Question

For each of the following independent situations, you are in the planning phase of the audit and have come across with the following information:

1.   B&S is a merchandising company. The company has been doing business in Australia for the last 20 years. The accountant of B&S has been notorious for finding gaps in the legislations in order to make its clients’ financial statements look presentable as desired by the clients themselves. In the past few years, B&S has always been required by the Australian Tax Office to provide additional supporting information after the lodgement of its tax returns.

2.   Zen runs a chain of superstores in Australia. Zen is highly dependent on the IT system to run its transaction processes with the suppliers. Moreover, to save time, each of Zen’s individual stores can raise their own inventory requisition without any authorisation from the central purchase department.

3. Neptune manufactures generators for domestic users. Seven years ago Neptune manufactured a generator far superior to any of its competitors at half the price. It has therefore dominated the market over the past few years. However, recently one of Neptune’s main competitors introduced a new generator to the market. It can produce electricity at twice the amount of Neptune’s generator by spending same amount of fuel and hence is superior to Neptune’s generator. However, Neptune’s CEO is quite optimistic about the whole situation. He told you that a pricing strategy will soon be implemented to defeat the respective competitor with a lower price.

4. Thomson has planned to close an inefficient factory in country New South Wales before the end of current year. It is expected that the redeployment and disposal of the factory’s assets will not be completed until the end of the following year. However, the financial controller is confident that he will be able to determine reasonably accurate closure provisions.

5. To help achieve the budgeted sales for the year, Richardson is about to introduce bonuses for its sales staff. The bonuses will be an increasing percentage of the gross sales made, by each salesperson, above certain monthly targets.

Required:

For each of the scenarios above, explain how the components of audit risk (inherent, control or detection risk) are affected.

Answer 1