You are currently planning the 30 June 20X7 audit of Forest Ltd, an
Australian-owned company that produces and exports woodchips to
Japan. Forestâ€™s operations are located in Eden, on the far south coast of
NSW. Timber is purchased from forests nearby, processed into woodchips
and immediately stockpiled for export at the companyâ€™s shipyards at
Twofold Bay. Forest 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 Forest Ltdâ€™s senior staff, you obtained
the following overview of this yearâ€™s operations:
A massive conveyor belt is used to transport the woodchips from the mill
to the stockpile. The manufacturer of this belt was recently taken over by
an overseas competitor of Forest Ltd, Chipper Ltd, which processes
woodchips in several South-East Asian countries. Chipper Ltd has
indicated that it is willing to sell equipment to its competitors, but at
double the price it will sell to its other customers. It is doubtful whether
any other companies in the world manufacture such specialised conveyor
Based on current usage figures, it is expected that the existing conveyor
belt will last until December 20X8. Sufficient spare parts are on hand to
carry out routine maintenance work. However, should a replacement belt
be required, it would take at least six months to have a replacement made
and shipped to Australia, and a further four weeks to install and test it. It
is unlikely that the company could survive a six months interruption to
normal operations. Management are currently deciding whether they
should order a replacement belt from Chipper Ltd despite the excessive
cost, or continue to search for an alternate supplier.
Timber is purchased in 50 hectare lots from plantations and state forests.
In the past, 70% of timber was sourced from plantations, however this
has fallen to 50% 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 20% from amounts owing as compensation for lost
Last month, a protester suffered a broken leg, allegedly because he was
hit by a timber truck. The protester was blocking the main access road to
one of the state forests at the time of the accident. The protester is now
suing Forest Ltd for damages, claiming the contractor was in fact an
employee of Forest Ltd at the time of the accident, and was acting on
Forest Ltdâ€™s instructions. Forest Ltd is fighting the case and appears to
have a reasonable chance of winning; however, the adverse publicity
being generated is making the state government nervous about selling
Forest Ltd any more of its timber resources.
One of Forest Ltdâ€™s customers, Wood Ltd, 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. Wood Ltd is refusing to
pay its account, which is already five months overdue. Forest Ltd has
launched an investigation into the allegations, but as yet has not been
able to substantiate them.
In January, Forest Ltd 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 creditorâ€™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 3% 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 Twofold Bay to Japan. All plantations from which Forest Ltd
sources timber are owned by US firms, which demand payment in $US
prior to the timber being cut. A recent downturn in the Japanese economy
is affecting forward orders, which have fallen by 15%.
(a) For each of the following items in Forest Ltdâ€™s financial report,
identify two (2) factors in the information provided that increase
(i) Accounts payable;
(ii) Commitments and contingencies;
(iii) Inventory; and
(b) Discuss one (1) adjustment to be made to your audit plan in
response to the audit risk associated with each of the factors
identified in part (a).
(c) Outline six (6) factors that indicate Forest Ltd may encounter going
concern problems over the next 12 months.
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