1 Geno Vesa Farm (GVF), a limited liability company, is a cheese manufacturer. Its principal activity is the production
of a traditional ‘Farmhouse’ cheese that is retailed around the world to exclusive shops, through mail order and web
sales. Other activities include the sale of locally produced foods through a farm shop and cheese-making
demonstrations and tours.
The farm’s herd of 700 goats is used primarily for the production of milk. Kids (i.e. goat offspring), which are a
secondary product, are selected for herd replacement or otherwise sold. Animals held for sale are not usually retained
beyond the time they reach optimal size or weight because their value usually does not increase thereafter.
There are two main variations of the traditional farmhouse cheese; ‘Rabida Red’ and ‘Bachas Blue’. The red cheese
is coloured using Innittu, which is extracted from berries found only in South American rain forests. The cost of Innittu
has risen sharply over the last year as the collection of berries by local village workers has come under the scrutiny
of an international action group. The group is lobbying the South American government to ban the export of Innittu,
claiming that the workers are being exploited and that sustaining the forest is seriously under threat.
Demand for Bachas Blue, which is made from unpasteurised milk, fell considerably in 2003 following the publication
of a research report that suggested a link between unpasteurised milk products and a skin disorder. The financial
statements for the year ended 30 September 2004 recognised a material impairment loss attributable to the
equipment used exclusively for the manufacture of Bachas Blue. However, as the adverse publicity is gradually being
forgotten, sales of Bachas Blue are now showing a steady increase and are currently expected to return to their former
level by the end of September 2005.
Cheese is matured to three strengths – mild, medium and strong – depending on the period of time it is left to ripen,
which is six, 12 and 18 months respectively. When produced, the cheese is sold to a financial institution, Abingdon
Bank, at cost. Under the terms of sale, GVF has the option to buy the cheese on its maturity at cost plus 7% for
every six months which has elapsed.
All cheese is stored to maturity on wooden boards in GVF’s cool and airy sheds. However, recently enacted health
and safety legislation requires that the wooden boards be replaced with stainless steel shelves with effect from 1 July
2005. The management of GVF has petitioned the government health department that to comply with the legislation
would interfere with the maturing process and the production of medium and strong cheeses would have to cease.
In 2003, GVF applied for and received a substantial regional development grant for the promotion of tourism in the
area. GVF’s management has deferred its plan to convert a disused barn into holiday accommodation from 2004
until at least 2006.
Required:
(a) Identify and explain the principal audit risks to be considered when planning the final audit of GVF for the
year ending 30 September 2005. (14 marks)