Jolie Co is a large company, operating in the retail industry, with a year ended 30 November 2010.

You are a manager in Jen & Co, responsible for the audit of Jolie Co, and you have recently attended a planning meeting with Mo Pitt, the finance director of the company.

As this is the first year that your firm will be acting as auditor for Jolie Co, you need to gain an understanding of the business risks facing the new client.

Notes from your meeting are as follows:

Jolie Co sells clothing, with a strategy of selling high fashion items under the JLC brand name. New ranges of clothes are introduced to stores every eight weeks

The company relies on a team of highly skilled designers to develop new  fashion ranges.

The designers must be able to anticipate and quickly respond to changes in consumer preferences.

There is a high staff turnover in the design team

Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order on-line, or over the phone.

The company has recently upgraded the computer system and improved the website, at significant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details.

The new on-line sales system has allowed overseas sales for the first time

The system for phone ordering has recently been outsourced.

The contract for outsourcing went out to tender and Jolie Co awarded the contract to the company offering the least cost.

The company providing the service uses an overseas phone call centre where staff costs are very low

Jolie Co has recently joined the Ethical Trading Initiative.

This is a ‘fair-trade’ initiative, which means that any products bearing the JLC brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process.

A significant advertising campaign promoting Jolie Co’s involvement with this initiative has recently taken place

The JLC brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised.

The brand represents 12% of the total assets recognised on the statement of financial position

The company owns numerous distribution centres, some of which operate close to residential areas.

A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm.

The authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached.

Two licences were revoked for a period of three months during the year

To help your business understanding, Mo Pitt has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative figures, which are shown below:

Required

a) Prepare briefing notes to be used at a planning meeting with your audit team, in which you evaluate the business risks facing Jolie Co to be considered when planning the final audit for the year ended 30 November 2010. (15 marks)

Professional marks will be awarded in part (a) for the format of the answer and the clarity of the evaluation. (2 marks)

(b) Using the information provided, identify and explain FIVE financial statement risks. (10 marks)