Question

ABC Enterprises Ltd. deals in currency transactions. Most of the company’s business involves buying and selling foreign currency to small businesses. ABC’s strength in the past has been providing higher levels of service than its competitors. The company is owned by three brothers who are equal shareholders, each of whom has provided the company’s long-term financing. To increase sales this year, ABC has reduced its profit margins. This strategy is not popular with the managers at the company’s several locations because their bonuses are based on net income for their own location. However, the controlling shareholders have made it clear that they are committed to this strategy for the short term at least, but that margins are expected to improve in the future. Many of the company’s capital assets are leased.

Required

   a. Identify three factors that affect inherent risk regarding ABC Enterprises Ltd.

   b. Each purchase of foreign currency is approved by the branch location’s manager, who initials the purchase order, indicating his approval and that he has recalculated the amount. The auditor concluded that control risk was high for the authorization objective. Answer the following questions regarding the auditor’s test of controls:

i) What attribute was the auditor testing for in the test of controls?

ii) Define the conditions for deviation.

iii) Define the population.

iv) Explain the acceptable risk of assessing control risk too low (ARACR) in the auditor’s test.

Answer 1