Question: in your planning of the audit of mama joans plc...
In your planning of the audit of Mama Joan’s Plc (as above) you have established the following. For the year ended 31 December 2017 the forecast profit before tax is £3.4 million. This is after the deduction of £1.6 million which, in your view, relates to non-recurring expenses. During the year a process of refurbishing a majority of the restaurants has been undertaken, with significant purchases of furniture and fittings and some changes to freehold property at a cost of £5 million in total. Some of this work has been delayed beyond the year end. Payments to the relevant supplier have therefore been withheld until completion. The supplier is in dispute with the company over the delay in payment. In order to finance the refurbishment, the company borrowed £5 million from the bank, repayable over a five year period. During the year Mama Joan’s acquired rights to the recipes of Flaming Ferdinand’s chili based pizzas, at a cost of £2 million. Since these rights have been granted outright for perpetuity the finance director has informed you that she has capitalized the cost with no amortization. During the year Mama Joan’s has outsourced its payroll processing to the payroll service organization, Tabor Financial, a subsidiary of the company’s bank. Tabor handles all elements of the payroll cycle and sends monthly reports to Mama Joan’s detailing the payroll costs. The company previously ran its own payroll. Mama Joan’s has a policy of revaluing land and buildings and the finance director has announced that all land and buildings will be revalued at the year end. During a review of the management accounts for the month of December 2017, you have noticed that receivables have increased significantly on the previous year end. The finance director has informed you that the company is planning to close 5 of its restaurants (10% of the total number of restaurants), making approximately 40 employees redundant after the year end. The decision was announced to affected members of staff shortly before the year-end, but the restaurants were not closed until the second week of January.
a) Describe how an auditor will use materiality in planning and performing an audit, including consideration of the quantification of overall materiality for this audit.
b) Describe audit risk and the components of audit risk.
c) Explain in detail SIX audit risks arising on the audit of Mama Joan’s Plc for the year ended 31 December 2017, and explain the auditor’s response to each risk in planning the audit.