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MJCo.operatesincapitalintensiveindustry.Thecompany’syearendis31July2015.
Youaretheauditseniorandyouhavestartedplanningtheaudit.Yourmanagerhas
askedyoutohaveameetingwiththeclientandtoidentifyanyrelevantauditrisksso
thattheauditplancanbecompleted.Fromyourmeetingyouascertainthefollowing:
MJ’smanagementweredisappointedwiththe2014resultsandsoin2015undertooka
numberofstrategiestoimprovethetradingresults.
FirstlyMJcutthesalepricesignificantlyandextendthecreditperiodfrom60daysto
90days.Inordertoexpandtheirbusiness,MJCowillneedtoacquiremoreplant;
theyhaveplacedordersforanothertenmachinesatanestimatedtotalcostof$10m
andthecompanyisnotsurewhetherthesemachineswillbereceivedbytheyearend.
Inadditionthecompanyhasspentanestimated$5monrefurbishingtheirexisting
premise.Inordertofinancethese,asumof$15millionwasborrowedfromthebank.
Thisisduetoberepaidoverthreeyears.
ThefinancedirectorofMJishappywiththe2015resultsandfeelsthattheyarea
goodreflectionoftheimprovedtradinglevels.
InMay2015anewaccountingpackagewasintroduced.Thisisabespokesystem
developedbytheinformationtechnology(IT)manager.Theoldandneckages
werenotruninparallelasitwasfeltthatthiswouldbetooonerousfortheaccounting
team.
Required:
Usingtheinformationprovided,identifyanddescribeFIVEauditrisksand
explaintheauditor’sresponsetoeachriskinplanningtheauditofMJCo.(10
marks)
3
MJ’sdirectorsareconsideringestablishinganinternalauditdepartmentnextyear,and
thefinancedirectorhasbeenaskedaboutthedifferencesbetweeninternalauditand
externalauditandwhatfactorstoconsiderwhethertoestablishaninternalaudit
department
Required:
(a)Distinguishbetweeninternalauditandexternalaudit.(4marks)
(b)Describethefactorsthefinancedirectorshouldconsiderbeforeestablishing
aninternalauditdepartment.(4marks)
(c)DescribethelimitationsofMJCoestablishingandmaintaininganinternal
auditdepartment.(2marks)
4
LilWindowGlassCo(Lily)isaglassmanufacturer,whichoperatesfromalarge
productionfacility,whereitundertakesc
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