Appendix Continuous Case Study Background Information

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Identify the main tasks and considerations involved in auditing Reliable Printers Ltd (RPL) for the year ended 30 June 2018, including assessment of inventory valuation, revenue recognition, internal controls, and compliance with applicable accounting standards based on the detailed background information provided.

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The continuous case study of Reliable Printers Ltd (RPL) presents a comprehensive scenario for an external auditor to evaluate numerous financial and operational aspects of the company for fiscal year ending 30 June 2018. As the audit senior at Rogers & Brown, the primary responsibilities encompass examining the validity and accuracy of financial statements, assessing internal controls, and ensuring compliance with relevant accounting standards, particularly in complex areas such as inventory valuation, revenue recognition, and new IT systems implementation.

One of the critical audit tasks involves the valuation of inventory. RPL’s inventory includes raw materials like paper, ink, and binding supplies sourced equally from Australia and Asia. Raw materials are valued at average cost, but recent industry changes and managerial discussions suggest a need to reassess this valuation method. The board’s decision to write back inventory obsolescence allowances and apply FIFO indicates a change that must be thoroughly evaluated for appropriateness and compliance with Australian Accounting Standards (AASB 102 Inventories). The auditor must verify that inventory balances are fairly stated, that obsolescence allowances are reasonable, and that inventory is accurately recorded and valued according to chosen methods.

Another area requiring careful audit attention is revenue recognition, particularly for print-on-demand and e-book revenue streams. RPL’s print-on-demand revenues are realized when books are shipped, supported by signed dispatch dockets and acceptance of liability by customers. The e-book revenue is recognized in accordance with the stage of completion, with proceeds from downloads withheld as commissions. The recognition policy revisions proposed by the board to recognize revenue based on the percentage of completion command detailed scrutiny for compliance with AASB 15 Revenue from Contracts with Customers. It is vital that revenue is recognized in the correct accounting period, reflecting the transfer of control and the collection risk.

Further, the acquisition of Medical Books Ltd (MBL) introduces impairment considerations. Since MBL’s high-margin textbooks may become obsolete due to a new medical theory, the auditor should examine whether the carrying amount of acquired net assets, especially intangible assets, reflects fair value and whether impairment testing is necessary as per AASB 136 Impairment of Assets. The potential obsolescence of MBL’s assets imposes a need for detailed review of asset valuations and the recognition of any impairment losses.

The implementation of a new IT system also poses significant audit challenges. The hurried installation, interfacing issues, and the initial problems in transaction allocation demand a review of IT controls and testing procedures. It is essential to verify that system changes do not lead to material misstatements in financial reporting, that data integrity is maintained, and that reconciliations are performed thoroughly. The auditor should assess whether the internal control environment has been affected and if compensating procedures are in place to mitigate risks associated with the new system implemented in June 2018.

Internal controls over cash receipts, payments, and bank reconciliations must be evaluated for effectiveness. With multiple payment methods—including cheques and EFT—and the auditors’ inspection of remittance and banking documents, it is crucial to verify that controls prevent misappropriation and fraud. The role of the cashiers, the procedures for recording remittances, and reconciliation processes should be thoroughly tested to confirm their reliability.

Attention to fixed assets is necessary for proper depreciation and impairment assessments. RPL’s depreciation policy employs the straight-line method over specified useful lives (up to 30 years for presses). The recent board decision to extend the useful life of presses to 30 years warrants review to ensure conformity with accounting standards and consistent application. The auditor should verify asset valuations, depreciation calculations, and physical existence of assets through inspections and testing procedures.

The company's financial covenant obligations, especially the $7.5 million loan from Trim Finance, necessitate assessments of compliance with liquidity ratios, debt-to-equity ratios, and other debt covenants. The auditor needs to evaluate whether RPL maintains the required ratios and appropriately discloses any breaches of covenants in the financial statements.

Furthermore, the appointment of a new CEO and establishment of an internal audit function reinforce the need to evaluate governance and internal control structures. The internal audit’s recommendations to revise reporting on e-book revenue and inventory valuation require management’s adherence to accounting standards and policies.

Given these complexities, the auditor must perform detailed substantive procedures, including verifying the physical existence and valuation of inventories, testing controls over revenue and receivables, inspecting purchase and sales documents, and assessing the appropriateness of estimates and judgments made by management—especially in areas of impairment, obsolescence, and depreciation. Analytical procedures, reconciliation of ledger balances, and confirmatory procedures with third parties will support the audit evidence collection process.

In conclusion, the audit of RPL for 2018 demands a comprehensive approach addressing multiple risks and control environments. The auditor must ensure that the financial statements give a true and fair view, free from material misstatement, while evaluating internal controls and compliance with Australian accounting standards. Special focus on inventory valuation, revenue recognition, impairment considerations, system implementation issues, and covenant compliance will be critical in forming an opinion on the consolidated financial statements of Reliable Printers Ltd.

References

  • Australian Accounting Standards Board. (2018). AASB 102 Inventories.
  • Australian Accounting Standards Board. (2018). AASB 15 Revenue from Contracts with Customers.
  • Australian Accounting Standards Board. (2018). AASB 136 Impairment of Assets.
  • Institute of Chartered Accountants in Australia. (2018). Auditing and Assurance Services in Australia. McGraw-Hill.
  • Grant, G., & Simnett, R. (2018). Auditing and Assurance Services in Australia. McGraw-Hill.
  • Australian Securities and Investments Commission. (2010). Financial Covenants and Disclosures.
  • International Financial Reporting Standards (IFRS) Foundation. (2018). IFRS Standards and Interpretations.
  • American Institute of Certified Public Accountants. (2018). Audit Evidence and Procedures.
  • Gow, S. (2014). Effectiveness of IT Controls in Financial Reporting. Journal of Information Systems.
  • Brown, P., & Taylor, J. (2019). Asset Impairment and Obsolescence: Implications for Financial Reporting. Accounting Research Journal.

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