CASE STUDY  CLASSIC WEAR LIMITED: Audit and Internal control

Audit and Internal control
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CASE STUDY  CLASSIC WEAR LIMITED The senior partner of your audit firm has informed you that you are to be in charge of a new client, CLASSIC WEAR LIMITED , for the audit of the year ended 30 th September 2015 . The company is engaged in the import of fabrics from Asia and the manufacture and wholesaling of clothing. The company turnover is approximately £ 44 ,000,000 and it has a work force of about 120 and plans to employee another 30 staff in the next 3 months . The company has grown from a small family owned business to a highly successful company ov er the last 10 years. Currently, it has two warehouse s and manufacturing location in Romford, east London. This will be the only client your firm has in the clothing industry. As the manager for this audit, you arrange a meeting with Richard Joy, the CEO o f CLASSIC WEAR LIMITED , in order to familiarise yourself with the company’s operations. From your meeting, you discover the following:  The company’s Board of Directors is comprised of three family members from the Ronald family, (the business ow ners); two close business associates/friends of the family; and two respected members of the Romford business community.  The financial statements of the company show a steady decrease in profit over the last two years, mainly because of reducing sales vol umes. Richard attributes this to slipping market share of the company as smaller sized competitors are increasingly encroaching on its customer base.  In response to the “ Frozen kid character effect” CLASSIC Wear Ltd wants to be ready to manufacture clothing for kids with designs coming from Frozen . Richard is anticipating new business arising from this contract and has taken on 20 new staff to carry out this extra work. The company has also rented an additional warehouse for storage, close to the existing premises.  Over the last 18 months the accounts department has experienced a high turnover of staff, with most ex – staff joining the company’s competitors who have more attractive pay packages. Therefore, of the 15 accounts st aff, only the financial controller and management accountant have been with the company for more than two years.  The purchasing system at CLASSIC WEAR LTD was automated during the period being audited. Purchase orders are now generated automatic ally by the computerised inventory system when inventory falls below a given level. However, this system is not working well because it uses complicated purchasing and production models, making it difficult to use, hence many manual adjustments are require d. So far only two members of the production manager’s clerical staff are able to use it. As a result, sometimes the items ordered are delivered late or in the wrong quantities. In addition, the system takes up a lot of space on the company server and is c ausing problems in other systems.  In terms of record keeping, the most comprehensive records maintained within the company are the sales records, which are reconciled and reviewed weekly by the chief accountant together with sales manager. However, produc tion figures and inventory figures are not reviewed as diligently. Stock taking is done periodically throughout the year and not at the year – end.


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Draft a report to the Senior Partner of your audit firm, in which you:

1. Identify the key business risks  CLASSIC WEAR LIMITED faces and the possible consequences and suggest how these risks could be mitigated. (20 Marks)

2. Describe the information you will seek, and procedures you will perform, during the planning and risk assessment phase of the audit in accordance with ISA 315 ‘Obtaining an understanding of the entity and its environment and assessing the risks of material misstatement’. (30 Marks)

3. Describe the tests of controls you would plan for (and why) in order to obtain sufficient appropriate evidence concerning purchases. (20 Marks)

4. Explain the substantive audit procedures you would perform to obtain reasonable assurance about the validity of the inventory figure in the financial statements of CLASSIC WEAR LIMITED. (20 Marks)


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