Case Study (Part 2)

You are an Audit Senior currently planning the 30 June 20X2 audit of Western Wood Limited (WWL), an Australian-owned company that produces and exports woodchips to Japan. WWL’s operations are located in Eucla, on the far eastern edge of Western Australia. Timber is purchased from forests nearby, processed into woodchips and immediately stockpiled for export at the company’s shipyards at Dockland Bay. WWL contracts timber cutters to deliver set tonnages of logs to its mill throughout the year. Woodchips are transported to Japan on charter vessels, which make an average of one trip a month.

At a recent planning meeting with WWL’s senior staff, you obtained the following overview of this year’s operations:

WWL uses specialised wood chipper machines for producing high-quality wood chips. To place itself in a more competitive position, WWL recently (in January 20X2) made a significant investment in new wood chipper machines, combing fume-free electric operation with an impressive 2.5 inch cutting capacity. These new machines offer greater precision and uniformity when cutting pine, miscellaneous wood and moso bamboo into uniform pieces. Your analytical procedures indicate a significant increase in acquisitions of machinery.

Timber is purchased in 65 hectare lots from plantations and state forests. In the past, 75% of timber was sourced from plantations, however this has fallen to 55% in the current year. The corresponding increase in timber sourced from state forests has angered environmental groups. Protests have been held in several forests, which has slowed production and frustrated the contractors, who are only paid once set tonnages of timber are delivered to the mill. In addition, several shipments of woodchips have been delayed, angering the Japanese customers who are threatening to deduct 35% from amounts owing as compensation for lost production time.

One of WWL’s customers, Premium Furniture Limited (PFL), is claiming that the latest batch of woodchips it received was contaminated with a microbe. This microbe affects the physical structure of the chips, reducing the pressure the chips can withstand when compressed. This has made the chips useless for heavy duty items such as desks and bookcases. PFL is refusing to pay its account, which is already five months overdue. WWL has launched an investigation into the allegations, but as yet has not been able to substantiate them.

In January, WWL upgraded its accounts payable system to a fully integrated package that automatically updates the general ledger when creditor entries are made. Some problems have been experienced with the creditors ledger, which is split into $US and $AUD amounts. In
some cases, $US amounts have been recorded as $AUD, resulting in inaccurate creditor balances. Month-end rollovers have also proved problematic, with creditor balances being incorrectly re-set to zero at the first of every month. This has required each creditor’s history
to be re-entered manually each month, a time-consuming process that is taking accounting staff away from their normal duties.

During the period, the Australian dollar has remained steady against the Yen, although it fell by about 4% against the US dollar. Debtors are invoiced in $US at the time of shipment, and paid in $US one month after the shipment is received. It takes around six weeks for the charter vessels to travel from Dockland Bay to Japan. All plantations from which WWL sources timber are owned by US firms, which demand payment in $US prior to the timber being cut. A recent pandemic-induced downturn in the Japanese economy is affecting forward orders, which have fallen by 15%.

The human resources department at WWL is responsible for selecting and appointing employees, approving pay rates and promotions, and processing employee terminations. The payroll department is responsible for preparing the weekly wages based on the information
from the human resources department and according to hours worked by each employee. WWL has a number of long-term contracts to deliver woodchips throughout Australia. The company operates a fleet of large trucks and has a number of permanent drivers who are assisted by other drivers on short-term contracts during busy times of the year (such as the three months prior to Christmas). Drivers work long shifts and most of the driving is done at night.

During busy times the human resources department falls behind with processing paperwork related to the short-term contract drivers. In particular, there are constant complaints from the drivers that they have to wait several weeks after they start work for their first pay.

When testing the payroll process you discover that the complaints from the drivers are justified; it takes on average three weeks from the date the driver starts work for the relevant authorization for the driver’s pay to be received by the payroll department. However, you also
find that on average drivers are paid for one additional week after they actually leave the company because the human resources department does not record the termination date accurately. The payroll department tells you that, because of the confusion, no provision is made for accrued wages at year-end.

Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to Western Wood Limited (WWL). When making your risk assessment:

(a) Identify four (4) key account balances from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the four (4) accounts identified. In your explanation, please mention the key assertion(s) at risk of material misstatement for each of the accounts identified.

(b) Identify how the audit plan will be affected and recommend specific audit procedures to address the risks associated with each account identified.

[Please Note – Maximum Word Limit: 1200 Words (excluding references)]