Lemoco Co (Lemoco) manufactures fizzy drinks such as cola and lemonade as well as other soft drinks
and its year-end is 31 December 20XX. You are the audit manager of Diet & Co and are currently
planning the audit of Lemoco. You attended the planning meeting with the engagement partner and
finance director last week and recorded the minutes from the meeting shown below. You are reviewing
these as part of the process of preparing the audit strategy.
Minutes of planning meeting for Lemoco
Lemoco’s trading results have been strong this year and the company is forecasting revenue of $85
million, which is an increase from the previous year. The company has invested significantly in the cola
and fizzy drinks production process at the factory. This resulted in expenditure of $5 million on updating,
repairing and replacing a significant amount of the machinery used in the production process.
As the level of production has increased, the company has expanded the number of warehouses it uses
to store inventory. It now utilizes 15 warehouses; some are owned by Lemoco and some are rented
from third parties. There will be inventory counts taking place at all 15 of these sites at the year-end.
A new accounting general ledger has been introduced at the beginning of the year, with the old and new
systems being run in parallel for a period of two months.
As a result of the increase in revenue, Lemoco has recently recruited a new credit controller to chase
outstanding receivables. The Finance Director thinks it is not necessary to continue to maintain an
allowance for receivables and so has released the opening allowance of $1.5 million.
In addition, Lemoco has incurred expenditure of $4.5 million on developing a new brand of fizzy soft
drinks. The company started this process in January 20XX and is close to launching their new product
into the market place.
The finance director stated that there was a problem in November in the mixing of raw materials within
the production process, which resulted in a large batch of cola products tasting different. A number of
these products were sold; however, due to complaints by customers about the flavor, no further sales of
these goods have been made. No adjustment has been made to the valuation of the damaged inventory,
which will still be held at cost of $1 million at the year-end.
As in previous years, the management of Lemoco is due to be paid a significant annual bonus based on
the value of year-end total assets.
1. Using the minutes provided, Identify and describe SIX audit risks, and explain the auditor’s
response to each risk, in planning the audit of Lemoco Co. (12 marks)
2. Identify the main areas, other than audit risks, that should be included within the audit strategy
document for Lemoco Co; and for each area provide an example relevant to the audit (4 marks)
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