Question 16

a)

Matters that Ant & Co should have considered prior to accepting the audit of Centipede are
firstly the condition of the firm. Ant & Co should have proper resources to conduct an audit services,
and the proper expertise, to ensure that they’re capable of auditing.

Secondly, the matter that Ant should consider is the client itself. The activity of the company
should be taken to consideration and understood.

Thirdly, before accepting audit appointments, Ant should seek from the previous auditors.
Ant should acquire the reason behind the switching of auditors by the client.

Next, the high personnel such as directors and the owners of the company should have a
good reputation, possibly from it being used to do CSR and such.

Lastly, Ant should confirm that the client complies with the laws and regulations and follow
the accounting standards accordingly.

b) Ratios

Ratios 20X5 20X4

Gross profit margin 37.2% 33.8%
Receivable days 23 days 22 days
Inventory days 54 days 47 days
Payable days 81 days 73 days
Current ratio 0.97:1 1.26:1
Operating profit margin 17.8% 18.5%

c) Audit risk and auditor’s response

Audit risk Auditor’s response

The company undertakes monthly perpetual
system, and only covers one-twelfth of all lines
monthly.

There were many exceptions where the

inventory records were consistently higher than
the physical inventory in the warehouse.

There are four additional sites where some of
the accounting records are maintained but
were not visited during the interim audit.
There is an increase in detection risk as the
auditors did not visit the site, which means not
all data are being audited.
Obtain the general ledger and do a site visit to
all the unattended sites, compare and calculate
the accounting records to confirm that the
incorporation of the records is correctly
recorded through the interface.
A building was closed at year ending 20X4, Obtain the non-current asset register, see if
however the building was only sold in 20X5. there is any depreciation being allocated to the
There is a risk of the building not being building before the selling of it.
depreciated yet after the closing down in the Calculate the value of depreciation to confirm
previous year, thus the building was probably that its being valued correctly.
sold at higher loss than recorded.
There is a legal action taken against Centipede Discuss with the management regarding the
by one of its wholesale customers. There is a calculation of the provision, the possibility of
claim being made, and Centipede may need to customer to win the claim, and the allocation of
pay compensation. the claim in the financial statements, so that it
The risk here is that Centipede may not complies with the correct accounting
calculate the compensation provision correctly standards.
or allocate it which could lead to the profit
being misstated.
The directors’ remunerations’ disclosure does
not comply with the local legislation, even
though it is in line with the IFRS.
The risk is that the disobey of the client from
the local legislation should