You are the proprietor of an PA firm with a growing audit practice. You have accepted the audit of T-Division, one of six separate Canadian divisions of a large, private multinational corporation. Each division operate as a separate entity. The manager of each division receives a salary, plus a bonus based on the net profit of the division. In each division, the manager has the authority over all other employees for buying materials, production issues, accounting, and personnel matters. James has reached the level of manager of the T-Division by working very hard and demanding high production levels of his staff. James has advised you that he wants to see all questions you have about accounting issues and he assures you that he will personally make sure that they are taken care of, without any more effort on your behalf. James explained that he has managed three other divisions in the past for this company, and each one received a “clean audit report,” which helped his career. He wants to ensure that T-Division also gets a “clean” audit report and to keep the auditor’s work at a minimum.
REQUIRED
a. Determine whether you would set the overall audit risk as high, medium, or low for your audit of T-Division. Justify your response.
b. Identify and briefly explain two other items of information about T-Division, besides what you already know, that would be important for you to consider in determining the proper level of audit risk.