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You are an audit manager at Carillion & Associates and have been assigned to the audit of Colette Hayman Ltd (CHL) for the year ending 30 June 2020. CHL is an Australian manufacturer, wholesaler and retailer of women's handbags and shoes. CHL manufactures all its products at its Melbourne factory and sells via retail outlets throughout Australia. CHL is listed on the Australian Securities Exchange, and Carillion & Associates has been its auditor for several years.

In recent years, CHL has been finding it difficult to meet its projected profit forecasts due to increased competition from new local competitors, imported products and online shopping; the increasingly high Australian dollar; and the impact of the global and USA financial crisis on consumer spending.

During the planning stage of the audit, you become aware of the following matters:

1. CHL has significant loans from its bank. The bank has indicated that it is concerned about CHL's ability to meet specific loan covenants, particularly the return on total assets (net profit/total assets).

2. The aged trade accounts receivable listing indicates that the percentage of accounts receivable exceeding 90 days has jumped from 15 per cent to 37.5 per cent during the last 12 months. The credit manager has indicated that this is because some of CHL's customers are currently experiencing financial difficulty.

3. In order to reduce costs, CHL changed one of its major suppliers of raw materials in February 2020 to a cheaper overseas supplier. However, the number of product returns has increased significantly since April 2020, and your discussions with management have indicated that the increased returns have involved customer complaints concerning the quality of the product.

4. Your review of the payroll system has indicated that when an employee is hired or terminated, the payroll clerk immediately prepares the paperwork and enters the information into the master file of the payroll computer system.

5. The payroll department at CHL's head office processes payroll weekly. The factory manager signs off all timesheets that are submitted by factory workers. The timesheets are input into the computer by the factory manager, and the payroll department then makes payment.

Required:

(a) Describe the two types of misstatement in a financial report that may arise from fraud. (2 marks)

(b) Explain the difference between general and application controls. In refer to matters 4 and 5 above, outline one weakness in either the control activities or information systems. (3 marks)

(c) Describe how the internal control weakness could lead to the material misstatement in the financial report. (2 marks)

(d) For each weakness provided in your response to (b) above, describe one practical manual general control and one practical IT-automated application control. (4 marks)

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