Question

AP9.4   North West Paper Inc. (North West) provides cardboard, paper, and plastic packaging materials to a large number of manufacturers and distributors in all states. The cardboard and paper division is a well-established business, but North West has been providing plastic products only since its takeover of Plastic Products Inc. 18 months ago. The takeover doubled North West's revenue and caused changes in its management structure, adding another two divisional managers. These new divisional managers are in charge of plastic product sales to different areas of the country, Plastic (Eastern) and Plastic (Western), and they join the Paper (Eastern) and Paper (Western) division managers in reporting directly to the CEO.

All internal operating reports are now structured along the four divisional reporting lines, although external financial statements continue to be produced for the whole business. All purchasing and billing systems are fully integrated, although it is possible to extract data along divisional lines, and by state (as before). North West purchases bulk supplies of raw plastic and paper and makes boxes, rolls, and sheets of these materials to fill customer orders. Production processes in the paper divisions have not changed, and North West has made minimal changes to the production processes used by Plastic Products Inc.

Required

a. Identify the inherent risks at the financial statement level caused by the takeover of Plastic Products Inc. What procedures could the auditors take to respond to risk at the financial statement level?

b. Discuss the factors that would increase or decrease the reliability of data used in substantive analytical procedures at North West.

Answer 1

Solution:

A).Please find enclosed images
banu Au In herent sudit Risks are the risks that the materical misstatements could happen possibly in financial statements due to a other reasons rather than the failule of internal control over the financial statements Those including the complexity of elements being reported in Francial statements while those elements involved many justifications and adjustments from the management of the Inherent ricks cause by externas factors rather than External factors. There are examples ira w Judgement. If the elements of financial statements involve a high judgment or justification from management the degree of incorrect judgement is likely to increase. Estimates. There are larges or significant accounting estimated in the financial Statement may increase the inherent risks. The complexity of the business might affect Certain items in the Financial statements egir complex contract with different many kinds of terms and condition as well as variability.

(1) Auditor Approach Normally the audibor perform a risk assessment on the Financial statements that they are auditing this usually happens. at the planning age of financial statement arediting & Aalt o As mention above, most of the factors that affect the inherent risks are from external factors oather than internal Therefore when assessing the inherent risks that could materially affect the entity's Financial statements, auditor Should assess how those factors could affect the entity's financial statements. The assessment should also be defending on the experiences and exportise of the industry that auditors' have. It is important to understand that ass essing inherent risks is subjective processes. Howerce the approach to perform the assessment is to take the look at the external environments that could potentially affect the quality of financial statement I
b).
A ) Date nte Page by. The relialoility of data is influenced by its source cend nature and is dependent on the circumstances och under which it is obtained. Accordingly following are referent when determining whether data is reliable for purposes of designing substantive analytical procedures. - (i) source of the information available. For ea o information may be more reliable when in is obtained from in defendent sources outside the entity. is Comparability of the information available. for eg: broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialised products & (i) Nature and relevance of the information available for eg whethes budgets have been established as results to be expected rather than as goals to be achieved: ling Control over the preparation and of the Information that are designed to esure its completeness, accuracy and validity, validity.