Case Study (Part 2) – ACCT 3000 Semester 2, 2022

You are an Audit Senior currently planning the 30 June 20X2 audit of Western Wood Limited
(WWL), an Australian-owned company that produces and exports woodchips to Japan. WWL’s
operations are located in Eucla, on the far eastern edge of Western Australia. Timber is
purchased from forests nearby, processed into woodchips and immediately stockpiled for
export at the company’s shipyards at Dockland Bay. WWL contracts timber cutters to deliver
set tonnages of logs to its mill throughout the year. Woodchips are transported to Japan on
charter vessels, which make an average of one trip a month.

At a recent planning meeting with WWL’s senior staff, you obtained the following overview
of this year’s operations:

WWL uses specialised wood chipper machines for producing high-quality wood chips. To
place itself in a more competitive position, WWL recently (in January 20X2) made a significant
investment in new wood chipper machines, combing fume-free electric operation with an
impressive 2.5 inch cutting capacity. These new machines offer greater precision and
uniformity when cutting pine, miscellaneous wood and moso bamboo into uniform pieces.
Your analytical procedures indicate a significant increase in acquisitions of machinery.

Timber is purchased in 65 hectare lots from plantations and state forests. In the past, 75% of
timber was sourced from plantations, however this has fallen to 55% in the current year. The
corresponding increase in timber sourced from state forests has angered environmental groups.
Protests have been held in several forests, which has slowed production and frustrated the
contractors, who are only paid once set tonnages of timber are delivered to the mill. In addition,
several shipments of woodchips have been delayed, angering the Japanese customers who are
threatening to deduct 35% from amounts owing as compensation for lost production time.

One of WWL’s customers, Premium Furniture Limited (PFL), is claiming that the latest batch
of woodchips it received was contaminated with a microbe. This microbe affects the physical
structure of the chips, reducing the pressure the chips can withstand when compressed. This
has made the chips useless for heavy duty items such as desks and bookcases. PFL is refusing
to pay its account, which is already five months overdue. WWL has launched an investigation
into the allegations, but as yet has not been able to substantiate them.

In January, WWL upgraded its accounts payable system to a fully integrated package that
automatically updates the general ledger when creditor entries are made. Some problems have
been experienced with the creditors ledger, which is split into $US and $AUD amounts. In
some cases, $US amounts have been recorded as $AUD, resulting in inaccurate creditor
balances. Month-end rollovers have also proved problematic, with creditor balances being
incorrectly re-set to zero at the first of every month. This has required each creditor’s history
to be re-entered manually each month, a time-consuming process that is taking accounting staff
away from their normal duties.

During the period, the Australian dollar has remained steady against the Yen, although it fell
by about 4% against the US dollar. Debtors are invoiced in $US at the time of shipment, and
paid in $US one month after the shipment is received. It takes around six weeks for the charter
vessels to travel from Dockland Bay to Japan. All plantations from which WWL sources timber
are owned by US firms, which demand payment in $US prior to the timber being cut. A recent
pandemic-induced downturn in the Japanese economy is affecting forward orders, which have
fallen by 15%.

The human resources department at WWL is responsible for selecting and appointing
employees, approving pay rates and promotions, and processing employee terminations. The
payroll department is responsible for preparing the weekly wages based on the information
from the human resources department and according to hours worked by each employee. WWL
has a number of long-term contracts to deliver woodchips throughout Australia. The company
operates a fleet of large trucks and has a number of permanent drivers who are assisted by other
drivers on short-term contracts during busy times of the year (such as the three months prior to
Christmas). Drivers work long shifts and most of the driving is done at night.

During busy times the human resources department falls behind with processing paperwork
related to the short-term contract drivers. In particular, there are constant complaints from the
drivers that they have to wait several weeks after they start work for their first pay.

When testing the payroll process you discover that the complaints from the drivers are justified;
it takes on average three weeks from the date the driver starts work for the relevant
authorization for the driver’s pay to be received by the payroll department. However, you also
find that on average drivers are paid for one additional week after they actually leave the
company because the human resources department does not record the termination date
accurately. The payroll department tells you that, because of the confusion, no provision is
made for accrued wages at year-end.

Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to
Western Wood Limited (WWL). When making your risk assessment:
(a) Identify four (4) 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 four (4) accounts identified. In your explanation, please
mention the key assertion(s) at risk of material misstatement for each of the accounts
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)]