**Audit Risks and Suggested Responses for Magpie Co**

As the audit supervisor for Crow & Co, I have identified several audit risks in the case of Magpie Co
for the year ending 31 July 20X5, along with suggested responses to address each risk. These risks
and responses are as follows:

**1. Risk: Refurbishment Costs Recognition**

**Response:** Verify the appropriateness of capitalizing $0.75 million in refurbishment costs as

property, plant, and equipment. Review the company's accounting policies and supporting
documentation to ensure compliance with accounting standards. Assess if these costs should be
expensed instead.

**2. Risk: New Sales System Implementation**

**Response:** Evaluate the adequacy of controls over the new sales system. Test the accuracy and
reliability of sales and receivables data generated by the system. Ensure that the transition from the
old to the new system did not introduce errors or inconsistencies.

**3. Risk: Cash Shortages**

**Response:** Investigate the increasing number of cash shortages reported by the new sales
system. Conduct surprise cash counts at various stores to verify reported cash takings. Assess the
effectiveness of controls in place for handling cash and cash reconciliation.

**4. Risk: Overdue Receivables**

**Response:** Review the aging of trade receivables and assess the adequacy of the company's
provision for doubtful debts. Evaluate the creditworthiness of overdue customers and consider the
need for additional provisions based on industry trends.

**5. Risk: Payables Ledger Reconciliations**

**Response:** Scrutinize reconciling items on supplier statements and evaluate the reasons for
discrepancies between supplier statements and the payables ledger. Investigate whether these
differences represent potential liabilities or errors in recording.
**6. Risk: Contaminated Inventory**

**Response:** Monitor the ongoing tests to determine the extent of contamination in the batch of
plants. Assess the impact on the valuation of inventory and consider the need for a provision for
obsolete or impaired inventory.

**7. Risk: Payroll Cycle Deficiencies**

**Response:** Review the findings from the 20X4 audit regarding deficiencies in the payroll cycle.
Assess whether these deficiencies have been addressed and improved. Test controls and compliance
with payroll procedures.

**8. Risk: Revenue Recognition**

**Response:** Scrutinize revenue recognition policies and assess the accuracy of reported revenue.
Perform substantive testing of revenue transactions, focusing on completeness, accuracy, and
compliance with accounting standards.

**9. Risk: Gross Profit Margin Fluctuation**

**Response:** Analyze the significant increase in the gross profit margin from the previous year.
Investigate the reasons behind this change, including potential changes in pricing, cost of sales, or
sales mix. Ensure the accuracy of related financial statement disclosures.

**10. Risk: Working Capital and Liquidity**

**Response:** Assess the company's working capital position and liquidity by analyzing key ratios
(e.g., inventory holding period, receivables collection period). Consider the impact of these ratios on
the company's ability to meet its short-term obligations and fund its operations.

In conclusion, these identified audit risks and corresponding responses provide a framework for
planning the audit of Magpie Co for the year ending 31 July 20X5. It is crucial to conduct a thorough
and well-documented audit to provide assurance on the reliability of the financial statements and
address potential issues effectively.