Question 2 - Audit planning and inherent risk (6% of total subject assessment)
You have just been appointed as the auditor of Gritty Manufacturing Ltd and you are in the process of planning your first audit. Gritty manufactures security cameras and is a part of the electronics industry
Gritty's operations consist of a factory and a head office which is located in the Sydney suburb of Alexandria. Gritty has distribution outlets in each capital city of Australia, as well as sales agents scattered throughout South East Asia, the USA and Western Europe. There has been heavy capital expenditure on the factory at Alexandria in recent years, and the security camera industry has in receni years been increasingly competitive and volatile. There is also a lot of discounting undertaken by manufacturers of inferior quality products. The industry faces problems with changes to technology, government legislation and health and safety issues for the staff in the different jurisdictions in which Gritty operates. As a result, obsolete stock is a problem for the security camera industry.
The CEO of Gritty is Fred McKenzie, a radio engineer who started the company 15 years ago. Fred is heavily reliant on his accountant, Mrs Norris, as he has minimal understanding of accounting.
The previous auditors have informed you that there were a number of issues with the previous audit. They also inform you that the accounting methods used for the valuation of foreign currency profits and losses were unreliable and of concern.
Your discussions with the Alexandria production manager, Dennis Watkins, reveal that he has a very stressful time managing production levels, with constant concerns of both over and under production,