Question

You are an Audit Senior currently planning the 30 June 20X9 audits of Comp Limited (Comp), Health Limited (Health), and News Limited (News). At recently scheduled planning meetings with Comp, Health, and News, you obtain the following overview of this year’s operations for each of the three client companies:

Comp is a manufacturer of computer hardware. The old costing system that was developed in- house, could no longer keep up with the complex and detailed manufacturing costing process that provides tender/bid submission costings and the company’s comprehensive reporting requirements. As a result, Comp purchased and installed a popular off the shelf (not customized) costing system to support the highly sophisticated and cost-sensitive nature of its product designs. Since this system had been utilized by many other firms in the industry, Comp has not thoroughly tested the adequacy of the features and controls inherent within the system. At the same time, the staff is not feeling confident with the new system due to lack of training and supervision. Staff is also concerned that data might be lost when converting to the new system.

Health operates chemist shops in Perth. A large proportion of the sales transactions are conducted in cash. Health claims on having strong control policies and procedures in place to monitor the employees handling cash transactions and safeguarding the cash. However, the proper implementation of those policies had been questioned by the previous auditor. As Health is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain additional funding for the expansion. Before approving the loan, the bank requires Health to provide them with an audited financial statement. The unaudited figures of current year suggest Health’s revenue to have increased significantly by 25 percent from last year while the gross profit appears to have increased marginally by 5 percent.

News has been in the paper manufacturing business for the last 17 years. It manufactures and distributes paper throughout the Australian continent. During the last five years, News opened four new factories in three different locations, financed mainly from bank loans. Due to rapid growth in the company, the financial director John Brown is keen to set up an internal audit department. Currently the project appears to have stalled, as some of the senior executives do not foresee the benefit of setting up such a department and are unwilling to commit any additional fund or resources on this plan. The senior executives argue that they are competent enough to monitor the internal controls of News.

Required:

Prepare a memorandum to the audit manager, outlining your risk assessments relating to Comp, Health and News. When making your risk assessments:

(a) Identify and discuss the risks that may arise from each of the above companies. In your explanation, please mention the components of the audit risk model affected.

(b) Identify how the audit plan will be affected and recommend specific audit procedures to address these risks.

Answer 1

Company Name	Facts	Risk	Impact on Audit Plan
Comp	Installation of New IT enabled System	- Unknown to the organisation Structure - Untrained Employees - Loopholes in the system unknown - Capital deployment.	- Auditor need to check the risk associated with the new IT system. - IT system deployed / report generation is as per the requirement for the audit objective. - RCM matrix need to be analysed again.
Health	Submission of Unaudited Financial Statement, Top Line simply increased by 25pc and gross profit by 5pc.	- Unaudited balancesheet should be mentioned with no records.	- First priority should be given to finaliation of the unaudited financial statemnets. Secondly, the areas further need to be checked and evaluated accordingly. This may cause increase in delivery of the project.
News	Set up of an Internal Audit Department	- Non Cooperation from Senior management as IA department wil report directly to the Top Management. - Non Coperation from Senior Management.	- Abeyance in Deliveriing of project under Audit. - Required IA department reports before scheduling any plans over the department.It helps to determine the level of risk and accordingly set up an plan which need further evaluation.