Report to the senior partner.

CASE STUDY
–
COMFORT PREGNANCY WEAR
LTD
You have been infor
med by the senior partner of your audit firm that you are to be in charge of
a new client,
COMFORT PREGNANCY WEAR
LTD, for the audit of
the year ended 30 June
2013
. The company is engaged in the import of fabrics from India and the manufacture and
wholesal
ing of
clothing
. The company turnover is approximately £
34
,000,000 and it has a work
force of about 150. The company has grown from a small family owned business to a highly
successful company over the last 10 years. Currently, it has one warehouse and
man
ufacturing location in
Romford,
e
a
st London. This will be the only c
lient
your firm has in
the clothing industry.
As the manager for this audit, you arrange a meeting with Richard
Joy
, the CEO of
COMFORT
PREGNANCY WEAR
LTD, in order to familiarise yoursel
f with the company’s operations. From
your meeting, you discover the following:
?
The company’s Board of Directors is comprised of three family members from the
Ronald
family, (the business owners); two close business associates/friends of the family; and two
respected members of the
Romford
business community.
?
The financial statements of the company show a steady decrease in profit over the last
two years, mainly because of reducing sales volumes. Richard attributes this to slipping
market share of the compa
ny as smaller sized competitors are increasingly encroaching
on its customer base.
?
In response to the “Kate effect” Comfort Pregnancy Wear Ltd wants to be ready to
manufacture copies of
any maternity clothing worn by
T
he Duch
ess of Cambridge
during
her pr
egnancy.
Richard is anticipating new business arising from this contract and has
taken on 20 new staff
to carry out this extra work. The company
has also rented an
additional warehouse for storage, close to the existing premises.
?
Over the last 18 months t
he accounts department has experienced a high turnover of
staff, with most ex
–
staff joining the company’s competitors who have more attractive pay
packages. Therefore, of the 15 accounts staff, only the financial controller and
management accountant have b
een with the company for more than two years.
?
The purchasing system at
COMFORT PREGNANCY WEAR
LTD was automated during
the period being audited. Purchase orders are now generated automatically by the
computerised inventory system when inventory falls belo
w a given level. However, this
system is not working well because it uses complicated purchasing and production
models, making it difficult to use, hence many manual adjustments are required. So far
only two
members
of the production manager’s clerical sta
ff are able to use it. As a result,
sometimes the items ordered are delivered late or in the wrong quantities. In addition, the
system takes up a lot of space on the company server and is causing problems in other
systems.
?
In terms of record keeping, the
most comprehensive records maintained within the
company are the sales records, which are reconciled and reviewed weekly by the chief
accountant together with sales manager. However, production figures and inventory
figures are not reviewed as diligently.
Stock taking is done periodically throughout the year
and not at the year
–
end.
3
Required:
Draft a report to the Senior Partner of your audit firm, in which you:
1.
Identify the key business risks
COMFORT PREGNANCY WEAR
LTD faces and the
possible conseque
nces and suggest how these risks could be mitigated. (
20 Marks
)
2.
Describe the information you will seek, and procedures you will perform, during the
planning and risk assessment phase of the audit
in accordance with ISA 315
‘Obtaining an
understanding
of the entity and its environment and assessing the risks of material
misstatement’
. (
30 Marks
)
3.
Describe the tests of controls you would plan for (and why) in order to obtain sufficient
appropriate evidence concerning purchases. (
20 marks
)
4.
Explain the
substantive audit procedures you would perform to obtain reasonable
assurance about the validity of the inventory figure in the financial statements of
COMFORT
PREGNANCY WEAR
LTD. (
20 marks
)
Total
90 marks