Question

You are the audit senior responsible for the audit of Spectrum Ltd for the year ended 30 June 2018. During your initial planning meeting with Justin James, the chief financial officer (CFO), he informs you of the following changes in the company’s operations.

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

(b) Spectrum plans to close an inefficient factory in country Tasmania before the end of 2018. It is expected that the redeployment and disposal of the factory assets will not be completed until the end of

(c) the following year. However, Justin is confident that he will be able to determine reasonably accurate closure provisions.

(d) The chief executive officer (CEO), Geoff Alderton, has just returned from Italy, where he signed a contract to import a line of clothing that has become the latest fashion fad there. The company has not previously been engaged in the clothing industry.

Due to Justin’s workload, the company recently employed a treasurer, Alice Campbell. Justin is excited about the appointment, because in the three months since Alice has been with the company she has realized a small profit for the company through foreign exchange transactions in US dollars.

For each of the scenarios provided, outline how the information affects inherent risk.

Answer 1

(a) Sales team compensation is linked to the sales of the Company. Now the sales team will try to manipulate sales so that they can get maximum bonuses. These types of transactions generally encourages fraudulent financial reporting. This should be taken as the risk indicator during the audit.

(b) & (c) Applicability of IFRS 5 Discontinued operations should be checked by the audit. If the management is planning to hive off this factory then it's assets and liabilities must be fair valued at the balance sheet. Proper disclosure of this fact should be given in the financial statements. Incorrect fair value measurement is the risk indicator in this scenario.

(d) Diversification of the business should be analyzed with the company's capability to invest in new business. Management may be in an undue pressure to increase the assets size of the company. Onerous contract is the risk indicator in this scenario.

(e) Appointing Alice as treasurer and directly delegating some work of CFO questions the segregation of duties control. It must be ensured that the work of treasurer is reviewed and supervised by some senior in the Organization.