Noda plc (‘Noda’) is a large company which your firm has just accepted as a new client. You are the audit manager for Noda and are planning the audit for the year ended 31 December 20XY. The principal activity of the company is the manufacture and sale of mobile phones and associated software. Noda is based in the UK but manufactures the phones in China and sells its product all over the world. You are conducting initial planning and risk assessment work and have discovered the following information: i. Draft Figures for the Year Ended 31 December 20XY Management accounts indicate that the revenue for the year has fallen by 25% compared with the previous year following concerns that Noda is using an operating system for its phones that is unpopular with customers. Noda has entered into a contract with the operating system supplier that lasts for another two years. Withdrawal from the contract could mean that Noda would have to make significant penalty payments to the operating system supplier. ii. Shareholder Threat As a result of the above the value of the Noda’s shares has fallen significantly. A group of shareholders are protesting that none of the directors should receive bonuses for the year. This issue is receiving a lot of publicity nationally. iii. Finance Issues Noda has obtained a significant amount of debt finance from various sources and its gearing ratio is now 80%. Industry analysts have commented that Noda may need to raise more money from shareholders in the future in order to continue in operations Identify and explain the potential audit risks indicated in the scenario above.
Noda plc (‘Noda’) is a large company which your firm has just
accepted as a new client. You are the audit manager for Noda
and are planning the audit for the year ended 31 December
20XY. The principal activity of the company is the manufacture
and sale of mobile phones and associated software. Noda is
based in the UK but manufactures the phones in China and
sells its product all over the world.
You are conducting initial planning and risk assessment work
and have discovered the following information:
i. Draft Figures for the Year Ended 31 December 20XY
has fallen by 25% compared with the previous year following
concerns that Noda is using an operating system for its phones
that is unpopular with customers. Noda has entered into a
contract with the operating system supplier that lasts for
another two years. Withdrawal from the contract could mean
that Noda would have to make significant penalty payments to
the operating system supplier.
ii. Shareholder Threat
As a result of the above the value of the Noda’s shares has
fallen significantly. A group of shareholders are protesting that
none of the directors should receive bonuses for the year. This
issue is receiving a lot of publicity nationally.
iii. Finance Issues
Noda has obtained a significant amount of debt finance from
various sources and its gearing ratio is now 80%. Industry
analysts have commented that Noda may need to raise more money from shareholders in the future in order to
continue in operations
Identify and explain the potential audit risks indicated in the
scenario above.
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