4.24 EASY Consider the following independent situations, all of which applies to audits of entities for the year ending 30 June 2015.
(a) Clothing ltd [Clothing] has been manufacturing uniforms for the Australian market for 20 years. A recent government tariff reduction policy has placed Clothing in direct competition with cheaper uniforms manufactured overseas. In a bid to retain its market share, Clothing has been selling part of its school uniform range at below cost.
(b) Foodstuffs Ltd is a large supermarket chain with offices in all capital cities around Australia. From 1 January 2015, data processing relating to payroll transactions will be carried out in each capital city by an independent computer service bureau instead of the company’s head office IT department.
(c) Machinery Ltd [Machinery] has been experiencing declining sales over the last two years. Cost cutting has proved difficult due to the high levels of imported materials used in Machinery’s operations and consequently margins have been falling. While the bankers are presently happy to continue providing machinery with loan facilities, they do expect to see improved results in the next financial report. Articles about machinery’s expected financial results appearing in recent press reports all had quite a pessimistic tone.
For each of the above independent situations, identify the specific component of audit risk that would be affected and how they would be affected.
4.25 MEDIUM Consider the following independent situations, all of which apply to audits of entities for the year ending 30 June 2015.
(a) One of the Kitchen Ltd’s major product lines is the Quick Serve, a ‘no frills’ microwave oven. Over the last three months, warranty claims on the Quick Serve have tripled from 3 percent of sales to 9 percent of sales. The problem appears to relate to the glass turntable, which may shatter if the oven is used constantly at the full power.
(b) Wings Pty ltd [Wings] is a small primary producer specialising in the production of vacuum-packed emu meat. Wings’ recent display at a trade show has seen orders flood in from overseas buyers. The accountant, Louise, has done her best to satisfy the orders as quickly as possible while maintaining the appropriate [foreign currency] accounting records. However, based on some of the questions she has been asking you, it appears that she is out of her depth.
(c) Alpha Ltd [Alpha] distributes and markets snack foods to major supermarket chains around Australia. During the year, four members of staff were dismissed for stealing inventory and selling it to a small convenience store at discount prices. It is believed that the practices had been carried out for at least 18 months. The four staff members were working in different departments and had been able to cover their activities through fraudulent journal entries. The CEO of Alpha, Graham Handley, is confident that all parties involved have been identified and legal action has been taken.
For each of the independent situations above, identify the specific component(s) of audit risk that would be affected and explain how they would be affected.
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