the customers requirement and only 30% is
received in advance for significant orders.

Inventory should be valued at the lower of the cost and NRV.

The audit risk is that some time the customer may cancel the order after significant funds have been
allocated and as the products are made to specific needs they may become obsolete resulting in low
NRV and the management may record them at the cost instead of NRV resulting in overstatement of
assets (inventory) and profits.

Cash Settled Shared Based Payment Plan

No accounting entries have been in respect of the cash settled share based plan and only disclosure
will be made of important details.

As per the accounting standard, it is obligatory for an entity to recognise share based transactions in
its financial statements (FS). Specific requirements are included for equity-settled and cash-settled
share-based payment transactions, as well as those where the entity has a choice of cash or equity
instruments.
The audit risk is that since the correct fair value may not be used and these options will lead to
liability and the management may not spread these expenses correctly and as no amounts will be
shown in relation these expenses resulting in understatement of liability and expenses.

Revaluation Of Manufacturing Sites

The $3.5 Million of Revaluation is material as it is 0.3% of the total assets of the organisation.

The finance director (FD) recommended the manufacturing sites to be revalued.

As per the standard, all the assets in the same class should be revalued.

The audit risk is that some assets in the manufacturing site may not have been revalued as there
revalued price may be lower, there is also an inherent risk of the revalued price as it is subjective to
the management and the valuations carried may not be correct as well as the risk that the
depreciation may be calculated based on the previous assets value and all of these result in
overstatement of assets and profits.

Government Grant

The $10 Million of the grant is material as it is 11% of the Total Asset.

All the company’s manufacturing site will be closed at the year end.

As per the standard, government grant should be recognised once they are received and the
conditions are met.

The risk is that the management recognised the 10 million despite not meeting the condition of
keeping the manufacturing site operational till July 20Y0 which may lead to a penalty element
leading to understatement of liability and expenses. Another risk is that since only 2million is to be
used for wages as income while the remainder should be recorded over the years in a straight line
basis while the management may have used an incorrect method or misclassified in the statement of
financial position resulting in misstatement of the expenses misrepresentation in the sofp.

Work In Progess

WIP is material as 12 is 13% of total assets and the wip has increased by 26% as compared to the
previous year.

Majority of the orders will not be complete till after the year end.

As per the standard, Work in progress (WIP) should be valued at the year end and include cost of
conversion material.

The risk is that wip is a complex calculation as different completion rate will be used at different
stages and since during the year there were returns from the customers due to quality issues which
will affect the NRV of wip meaning that a write off would be needed but the management may not
have the expertise to calculate the WIP accurately resulting in overstatement of assets and
understatement of expenses.

Provision For Customer Returns

Archer Co offers a guarantee that defective items will be replaced free of charge.

As per the accounting standard, a provision should be recorded where a reliable estimate can be
made, there is obligation to pay and there is probable outflow of economic resources.
The audit risk is that although all the conditions are met as they have claimed to replace and an
estimate will be available as they will be aware of the cost and penalty in the policies but Archer Co
may not record a provision in relation to the returns resulting in understatement of liability and
expenses.

(II) Additional Information

 A copy of stock exchange listing to verify the amount of shares issued and the prices at
which the shares were issued.
 A copy of the CSSBPP agreement to verify the senior executive who are part of the scheme
and the conditions relating to it.
 Documentation of the discussion with the management regarding the basis of the
revaluation of the assets calculation to verify the mathematical accuracy.
 Copy of due diligence of the valuer in order to verify their competence, qualification, skills
and experience in order to verify the revaluation has been done by an appropriate
individual.
 Copy of forecast financial statements more importantly the statement of cash flow to assess
working capital issues.