Question

Consider the following independent situations, all of which apply to audits of entities for the year ending 31 December 20X7:

(i) Slipway Limited, a listed company, has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in Slipway’s operations and consequently margins have been falling. While the bankers are presently happy to continue providing Slipway with loan facilities, they do expect to see improved results in the next financial report. Articles about Slipway’s expected financial results appearing in recent press reports all had quite a pessimistic tone.

(ii) Discount Foods Limited is a large supermarket chain with offices in all capital cities around Australia. Until 30 June 20X7 data processing relating to payroll transactions will be carried out in each capital city by an independent computer service bureau. \

(iii) Getaway Pty. Limited is a long established firm which has been operating a boutique hotel in the Blue Mountains for over 20 years. During this time, it has adopted a conservative business strategy that has seen it produce adequate, though slightly unimpressive, results. A new CEO has been appointed to run the firm from 1 September 20X7. He has already released his plans for renovating the hotel, despite not officially serving as CEO yet. You have also heard him discuss the implementation of a new marketing strategy to boost occupancy rates.

(iv) Angora Pty. Limited is a small primary producer specializing in the production of angora wool. Angora’s recent display at a trade show has seen orders flood in from overseas buyers. The accountant, Michael, has done his best to satisfy the orders as quickly as possible while maintaining the appropriate (foreign currency) accounting records. However, from some of the questions he has been asking you, you suspect he is out of his depth.

(v) Kings Pty. Limited has been manufacturing uniforms for the Australian market for the last 40 years. The government’s recent tariff reduction policy has placed Kings in direct competition with cheaper uniforms manufactured overseas. In a bid to retain market share, Kings has been selling part of its school uniform range at less than cost. However, overall profit figures remain buoyant.

Required: For each of the above independent situations describe the overall impact on audit risk and identify the specific component(s) of audit risk affected.

Answer 1

Situations	Specific Component of Audit Risk	Overall Impact on Audit Risk
(i) Slipway Limited, a listed company, has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in Slipway’s operations and consequently margins have been falling. While the bankers are presently happy to continue providing Slipway with loan facilities, they do expect to see improved results in the next financial report. Articles about Slipway’s expected financial results appearing in recent press reports all had quite a pessimistic tone.	Control Risk	Here in the scenario, it is apparent that cost cutting strategy is not proving beneficial at any cost. It means controls put in place are not coherence with the process. And they are not implement efficeintly an deffectively to control the same. Accordingly Auditor need to recommend the chnages in control which prevent or detect the material cost.
(ii) Discount Foods Limited is a large supermarket chain with offices in all capital cities around Australia. Until 30 June 20X7 data processing relating to payroll transactions will be carried out in each capital city by an independent computer service bureau. \	Detective and Control Risk	Here, Maintaining payroll system separately on location wise basis leaves the organisation at both detection as well as control risk. Because shifting or transfer of employee will not be entertained within the system as system is not centralised. Chances of mismanagement is very high and fraudulent. Auditor need to have substantive procedures and such audit may be time consuming in themselves to come to any conclusion about the process deployed within the organisation.
(iii) Getaway Pty. Limited is a long established firm which has been operating a boutique hotel in the Blue Mountains for over 20 years. During this time, it has adopted a conservative business strategy that has seen it produce adequate, though slightly unimpressive, results. A new CEO has been appointed to run the firm from 1 September 20X7. He has already released his plans for renovating the hotel, despite not officially serving as CEO yet. You have also heard him discuss the implementation of a new marketing strategy to boost occupancy rates.	Inherent Risk	In this situation appointment of new CEO not on documents will be factor of audit risk till inherent level, " tolerable level" because only directions for policy procedures will be adhered and no other authorisation will be eventually directed by him will be followed in monetary terms. As even any authorisation will not be found correct to any outside body. hence risk level is at inherent level in this case.
(iv) Angora Pty. Limited is a small primary producer specializing in the production of angora wool. Angora’s recent display at a trade show has seen orders flood in from overseas buyers. The accountant, Michael, has done his best to satisfy the orders as quickly as possible while maintaining the appropriate (foreign currency) accounting records. However, from some of the questions he has been asking you, you suspect he is out of his depth.	Detective risk	In this scenario, as Accountant is not aware of the maiantainence of books or accounting principles to be followed, control policies are already in place to detect the same but as lack of specilization will cause non proper / unauthorised accounting entries in books which may have different impact theron. So auditor has to detect each and every entry related with such transaction on open eye basis in order to reflect that no mismanagement is been done herewith.
(v) Kings Pty. Limited has been manufacturing uniforms for the Australian market for the last 40 years. The government’s recent tariff reduction policy has placed Kings in direct competition with cheaper uniforms manufactured overseas. In a bid to retain market share, Kings has been selling part of its school uniform range at less than cost. However, overall profit figures remain buoyant.	Control Risk	In this situation, falling down the prices and keeps the position as earlier. Seems the organisation is well equipped with efficient and effective control or vice versa where control are not enough to share the mismanagement within the organisation or its impact on organisation. So here auditor need to do the dept analysis of the controls in process to draw conclusions.