Maxi Com Ltd

STUDENT ID: S1459642

STUDENT NAME: IHALAGEDARA DILRUKSHI WANASINGHE
SUBJECT: AUDIT THEORY AND ASSUSRANCE
ASSIGMNT: ASSIGMENT 25%
ASSESSOR: DAYANI KIRUBAHARAN
AUDITING ASSIGNMENT SHORT ANSWERS

Table of Contents
1 Executive Summary..............................................................................................................2
2 Introduction.........................................................................................................................2
3 Factors that will affect the planning of the audit for Maxi..................................................2
4 Account Balances that are at risk of material misstatements..............................................3
5 Going concern risk...............................................................................................................4
6 Implications of the sales bonus system................................................................................5
7 Substantive test of detail......................................................................................................6
8 Reference.............................................................................................................................7

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1 Executive Summary

Maxi company limited is a well-establish computer hardware manufacture in Australia. It

exports products to more than 20 countries. And has secured a contract with one of the largest
manufactures in Korea. The company outsourced some of its operations to China to reduce
the cost. It reduced the cost of operations, but the company had some issues like lower profits
and losing orders. Due to high competition in the industry the company got a loan from bank
to upgrade its production methods. And introduced new salary scheme to give 5% sales
commission while the basic salary is fixed. There are some issues with the company and the
company hired an auditor from D&K audit partners. This report the information and some of
the risks that could affect on preforming the audit.

2 Introduction
Maxi company limited is a computer hardware company. It sells computer parts all over
Australia and export to customers more than 20 countries. The auditor needs to understand
the business’s nature and policy procedures that the company has to perform the audit. So,
the report will evaluate about Maxi company’s policy and procedures that will help to
perform the audit. The report will discuss factors that has impacts on auditing and some risks
and controls that can be put to secure that the audit process is going without errors and
independently.

3 Factors that will affect the planning of the audit for Maxi.
 Nature of the industry that Maxi operates
Maxi is a well – established computer and hardware manufactures. Computer Hardware
Industry is an innovative industry. And the industry is changing all the time. With the
technology developments and innovations, the industry is getting more and more competitive.
So, maxi has to do more innovations with the best quality to cope with the competitors in the
market. The case states that Maxi is doing regular upgrades over 3 years to cope with the
competition. This can be a factor that affect the audit planning.

 Nature of the company’s operations- It has outsourced some of its operations,

therefore there might be difficulties in obtaining data related to the audit from
overseas.

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It doesn’t mention that they have documented what they are manufacturing in china. And
about inventory records. So, there can be some difficulties in getting those data from china.
Even there was lost in orders.
 Internal controls & accounting methods – Example: Loan Arrangements,
Commission System.
The company got a loan form a bank to upgrade its technology. And the company introduced
new salary scheme that paid lower fixed salary to its sales staff, if they achieved or exceed
sales target, they will get 5% commission.

4 Account Balances that are at risk of material misstatements

below tables shows the three account balances that are at a risk of material misstatements and
the reasons why these are at risk.

Account Assertion at Risk Reason

Inventory Completeness Whether all the inventories in

China & Australia has been
included.

Property, Plant & Accuracy, Valuation & Due to revision of depreciation

Equipment Allocation rates & due to upgrade
manufacturing process resulting in
the purchase of new equipment
have they been valued correctly?

Sales Existence Staff might show false sales to get

the commission, so it’s
questionable whether some sales
actually exist. Overstated Sales

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5 Going concern risk

Business risks include threats that may decrease the business's income and/or cash inflows,
which may potentially mean that either a business is not an ongoing concern, or there are
serious concerns regarding its ability to remain a continuing concern. Identifying this
elevated risk at this early point in the audit process ensures that subsequent audit procedures
can be prepared as just a response to the defined particular risks. (Triyatmi, 2020)
All this means that the auditor must obtain a thorough understanding of the economic
conditions where a business operates, like Maxi operates Computer Hardware industry, it is
important to understand the trends, market changes and how the business is competing in the
market.   Risks may arise from many causes, including a decreased demand for products and
services, the failure of consumers to pay for goods and services (Credit limits) and the
reluctance to collect the required funds. Such factors shall be assessed for their particular
effect on the operations of a business. There are non-financial and financial risks to evaluate
going concern risk of Maxi. Those are,

a) Non-Financial Risk
 High Competition –Maxi is changing its operations to cope with the
competition.
 Changing nature of the industry – Computer Hardware is highly competitive
industry and changing rapidly with new innovations.
 Finance (Bank Loan) based on profitability – Maxi got a bank loan to upgrade
the manufacturing process and still it has lower profits.

b) Financial Risk
 Small profits for last 3 years – Maxi did regular upgrades during years and
outsourced some operations to china to reduce the cost but had lower profits
over 3 years.
 Late payments from creditors – Maxi has given 30-day credit to its wholesale
customers, but the customers don’t pay on time.
 Lower Salary paid to employees – Maxi paid lower fixed salary to employees
and pay 5% of sales commission.

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6 Implications of the sales bonus system

In Maxi company pays lower fixed salary to its employees. And has introduced 5% sales
commission. So, to ensure that this scheme is not manipulated management can put controls
like,
 Authorization – If an employee eligible to 5% sales commission that need to be
approve from the payroll clerk and the head of human resource department. And
when releasing to payments the accountant should approve the commission amount
with supported documents.
 Commission confirmation schemes – Arrange the sales targets that need to achieve to
get 5% commission. Like tracking the sales amount of each salesperson from a system
and confirm it with sales manager.
 Limit Access – Sale manager should have to check the sales volumes of the
employees but not to the commission amounts system. Manager and accountant
should have access to check the sales targets and commission calculation system to
check ensure that the salary amounts, and sales amounts are correct.
 The average rise in salaries will be the carried out by head of human resource
manager and head of accounting department, and that should be checked by other in
charges to ensure there are no mistakes. These changes must be informed to payroll
clerks and sales managers.

These controls can be put to control this scheme and auditor can put test of controls to check
if these has been followed to perform the audit.

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7 Substantive test of detail

Assertion Substantive test of detail

Existence and  Cut off tests - Take a sample of inventory and compare
Occurrence the quantities with the ledgers
 Test inventory in transit – (Inventories in china or review
freight costs)
 contract documents of the manufactures of Korea and
sales growth records after the acquisition.
 Inventory ownership analysis – check whether if the
outsourced processes are fully owned by the company or
not
 Take sales ledgers to ensure that the sales have been
happened and check customer confirmation invoices or
shipping documents (There has been lost of orders)
 Check if the board of directors has approved for the new
salary scheme (5% sales commission)
Accuracy, valuation &  Depreciation methods that the company has performed
allocation correctly
 Check if the lost orders has been recorded
 Check bank statements and check with the bank about
loan repayments and interest rates
 Check the salary scheme change documents and payroll
ledgers to ensure that the commissions have been
allocated without errors

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8 Reference
Accaglobal.com. 2020. Fundamentals Level – Skills Module, Paper F8 (IRL) Audit And
Assurance. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-
students/acca/f8/exampapers/irl/J14_F8IRL_Ans.pdf
Accaglobal.com. 2020. Going Concern | ACCA Qualification | Students | ACCA Global.
Available at: https://www.accaglobal.com/an/en/student/exam-support-
resources/professional-exams-study-resources/p7/technical-articles/going-
concern.html#:~:text=For%20a%20company%20facing%20going,disclosed%20in
%20the%20financial%20statements.
Triyatmi, C., 2020. FINANCIAL AND NON FINANCIAL FACTORS ON GOING-CONCERN
OPINION, Media.neliti.com. Available at:
https://media.neliti.com/media/publications/27122-EN-financial-and-non-financial-
factors-on-going-concern-opinion.pdf