QUESTION 3 You are the auditor for Sigma Pty Ltd. As part of your preliminary work, you have obtained the following information:

In addition, you have found out that: (1) The company has implemented a new bonus scheme during the year, whereby the directors would be awarded a bonus of a percentage of the profits for the current year if they could exceed the previous years profit by 25%. (2) The financial controller resigned during the year and the company has yet to hire another financial controller. The accounts of the current year were prepared by the assistant accountant.

Required: (a) For each ratio (i) to (v) above: (i) Comment on the results of the ratio. (ii) Identify potential risks to be investigated further.

For each situation (1) and (2) above: (i) Which component of the Audit Risk Model (ARM) would be affected, and how? (2 marks) (ii) Discuss how your audit plan would be affected.

Thank you for your help :)

Current year (unaudited) Previous year (audited) Industry average 1.91 2.35 2.91 (i) Current ratio (Working capital ratio) (ii) Receivables turnover (iii) Inventory turnover (iv) Gross profit margin (v) Net profit margin 57 days 72 days 51 days 65 days 73 days 96 days 20% 18% 20% 4% 4% 6% Note: Prepare your answers for part (a) in a tabular format as follows: (a)(i) - Comments (a)(ii) - Risks identified (i) (ii) (iii) (iv) (v) Note: Prepare your answers for part (b) in a tabular format as follows: (b)(i) - Component of ARM (b)(ii) - Effect on Audit Plan (i) (ii)