Maple Leaf Holdings Limited (“ML”) is a company listed on HongKong Stock Exchange. Together with its subsidiaries, ML is engagedin the manufacturing and trading of various candies and chocolatesin Hong Kong and the Mainland China. ML sells a wide range ofproducts, from ordinary to high-end. Ordinary products targetingthe mass consumer are sold to supermarkets and convenience stores.For high-end products, sales are made to luxury restaurants andhotels. ML also operates its own retail outlets.
In December 2018, ML appointed its first internal auditor, Ms.Cindy Yu, who reports directly to the accounting manager. Cindy isa newly qualified CPA. She joined ML as an accounting assistant in2012, shortly after obtaining her first degree. In 2016, she waspromoted as assistant accounting manager. She was transferred toher present role in December 2018.
Cindy has been focusing her work on the economy, efficiencyand effectiveness of operations, mainly in respect of thenon-financial controls of ML. She and her team have reviewed theingredient ordering and warehousing processes in the past twelvemonths.
Cindy produced an internal audit report summarising herfindings and recommendations on where processes could be improved.However, due to time, manpower and resources constraints, she didnot maintain much record on her understanding of the ingredientordering and warehousing processes and details of the work sheperformed (e.g. what samples were tested).
Some significant recommendations in the internal audit reportwere:
(1) more disaggregated information and analyses on salesshould be generated, prepared and reviewed on a regular basis forbetter purchase decisions and formulation of effective salesstrategies; and
(2) security in the warehouse should be improved including theinstallation of surveillance cameras inside the warehouse ratherthan just at the entrance, and having two guards instead ofcurrently only one guard.
Required:
. (a) From the above information, evaluate the effectivenessof ML’s internal audit function.
. (b) Assume you are the external auditor of ML for thefinancial year ended 31 December 2019:
(i) Discuss the impact of the internal audit findings on yourfinancial statement audit.
(ii) Identify and explain any TWO financial statementassertions you will focus on in your audit.
