You are the audit supervisor of Seagull & Co and are currently planning the audit of your

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Question:

You are the audit supervisor of Seagull & Co and are currently planning the audit of your existing client, Eagle Heating Co., for the year ending December 31, 2020. Eagle manufactures and sells heating and plumbing equipment to a number of home improvement stores across the country.

Eagle has experienced increased competition and is facing significant pressure to meet sales targets. As a result, it has decreased the selling price of its products significantly since September 2020. The finance director has informed your audit manager that he expects increased inventory levels at the year end. He also notified your manager that one of Eagle's key customers has been experiencing financial difficulties. Therefore, Eagle has agreed that the customer can take a six-month payment break, after which payments will continue as normal. The finance director does not believe that any allowance is required against this receivable.

In October 2020, the financial controller of Eagle was dismissed. He had been employed by the company for over 20 years, and he has threatened to sue the company for unfair dismissal. The role of financial controller has not yet been filled and so his tasks have been shared between the existing finance department team. In addition, the accounts payable supervisor left in August and a replacement has been appointed in the last week. However, for this period no supplier statement reconciliations or accounts payable reconciliations were performed.

You have undertaken a preliminary analytical review of the draft year-to-date statement of profit or loss, and you are surprised to see a significant fall in administration expenses.

Required

Discuss the factors that will impact the risk of material misstatement at the financial statement and account levels in planning the audit of Eagle.