You are the audit senior responsible for the audit of SampsonLimited. You are currently planning the audit for the year ended 31December 20X7. During your initial planning meeting held with thefinancial controller, he told you of the following changes in thecompany’s operations.
(i) Due to the financial controller’s workload, the companyhas employed a treasurer. The financial controller is excited aboutthe appointment because in the two months that the treasurer hasbeen with the company he has realised a small profit for thecompany through foreign-exchange transactions in yen.
(ii)SampsonhasplannedtocloseaninefficientfactoryincountryNewSouthWalesbeforetheendof 20X7. It is expected that the redeployment and disposal of thefactory’s assets will not be completed until the end of thefollowing year. However, the financial controller is confident thathe will be able to determine reasonably accurate closureprovisions.
(iii) To help achieve the budgeted sales for the year, Sampsonis about to introduce bonuses for its sales staff. The bonuses willbe an increasing percentage of the gross sales made, by eachsalesperson, above certain monthly targets.
(iv) The company is using a new general ledger softwarepackage. The financial controller is impressed with the new system,because management accounts are easily produced and allow detailedcomparisons with budgets and prior-period figures across productlines and geographical areas. The conversion to the new systemoccurred with a minimum of fuss. As it is a popular computerpackage, it required only minor modifications.
(v) As part of the conversion, the position of systemsadministrator was created. This position is responsible for allsystems 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 ofaudit risk (inherent, control or detection risk) are affected.(
