Acca P7 Dec- 2012 Answers
Answers
Professional Level – Options Module, Paper P7 (INT)
Advanced Audit and Assurance (International) December 2012 Answers
1 (a) Briefing notes
To: Audit Partner
From: Audit Manager
Regarding: Audit planning and ethical issues in respect of Grohl Co
Introduction
These briefing notes evaluate the business risks facing Grohl Co, and identify and explain four risks of material misstatement to be considered in planning the audit of the financial statements for the year ended 30 November 2012. In addition, two ethical issues are discussed and relevant actions recommended.
(i) Business risks
Imported goods – exchange rate fluctuations
Grohl Co relies on a key component of its production process being imported from overseas. This exposes the company to exchange rate volatility and consequentially cash flow fluctuations. The company chooses not to mitigate this risk by using forward exchange contracts, which may not be a wise strategy for a business so reliant on imports. Exchange gains and losses can also cause volatility in profits, and as the company already has a loss for the year, any adverse movements in exchange rates may quickly increase this loss.
Imported goods – transportation issues
Heavy reliance on imports means that transportation costs will be high, and with fuel costs continuing to increase this will put pressure on Grohl Co’s margins. It is not just the cost that is an issue – reliance on imports is risky as supply could be disrupted due to aviation problems, such as the grounding of aircraft after volcanic eruptions or terrorist activities. Reliance on imported goods increases the likelihood of a stock out. Unless Grohl Co keeps a reasonable level of copper wiring as inventory, production would have to be halted if supply were interrupted, creating idle time and inefficiencies, and causing loss of customer goodwill.
Reliance on single supplier
All of Grohl Co’s copper wiring is supplied by one overseas supplier. This level
Professional Level – Options Module, Paper P7 (INT)
Advanced Audit and Assurance (International) December 2012 Answers
1 (a) Briefing notes
To: Audit Partner
From: Audit Manager
Regarding: Audit planning and ethical issues in respect of Grohl Co
Introduction
These briefing notes evaluate the business risks facing Grohl Co, and identify and explain four risks of material misstatement to be considered in planning the audit of the financial statements for the year ended 30 November 2012. In addition, two ethical issues are discussed and relevant actions recommended.
(i) Business risks
Imported goods – exchange rate fluctuations
Grohl Co relies on a key component of its production process being imported from overseas. This exposes the company to exchange rate volatility and consequentially cash flow fluctuations. The company chooses not to mitigate this risk by using forward exchange contracts, which may not be a wise strategy for a business so reliant on imports. Exchange gains and losses can also cause volatility in profits, and as the company already has a loss for the year, any adverse movements in exchange rates may quickly increase this loss.
Imported goods – transportation issues
Heavy reliance on imports means that transportation costs will be high, and with fuel costs continuing to increase this will put pressure on Grohl Co’s margins. It is not just the cost that is an issue – reliance on imports is risky as supply could be disrupted due to aviation problems, such as the grounding of aircraft after volcanic eruptions or terrorist activities. Reliance on imported goods increases the likelihood of a stock out. Unless Grohl Co keeps a reasonable level of copper wiring as inventory, production would have to be halted if supply were interrupted, creating idle time and inefficiencies, and causing loss of customer goodwill.
Reliance on single supplier
All of Grohl Co’s copper wiring is supplied by one overseas supplier. This level