You are an audit supervisor of PricewaterhouseCoopers (PwC) and are planning the audit of your client, Blister Pharmaceuticals co. which manufactures and imports sanitary and cleaning products (gloves, sanitizers, etc). Its year end was 31 July 2020 and the draft profit before tax is Rs 33.6 million. You are supervising a large audit team for the first time and will have specific responsibility for supervising and reviewing the work of the audit assistants in your team. Blister Pharmaceuticals Co purchases most of its raw materials from suppliers in Africa and these goods are shipped directly to the company's warehouse and the goods are usually in transit for up to three weeks. Due to the COVID-19 Pandemic, the company has incurred Rs 1.3 million of expenditure on developing a new range of cleaning products used for dis-infection purposes which are due to be launched into the market place in November 2020. In September 2019, Blister Pharmaceuticals co. also invested Rs 0.9 million in a complex piece of plant and machinery as part of the development process. The full amount has been capitalised and this cost includes the purchase price, installation costs and training costs. This year, the bonus scheme for senior management and directors has been changed so that rather than focusing on profits, it is instead based on the value of year-end total assets. In previous years an allowance for receivables, made up of specific balances, which equalled almost 1% of trade receivables was maintained. However, the finance director feels that this is excessive and unnecessary and has therefore not included it for 2020 and has credited the opening balance to the profit or loss account. A new general ledger system was introduced in May 2020; the finance director has stated that the data was transferred and the old and new systems were run in parallel until the end of August 2020. As a result of the additional workload on the finance team, a number of control account reconciliations were not completed as at 31 July 2020, including the bank reconciliation. The finance director is comfortable with this as these reconciliations were completed successfully for both June and August 2020. In addition, the year-end close down of the purchase ledger was undertaken on 8 August 2020. Describe SIX audit risks, and explain the auditor's response to each risk, in planning the audit of Blister Pharmaceuticals Co. Prepare your answer using two columns headed Audit risk and Auditor's response respectively.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
You are an audit supervisor of PricewaterhouseCoopers (PwC) and are planning the audit of your client, Blister Pharmaceuticals co. which manufactures and imports sanitary and cleaning products (gloves, sanitizers, etc). Its year end was 31 July 2020 and the draft profit before tax is Rs 33.6 million. You are supervising a large audit team for the first time and will have specific responsibility for supervising and reviewing the work of the audit assistants in your team.
Blister Pharmaceuticals Co purchases most of its raw materials from suppliers in Africa and these goods are shipped directly to the company's warehouse and the goods are usually in transit for up to three weeks.
Due to the COVID-19 Pandemic, the company has incurred Rs 1.3 million of expenditure on developing a new range of cleaning products used for dis-infection purposes which are due to be launched into the market place in November 2020. In September 2019, Blister Pharmaceuticals co. also invested Rs 0.9 million in a complex piece of plant and machinery as part of the development process. The full amount has been capitalised and this cost includes the purchase price, installation costs and training costs.
This year, the bonus scheme for senior management and directors has been changed so that rather than focusing on profits, it is instead based on the value of year-end total assets. In previous years an allowance for receivables, made up of specific balances, which equalled almost 1% of trade receivables was maintained. However, the finance director feels that this is excessive and unnecessary and has therefore not included it for 2020 and has credited the opening balance to the profit or loss account.
A new general ledger system was introduced in May 2020; the finance director has stated that the data was transferred and the old and new systems were run in parallel until the end of August 2020. As a result of the additional workload on the finance team, a number of control account reconciliations were not completed as at 31 July 2020, including the bank reconciliation.
The finance director is comfortable with this as these reconciliations were completed successfully for both June and August 2020. In addition, the year-end close down of the purchase ledger was undertaken on 8 August 2020.
Describe SIX audit risks, and explain the auditor's response to each risk, in planning the audit of Blister Pharmaceuticals Co. Prepare your answer using two columns headed Audit risk and Auditor's response respectively.
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