Bazaar Company buys computers, parts, and related equipment and resells them at a markup to a loyal

Question:

Bazaar Company buys computers, parts, and related equipment and resells them at a markup to a loyal base of corporate customers. Competition is growing, but the market is favorable, and Bazaar offers excellent customer service, giving it a competitive advantage. The owner is very involved in most of the important operating decisions. His capable assistant steps in when necessary. The owner plans to implement a code of ethics at some point and also wishes to improve certain controls.
Bazaar is a medium-sized private company that operates multiple warehouses, each carrying a mix of inventory items. The first type of inventory, which can be costly, consists of specialized computer hardware, desktop computers, and laptop computers. The turnover rate for this inventory is high, since new technology is always emerging. Because the company orders months in advance, Bazaar occasionally overestimates demand. After three or four months, products are difficult to sell, but they are kept because most cannot be returned to the supplier, and Bazaar is reluctant to hold sales for fear they would negatively affect the sales at regular prices.
This year, Bazaar implemented an integrated computer system to manage the general ledger as well as inventory, purchases, and sales. The system was developed by external consultants and is maintained by Bazaar's IT department.
The sales mix has not changed significantly from previous years. Ten new accounts were opened during the year, with average monthly sales of $5,000 each. Sales also increased because a new representative was hired at the beginning of the fiscal year. Average monthly sales for the 10 experienced representatives are $500,000 each. Rookie representatives normally perform at 50 percent of an experienced representative's level in their first year. Bazaar also lost a customer, who had averaged $90,000 a year in sales, to the competition. Purchases increased and were distributed across the inventory types in amounts similar to the overall sales mix.
The following was documented in the Bazaar Company audit file. You are the manager on the file and you are reviewing the work performed.
Engagement Risk Assessment
Overall, audit risk is low.
Audit Strategy
A mixed audit strategy would be appropriate because some controls seem to be in place and could be relied on. The controls need to be tested before confirming the strategy.
Audit Sections
Materiality
The partner established a materiality of $250,000 for the engagement, based on 5 per-cent of net income after tax.
Sales
Sales procedures performed
1. Matched totals on sales listing to sub-ledger and general ledger.
2. Sales variance analysis:

Credit Notes
Sampled credit notes. A credit was issued for a price adjustment made by a sales representative. The supporting paperwork stated that the credit had been issued in error (which seems to happen often), and the refund cheque was cancelled. However, the details of the refund cheque could not be located. The clerk says he left the cheque copies on his desk and the next morning they were gone. He gave up looking for them.
Expense Analysis
Randomly sampled 10 general ledger expense accounts. Three of the expense account items sampled were traced to invoices and issued cheques. The remaining items were reviewed for reasonableness.

Required
As the manager of the audit file, comment on the following:
(a) Was the risk assessment adequate? If not, what was missing?
(b) Was the documentation of the determination of materiality adequate? If not, what was missing?
(c) Was the work performed over the sales, credit notes, and expense accounts adequate? If not, what else would you expect to be done?

Liquidation
Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due....