Consider each of the following situations, which are independent of each other:
a) Your audit plan for sales places substantial reliance on the system of internal control and the use of analytical review. Your testing of the internal control system for sales has found a significant number of instances where clients’ credit ratings have not been checked and abnormally large discounts have been
given. The sales manager states that these changes have been the result of difficulties in maintaining past sales levels.
b) You are carrying out the annual audit of a tractor retailer. You are aware of significant problems in the rural industry over the past six months and little improvement is in sight.
c) Since the last audit your client has introduced a new management compensation scheme with the result that top managers’ salaries are closely tied to the company’s’ profitability.
d) Management informs you that during the year the internal auditors discovered that a substantial amount of stock had disappeared from a small branch of your client. A number of local managers have subsequently resigned although there were no prosecutions. The loss equalled 1% of the company’s operating profit.
e) Since your last audit the client has introduced a new computer information system for inventory to replace the manual system. Management has indicated that the big advantage of the new system over the old one is that it provides information on inventory levels and gross margins for both product line and geographical area.
f) A new competitor of your client entered the market two months before year end and, since that time, selling prices have fallen significantly. Your inquiries have revealed that the industry expects heavy discounting to continue for the whole of next year.
g) The organization has introduced an internal audit department in the second quarter of the year. The section consists of three staff. The chief Internal Auditor is a former “Big 6” audit manager with 10 years experience in the profession. He has no internal audit experience. He reports direct to the Managing Director. Since joining the firm he has spent most of his time examining the internal control systems of the company. He is assisted by one new graduate and another person who has two years of internal audit experience and is presently in his third year part-time of a commerce degree.
h) There were neither major disposals nor additions to fixed assets during the period. Fixed assets are not material and consist mainly of furniture and fittings
Assume you are responsible for constructing an audit plan in each of the situations discussed above. In each case describe how the situation posed would affect your audit plan. Include reference to the nature and /or extent of audit evidence to be collected.
Can you please give me the question one by one?
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