Audit Planning Briefing Notes for Good Food Company

Learning Outcomes addressed and assessed in this Assignment

1. Evaluate the nature, purpose and scope of an audit and the legal, regulatory and ethical framework for auditing
2. Demonstrate how the auditor obtains and accepts audit engagements and conducts a detailed investigation into an audit client to identify the risks of material misstatement (whether arising from fraud, error or other irregularities)

Good Food Company (GFC), is a privately owned Irish registered company with a large number of restaurants throughout the country, operating under two well-known brand names. The company’s strategy is to offer a variety of family dining experiences in the restaurants situated in city and town centres, with the objective of maximising market share in a competitive business environment.

You are an audit junior in Sackville & Co, a firm of Chartered Certified Accountants, who were appointed to the GFC audit this year. You are due to attend the audit planning meeting for the upcoming audit of the financial statements of GFC Ltd for the year ended 30th April 2021. The audit partner has asked you to prepare for some notes for the other junior teammembers.

The Happy Kidz (HK) chain of restaurants provides family-friendly dining in an informal setting. The restaurants are all located in busy town centres. Each restaurant has a large children’s play area containing climbing frames and slides, and offers a crèche facility, whereparents may leave their children for up to two hours. There was media criticism of the qualityof the childcare offered in one crèche earlier this year after a child was slightly injured whileplaying there. The company is currently conducting a review of operations following theincident. One of the restaurants was closed in October 2020 for three weeks following a health and safety inspection which revealed some significant breaches in hygiene standards in the kitchen. The management were completely surprised by the findings of the regulatory authority.

The Mc Dees (MD) chain offers fast-food. These restaurants are located at bus/ train stations and airports. In 2020 GFC launched a significant marketing campaign to support the MD brandname. In November 2020 the company began providing nutritional information on its menusin the MD restaurants, following pressure from the government for all restaurants to disclosemore about the ingredients in their food. A new government regulation issued in November2020 will take effect in June 2021. New advertising regulations coming into force in June 2021,will forbid the advertising of food in a manner specifically aimed at children. 50% of theturnover for this business segment is derived from the sale of ‘Happy Foods’ – self-contained children’s meals which contain a small toy.

Due to the Covid-19 pandemic and the actions of the government to curb the spread of the virus, the restaurants were all closed for many months in 2020 and have not yet re-opened in  2021. The HK and MD chains were already providing a takeaway service and this was allowed to continue during the restrictions, but revenue is still much lower than in previous years. The company has incurred significant costs to make the restaurants Covid safe for when they are allowed to re-open and these costs were covered by an extension to the company overdraft facility. The limit of the overdraft facility has been reached and the bank is refusing to increase it further.

The company availed of a number of government grants during the lockdown, but this source of assistance will not be available to the company for much longer. The directors are very concerned about the cashflow position of the company. A cashflow forecast prepared for April 2021 to August 2021 shows a significantly worsening cash position for the company.

Prepare briefing notes to be used at the planning meeting with your junior audit team members in which you:

i) Refer to the relevant International Standard on Auditing and analyse the aspects of a client’s business which should be considered in order to gain an understanding of the company and its operating environment. (12 Marks)

ii) Recommend the sources of evidence an auditor can use to gain this understanding of a company and its operations. (8 Marks)

iii) Define Business Risk and Risk of Material Misstatement in the Financial Statements, and explain their inter relationship. (10 Marks)

iv) Using the information provided, evaluate FIVE business risks facing GFC. (50 Marks)

Outstanding work which is both illuminating and insightful. Language is fluent and authoritative demonstrating a comprehensive knowledge, and convincing command of the subject matter. Accurate and concise application of knowledge. Exceptionally clear and appropriately articulated examples provided to support students answer. Excellent structure.

Evidence of a very good understanding of concepts and regulations and current situation. Competent critical analysis with the ability to develop a clear and compelling argument. Sufficiently developed examples where required to help illustrate students work.

Good understanding of the underlying concepts and a good attempt at applying the framework when required. Good logic and structure to answer. Examples  provided to illustrate answer but not sufficiently developed.

Evidence of some reading from lectures, hand-outs, recommended texts though often descriptive in nature. Reasonable use of most major points though missing some key elements of the framework. Confused or unclear in parts. Examples provided where required but underdeveloped.