CASE STUDY (PART 2) – ACCT 3000 SEMESTER 2, 2023
You are an Audit Senior currently planning the 30 June 20X3 audit of Western Timber
Limited (WTL). WTL operates a timber sawmill in Wickham, Western Australia. The
company obtains its raw materials from several local growers and its own plantations. Logs
are transported on large trucks that are weighed in on the company’s weighbridge and weighed
out after dropping their loads in the storage area. Logs are then debarked and sawn to size in
the cutting area of the mill. The various logs are then sent to other areas of the sawmill
depending on what they will be used for.
During the planning stage of the audit, you perform analytical procedures. You discover that
the average number of days taken by WTL to pay its creditors has declined significantly from
the average recorded over the past four financial years.
Your investigation reveals that log suppliers represent more than 80 percent of the value of
accounts payable. As an internal control, details of the goods received notes are matched
against the supplier’s invoice. The accuracy of the invoice is checked, after which the invoice
is authorised for payment by the mill accountant. Any discrepancy between what the
supplier’s invoice amounts should be and the actual amount charged by the supplier is
communicated to the supplier by way of a pre-numbered ‘request for credit’ form. This form
provides reasons for the differences and the amount requested to be credited to the company
by the supplier.
The correct amount of the invoice is entered into the accounts payable accounting system and
the supplier’s monthly statement is reconciled to the accounts payable balance per the
creditors’ ledger at month end. The differences are mostly attributable to unprocessed invoices
due to pricing differences, timing differences in the recorded date of a payment made, amounts
requested for credit, and settlement discounts allowed.
Sarah Parkinson, the company’s financial controller, informs you that due to the increase in
the price of timber, new contracts with suppliers have been negotiated over the past year. The
accounts payable personnel have complained that management is too slow in informing them
about the effective dates of the implementation of the contracts and the revised prices. A brief
inspection of the accounts payable reconciliations for five of the biggest suppliers indicates
that many invoices are being held back due to the lack of correct pricing.
WTL maintains details of stock quantities on its computer and these stock quantities are
updated from goods received notes and sales invoices. WTL conducts a ‘wall-to-wall’ count of
its inventory when all operations cease, and all inventory is counted in a single stocktake. The
bulk of inventory is held in two adjoining warehouses owned by WTL. However, a material
amount of timber inventory is held in a separate warehouse in a different suburb by a third
party.
During the audit planning stage of the audit, you have discovered the following:
Some empty containers may have been included in the inventory count due to poor
labelling procedures.
The lower of cost or net realisable value method may have been incorrectly applied.
WTL has been the biggest exporter of the Jarrah (Eucalyptus Marginata) and Marri (Corymbia
Calophylla) timber species to China. Border restrictions, stricter checks by Australian custom
officials, and recent trade disputes between Australia and China have delayed several
shipments of timber. These delays have angered Chinese customers who are threatening to
, deduct 35% from the amounts owing as compensation for lost production time. These
customers are also threatening to not purchase any Jarrah or Marri from WTL in the near
future and instead expand imports of kauri Timber from New Zealand.
Two of WTL’s major customers in China, Sino-Timber and Hong Timber, are claiming that
the latest batch of timber supplies they received were infested with woodworm. Both the
companies claim the infestation to be so serious that no treatment has seemed to work. This
infestation has made the timber useless. Sino-Timber and Hong Timber are refusing to pay
their accounts, which are already six months overdue. WTL has launched an investigation into
the allegations, but yet has not been able to substantiate them.
During the period, the Australian dollar has remained steady against the Chinese Yuan,
although it fell by about 4% against the US dollar. Chine customers are invoiced in $US at the
time of shipment, and payment is received in $US one month after the shipment is delivered. It
takes around four weeks for the charter vessels to travel from WTL’s shipyard at Bluedock
Bay to China. Recent trade disputes between Australia and China are affecting forward orders,
which have fallen by 47%.
Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to
Western Timber Limited (WTL). When making your risk assessment:
(a) Identify three (3) 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 three (3) accounts identified. In your explanation, please
mention the key assertion(s) at risk of material misstatement for each account
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)]
You are an Audit Senior currently planning the 30 June 20X3 audit of Western Timber
Limited (WTL). WTL operates a timber sawmill in Wickham, Western Australia. The
company obtains its raw materials from several local growers and its own plantations. Logs
are transported on large trucks that are weighed in on the company’s weighbridge and weighed
out after dropping their loads in the storage area. Logs are then debarked and sawn to size in
the cutting area of the mill. The various logs are then sent to other areas of the sawmill
depending on what they will be used for.
During the planning stage of the audit, you perform analytical procedures. You discover that
the average number of days taken by WTL to pay its creditors has declined significantly from
the average recorded over the past four financial years.
Your investigation reveals that log suppliers represent more than 80 percent of the value of
accounts payable. As an internal control, details of the goods received notes are matched
against the supplier’s invoice. The accuracy of the invoice is checked, after which the invoice
is authorised for payment by the mill accountant. Any discrepancy between what the
supplier’s invoice amounts should be and the actual amount charged by the supplier is
communicated to the supplier by way of a pre-numbered ‘request for credit’ form. This form
provides reasons for the differences and the amount requested to be credited to the company
by the supplier.
The correct amount of the invoice is entered into the accounts payable accounting system and
the supplier’s monthly statement is reconciled to the accounts payable balance per the
creditors’ ledger at month end. The differences are mostly attributable to unprocessed invoices
due to pricing differences, timing differences in the recorded date of a payment made, amounts
requested for credit, and settlement discounts allowed.
Sarah Parkinson, the company’s financial controller, informs you that due to the increase in
the price of timber, new contracts with suppliers have been negotiated over the past year. The
accounts payable personnel have complained that management is too slow in informing them
about the effective dates of the implementation of the contracts and the revised prices. A brief
inspection of the accounts payable reconciliations for five of the biggest suppliers indicates
that many invoices are being held back due to the lack of correct pricing.
WTL maintains details of stock quantities on its computer and these stock quantities are
updated from goods received notes and sales invoices. WTL conducts a ‘wall-to-wall’ count of
its inventory when all operations cease, and all inventory is counted in a single stocktake. The
bulk of inventory is held in two adjoining warehouses owned by WTL. However, a material
amount of timber inventory is held in a separate warehouse in a different suburb by a third
party.
During the audit planning stage of the audit, you have discovered the following:
Some empty containers may have been included in the inventory count due to poor
labelling procedures.
The lower of cost or net realisable value method may have been incorrectly applied.
WTL has been the biggest exporter of the Jarrah (Eucalyptus Marginata) and Marri (Corymbia
Calophylla) timber species to China. Border restrictions, stricter checks by Australian custom
officials, and recent trade disputes between Australia and China have delayed several
shipments of timber. These delays have angered Chinese customers who are threatening to
, deduct 35% from the amounts owing as compensation for lost production time. These
customers are also threatening to not purchase any Jarrah or Marri from WTL in the near
future and instead expand imports of kauri Timber from New Zealand.
Two of WTL’s major customers in China, Sino-Timber and Hong Timber, are claiming that
the latest batch of timber supplies they received were infested with woodworm. Both the
companies claim the infestation to be so serious that no treatment has seemed to work. This
infestation has made the timber useless. Sino-Timber and Hong Timber are refusing to pay
their accounts, which are already six months overdue. WTL has launched an investigation into
the allegations, but yet has not been able to substantiate them.
During the period, the Australian dollar has remained steady against the Chinese Yuan,
although it fell by about 4% against the US dollar. Chine customers are invoiced in $US at the
time of shipment, and payment is received in $US one month after the shipment is delivered. It
takes around four weeks for the charter vessels to travel from WTL’s shipyard at Bluedock
Bay to China. Recent trade disputes between Australia and China are affecting forward orders,
which have fallen by 47%.
Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to
Western Timber Limited (WTL). When making your risk assessment:
(a) Identify three (3) 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 three (3) accounts identified. In your explanation, please
mention the key assertion(s) at risk of material misstatement for each account
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)]
