Question - Inherent Risk, Control Risk and Audit planning
You are the audit senior responsible for the audit of Delilah Ltd. You are currently planning the audit for the year ended 30 June 2012. During your initial planning meeting held with the financial controller, he told you of the following changes in the company's operations:
(i) Due to the financial controller's workload, the company has employed a treasurer. The financial controller is excited about the appointment because in the two months that the treasurer has been with the company he has realized a small profit for the company through foreign-exchange transactions in yen.
(ii) Delilah has planned to close an inefficient factory in country New South Wales before the end of 2012. 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.
(iii) To help achieve the budgeted sales for the year, Delilah 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.
(iv) The company is using a new general ledger software package. The financial controller is impressed with the new system, because management accounts are easily produced and allow detailed comparisons with budgets and prior-period figures across product lines and geographical areas. The conversion to the new system occurred with a minimum of fuss. As it is a popular computer package, it required only minor modifications.
(v) As part of the conversion, the position of systems administrator was created. This position is responsible for all systems maintenance, including data backups and modifications. These tasks were the responsibility of the accountant.
(vi) The managing director has returned from the USA, where he signed a contract to import a line of clothing that has become the latest fashion fad in the USA. The company has not previously been engaged in the clothing industry.
Required:
For each of the scenarios above, identify which of the components of audit risk (inherent, control or detection risk) are affected. In your answer you will need to justify you choice. Format your answer as follows:
Part Inherent Risk or CR Justification
i
ii
iii
iv