For each of the scenarios above, explain how the components of audit risk (inherent, control or detection risks) are affected.
You are the audit senior responsible for the audit of Sampson Limited. You are currently planning the
audit for the year ended 31 December 20X7. 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 realised a small profit for the company through foreign-exchange
transactions in yen.
(ii) Sampson has planned to close an inefficient factory in country New South Wales before the end
of 20X7. 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, Sampson 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
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.
Required:
For each of the scenarios above, explain how the components of audit risk (inherent, control or detection risks) are affected.
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