Cornflour Ltd is an importer of kitchen appliances and distributes the goods to retailers around the country.
Cornflour Ltd is an importer of kitchen appliances and distributes the goods to retailers around the country. Cornflour has benefited from rising house prices in most capital cities over the past five years which have encouraged homeowners to spend money on kitchen renovations and make a profit on the sale of the property. However, some analysts believe that recent government changes to tax laws will discourage home renovations because it will be more profitable to sell houses unrenovated.
Cornflour’s 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.
Cornflour has a monthly reporting system for internal management, but the audit team notice that the reports are being issued later in the following month this year than they were last year on the instructions of senior management.
(a) Explain why and how the circumstances described could affect the audit risk assessment.
(b) How would you audit Cornflour’s closing procedures? Which potential errors would be of most interest? Explain.
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