CASE STUDY 2 - AUDIT RISK

Use the following CASE STUDY facts to answer Questions 9 to 12 on this page:

You are performing the audit for Premium PetCare Pty Ltd (PP), which operates a luxury boarding kennel and daycare facility for dogs and cats. PP bill their customers after their pet's stay, with 30-day payment terms. The Accounts Receivable turnover has slowed in the past year, with the average collection period going from 31.3 days in the previous period to 50.6 days this financial year. PP's revenues have remained stable over the past 3 years.

In the draft financial statements, PP's interest-bearing liabilities consist solely of an interest-only 10-year bank loan of $400,000 at a fixed interest rate of 6.17% per annum. Their interest expense for the past financial year is recorded as $30,850 in the draft statements.

Upon assessing the design of internal controls for PP, you conclude that there is fundamental segregation of duties present and that general IT controls are strong.

Question 9

What is the auditor's preliminary assessment of control risk for PP and why? (2 marks)

Question 10

What impact does the control risk assessment (from Q9 above) have on inherent risk and detection risk? (2 marks)

Question 11

What was most likely to bring the reduction in Accounts Receivable turnover to the auditor's attention?

Select one:

a. touring the client's facilities

b. the preliminary analytical review

c. preliminary inquiries of management

d. researching the client's industry

Question 12

Which accounts and assertions are at risk of material misstatement for PP, and why? (5 marks)