You are currently planning the 30 June 20X7 audit of Forest Ltd, an

Australian-owned company that produces and exports woodchips to

Japan. Forest’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 company’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 Ltd’s senior staff, you obtained

the following overview of this year’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

belts.

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

production time.

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 Ltd’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 Ltd’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 creditor’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%.

 

 

Required:

 

(a) For each of the following items in Forest Ltd’s financial report,

identify two (2) factors in the information provided that increase

audit risk:

(i) Accounts payable;

(ii) Commitments and contingencies;

(iii) Inventory; and

(iv) Receivables.

 

(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.