Dunks Holdings Ltd. (Dunks) is an importer of hardware goods and distributes the goods to hardware retailers around the country. The growth in the do-it-yourself (DIY) market, which has accompanied the boom in house prices in most capital cities over the past five years, has provided consistent sales growth for both hardware retailers and wholesalers like Dunks. However, the recession that began last year has cast doubt on the ability of this sector to keep growing. Some analysts believe that the DIY market will not be affected by the recession because, in tough economic times, homeowners increase their "nesting" behavior; that is, they spend even more on improving their homes and retreat from outside activities such as holidays, the theatre, and restaurants. This view is disputed by other analysts who believe that job losses and general pessimism in the economy will impact adversely on all company profits, including Dunks.
Dunks' share price has fallen over the last year as doubt about its ability to grow its profits in the current year spreads. The CEO and other senior management have large bonuses linked to both share prices and company profitability, and there is a mood within the company that achieving sales and profit targets this year is vital to avoid job losses at the company.
You have been brought into the audit team for Dunks this year and given the responsibility for auditing Dunks' closing procedures. Dunks has a monthly reporting system for internal management, but you notice that the reports are being issued later in the following month this year than they were last year.
Required
(a) Explain why and how the circumstances described above could affect your risk assessment.
(b) How do you plan to audit Dunks' closing procedures? What potential errors would you be most interested in?