ACCT 3005 Auditing Theory and Practice- Soft Touch Limited

ACCT 3005 Auditing Theory and Practice- Soft Touch Limited

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ACCT 3005 Auditing Theory and Practice

Task

Q1. Soft Touch Limited Financial year end 30 June 2020 Soft Touch Limited (STL) is an Australian public company. The company is not listed. It manufactures high-quality toilet paper and tissues in two states, Victoria and Western Australia using Australian wood chips. STL commenced operations in 1992 and maintained slow but steady growth over the years.

Its major customers are the large supermarkets: Coles, Woolworths, IGA and Aldi. It also sells to smaller outlets, such as pharmacy stores. STL has had a tumultuous 2020. The bushfires throughout Australia in January and February led to a shortage of woodchips from its usual suppliers, reducing STL’s ability to maintain its manufacturing processes. Fortunately, by the end of February, STL was able to source additional supplies of woodchips, albeit at a significantly higher cost. In March toilet paper and tissue sales increased exponentially due to toilet paper and tissue stockpiling associated with COVID-19. This made access to sufficient woodchips even more difficult. The company initially responded to its increased orders by extending its manufacturing hours by 2 hours a day and offering overtime to its fulltime staff and additional hours to its casual staff. However, this was not sufficient to meet demand, and the company doubled its normal employee numbers by hiring more casual staff and operating its manufacturing processes 24 hours, 7 days a week for 6 weeks from the middle of March to the end of April.

Manufacturing was then decreased to 24 hours for 5 days a week. Unlike the normal 2 week induction period for new staff that the company had previously offered, the new workers hired at this time were provided with a one-day induction and then went straight on to the production line. The company has two delivery drivers who normally deliver to the supermarkets’ large central warehouses and pharmacies. The drivers worked extensive overtime during this period. However, due to the inability to meet demand, STL ceased deliveries to small pharmacies, forcing them to find other suppliers. As a result of the huge surge in demand for toilet paper and tissues, other companies have entered this market.

To establish themselves these companies have offered their products at a discounted rate. They have become the preferred suppliers to the pharmacies where STL ceased deliveries. By the end of June, demand for toilet paper had fallen to pre-COVID-19 levels and the company held a large inventory of both toilet paper and tissues in its warehouses.

The company is audited by Contessotto, Perera and Chandra (CPC), a mid-tier audit firm located in Melbourne. CPC has audited STL since its incorporation?

Q2. The Audit Team The audit team consists of 4 people. The partner is Kellie. She has been involved in the STL audit for over 20 years and partner on the engagement for the last 15 years. The audit manager is Tim. This is Tim’s first time on the STL audit. Nisa is the audit senior and is responsible for the initial audit planning.

Nisa has recently completed the Graduate Diploma of Chartered Accounting. The graduate on the audit is MingYan. While a student, MingYan worked part-time in the accounting department at STL undertaking basic processing tasks. MingYan’s friend is the receptionist at STL. The receptionist has no accounting knowledge and has no involvement with the recording or processing of accounting transactions The audit team commenced planning the audit on STL in the middle of March 2020. The auditors were delighted to be able to buy toilet paper and tissues from the STL warehouse under the same pricing arrangement available to STL’s staff. The interim work on STL was undertaken at the end of March and early April and the final work in early September 2020. Corporate Governance and the accounting department The company’s Board of Directors consists of 5 directors.

Due to the small size of the board, there is no separate audit committee. STL also does not have an internal audit division. The Board of Directors consists of an independent and non-executive Chairman, the CEO who has been with the company for 2 years, a CFO who has been with the company for 3 years, and an independent lawyer and another independent non-executive director. Up until December 2019, the CFO previously worked as an auditor with CPC and was involved on the audit of STL. The CFO is great mates with Tim (the audit manager) and prior to the current season often went to the AFL games each Saturday to support Essendon.

Shareholders are expecting to see a large increase in profit this year as they are aware of the significant increase in toilet paper and tissue sales. The accounting department is of a reasonable size and has the ability to segregate duties, although this is not something the company focuses on. The increased manufacturing has placed the current accounting staff under extreme stress as the number of staff on the payroll has increased significantly and there has been a large increase in the numbers of suppliers’ invoices received and associated goods received notes. In addition, the number of sales orders have doubled.

The company chose not to increase the number of accounting staff despite the large increase in manufacturing? The financial reports Soft Touch Limited Statement of Comprehensive Income for the year ended 30 June 2020.

The inventory level at Melbourne is $846,000 and in Perth $500,000. there are debt covenants associated with the long term borrowings. STL is not at risk of breaching any of the debt covenants?

ACCT 3005 Auditing Theory and Practice

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