CASE 1 Your client, BZ Limited (BZ), operates brewery and bottling plants in various locations around the world.

CASE 1 Your client, BZ Limited (BZ), operates brewery and bottling plants in various locations around the world. Each country has a Regional Processing Centre (RPC), which acts as the accounting and administrative centre for that country. Each country prepares financial data and summarises the information into a standardised package format. This package is submitted to head office in Perth on a monthly basis. Material balance sheet items consist of inventories, trade receivables, trade payables, brand names and property, plant and equipment. It is February 2016, you are currently planning the June 2016 audit and have the following information. Each situation is to be considered independently:

A.   Civil unrest in Country X makes it impossible for branch auditors to visit the RPC to carry out audit procedures on your behalf. Due to a communications blackout, you are unable to ascertain whether the RPC is still functional. Country X contributes approximately 8 percent of BZ’s turnover.

B.   In past years, head office has maintained tight control over the operations of BZ. However, in keeping with current Total Quality Management principles, many functions formerly performed at head office are now performed by each RPC. Management has expressed some concern at the quality of the monthly reporting packages which it has been receiving, particularly those from the south pacific region.

C.    Senior management has been engaged in high-level discussions with a major competitor, L Limited, with the view to establishing a joint venture operation in the UK. The joint venture agreement, signed in early February, states in part:

·      ‘BZ agrees to close down its current operations in the United Kingdom within one year of the agreement being signed.’ (These operations currently contribute 4 percent of total net profit.)

·      ‘BZ agrees that two of its six directors will be seconded to the joint venture for two years to oversee its operations.’ (This will involve the directors moving from Australia to the United Kingdom.)

D.   In order to maintain steady supply of quality barley to the Australian breweries, BZ has entered a three-year contract with a supplier. This contract provides in part:

·      “BZ guarantees to purchase the supplier’s entire stock of Grade A barley over the period of the contract. The price paid will be market rate less 10%”.

·      “Should the supply of Grade A barley fall below BZ’s requirements, BZ can purchase barley to the amount of the shortfall from other sources”.

E. Brand X beer comprises 30 percent of total revenues. A recent Brand X beer tasting festival in Europe ended with hundreds of people being taken to hospital with severe stomach cramps. The problem is believed to relate to contamination of an ingredient used in the beer. This ingredient is produced centrally in Sydney and distributed to all the breweries for use in their manufacturing operations.

F. New environmental laws introduced in Australia during the year have imposed the following statutory accounting regulations on the Australian operations of BZ:

 · The ‘cost’ of waste discharges into waterways must be charged as an expense, to reflect the reduced quality of the water post-discharge.

· The ‘value’ of any waterways situated on company property must be taken up as an asset. The waterways must be amortised as detailed above. The value of the waterways will not be allowed to fall below 70 percent of their original value.

Required: For each independent situation provide:

A) the effect on the audit plan, and

B) Include the nature and extent of audit evidence needed must be considered.