Background information Gifts Ltd (Gifts) operates 30 specialty gift stores. The

Question

Background information Gifts Ltd (Gifts) operates 30 specialty gift stores. The company’s year-end is 30 June 2018. The audit manager and partner recently attended a planning meeting with the finance director and have provided you with the planning notes below. You are the audit senior, and this is your first year on this audit. The audit manager has asked you to undertake some research to gain an understanding of Gifts, so that you are able to assist in the planning process. He has then asked that you identify relevant audit risks from the notes below and also consider how the team should respond to these risks. Gifts spent $2.1 million in refurbishing all of its stores and extending their central warehouse. In order to finance this refurbishment, Gifts borrowed $2 million from the bank. This is due to be repaid over five years. The company will be performing a year-end inventory count at the central warehouse, as well as at all 30 stores, on 30 June 2018. Inventory is valued at selling price less an average profit margin, as the finance director believes that this is a close approximation of cost. Prior to the 2018 financial year, each store maintained its own financial records and submitted returns monthly to head office. During the 2018 financial year all accounting records were centralised within head office. Therefore, at the beginning of the 2018 financial year, each store’s opening balances were transferred into head office’s accounting records. The increased workload at head office has led to some changes in the finance department and in May 2018 the financial controller left. Her replacement will start in late June 2018. REQUIRED: a) List two (2) sources of information that would be of use in gaining an understanding of Gifts, and for each source describe what information you would expect to obtain.

Explanation / Answer

Gathering information before an audit is a very important part of the audit process that helps us in identifying risks relating to any audit exercise. Sources of such information, in case of Gift may be as follows:

Other important sources of information about the company may be Media Reports, expense vouchers generated during the year, Another one is the Audit Papers of the previous auditors. These are extensively utilized to identify specific audit risks.

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