1. You are an audit manager in BH & Co, a firm of certified accountants and registered auditors. You are planning the audit of Chelmsford Ltd for the year ending 31 December 2020, an existing client who manufactures and sells large kitchen appliances to several department stores across the country. Company’s sales are all on two-months credit.

Due to the Covid19 pandemic causing non-essential businesses to close several times during the 2020 to comply with the government quarantine guidelines, Chelmsford Ltd experienced a significant drop in sales and as a result, in order to improve sales, has been decreasing the selling price of its products significantly since April 2020. The finance director did mention that she fully expected the inventory levels at the year-end to be significantly higher than previous year’s closing inventory.

You have also become aware that one of Chelmsford Ltd’s key customers has been experiencing financial difficulties. To help this customer, Chelmsford Ltd has agreed that the customer can take a six-month payment break, after which payments will continue as normal. She does not believe it to be necessary to provide for bad and doubtful debt against this customer’s year-end outstanding balance.

In June 2020 the company dismissed its financial controller, John Doe, who had been with Chelmsford Ltd for over 24 years. John has initiated legal proceedings against the company for unfair dismissal. Since the role of financial controller has not yet been filled, his tasks have been shared between the existing finance department team. As if things were not bad enough, the purchase ledger supervisor left the company in July 2020 and her replacement was only appointed a few days ago. However, this meant that for the last five months of the year no supplier statement reconciliations or purchase ledger control account reconciliations were performed.

You have undertaken a preliminary analytical review of the draft income statement for the year, and you are surprised to see a significant fall in administration expenses.

Required:

Identify and discuss FOUR audit risks, and the auditor’s response to each risk, in planning the audit of Chelmsford Ltd.