You are an Audit Senior currently planning the 30 June 20X9 audits of Comp Limited (Comp), Health Limited (Health) and News Limited (News). At recently scheduled planning meetings with Comp, Health and News, you obtain the following overview of this year’s operations for each of the three client companies:

Comp is a manufacturer of computer hardware. The old costing system that was developed in- house, could no longer keep up with the complex and detailed manufacturing costing process that provides tender/bid submission costing's and the company’s comprehensive reporting requirements. As a result, Comp purchased and installed a popular off the shelf (not customized) costing system to support the highly sophisticated and cost sensitive nature of its product designs. Since this system had been utilized by many other firms in the industry, Comp has not thoroughly tested the adequacy of the features and controls inherent within the system. At the same time, the staffs are not feeling confident with the new system due to lack of training and supervision. Staff are also concerned that data might be lost when converting to the new system.

Health operates chemist shops in Perth. A large proportion of the sales transactions are conducted in cash. Health claims on having strong control policies and procedures in place to monitor the employees handling cash transactions and safeguarding the cash. However, the proper implementation of those policies had been questioned by the previous auditor. As Health is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain additional funding for the expansion. Before approving the loan, the bank requires Health to provide them with an audited financial statement. The unaudited figures of current year suggest Health’s revenue to have increased significantly by 25 percent from last year while the gross profit appears to have increased marginally by 5 percent.

News has been in the paper manufacturing business for the last 17 years. It manufactures and distributes paper throughout the Australian continent. During the last five years, News opened four new factories in three different locations, financed mainly from bank loans. Due to rapid growth in the company, the financial director John Brown is keen to set up an internal audit department. Currently the project appears to have stalled, as some of the senior executives do not foresee the benefit of setting up such a department and are unwilling to commit any additional fund or resources on this plan. The senior executives argue that they are competent enough to monitor the internal controls of News.

Required:

Prepare a memorandum to the audit manager, outlining your risk assessments relating to Comp, Health and News. When making your risk assessments:

(a) Identify and discuss the risks that may arise from each of the above companies. In your explanation, please mention the components of the audit risk model affected.

(b) Identify how the audit plan will be affected and recommend specific audit procedures to address these risks.

Answer rating: 100% (QA)

ISA 200 sets out the overall objectives of the auditor and the standard explains the nature and scope of an audit designed to enable an auditor to meet those objectives The standard also requires that ... View the full answer