Solving auditing questions regarding risk

  1. Tech Ltd (Tech) runs a chain of superstores in Australia. Tech highly depends on the electronic data interchange system to manage their transaction processes with the suppliers. Each individual store can raise their own inventory requisition without authorisation from the central purchase department and as a result saves them a lot of time. Mr. Abbot is the new CEO, who joined Tech three months ago. He used to work in the fashion industry and hence he is quite confident that Tech’s superstores sales can be increased by introducing clothing labels in the stores.
  2. Pluto Ltd (Pluto) manufactures generators for domestic users. Seven years ago Pluto manufactured a generator far superior to any of its competitors at half the price. It has therefore dominated the market over the past few years. However, recently one of Pluto’s main competitors introduced a new generator to the market. Based on the new competitor’s latest advertisements, you are aware that the competitor’s generator can produce electricity at twice the amount of Pluto’s generator by spending same amount of fuel and hence is superior to Pluto’s generator. However, Pluto’s CEO is quite optimistic about the whole situation. He told you that a pricing strategy will soon be implemented to fend off the new competitor and make redundant some employees to remain competitive.
  3. A team of internal auditors has been hired 10 months ago by Saturn Ltd (Saturn) to improve on its existing internal control, which has been relied on for the past 10 years. Based on your experience, the revamping process should only take about 8 months. It came to your attention that only a short while after the employment of the internal auditors, the CEO of Saturn experienced severe personal financial difficulty. You also find that the process of revamping the internal control has been dragging because the CEO kept on declining the internal auditors’ suggestions for improvement. The accountant of Saturn has been notorious for finding gaps in the legislations in order to make its clients’ financial statements look presentable as desired by the clients themselves. In the past few years, Saturn has always been required by the Australian Tax Office to provide additional supporting information after the lodgement of its tax returns.


For each of the above independent situations, answer the following:

(a) Identify and discuss why the above situation represents a risk.

(b) By applying auditing knowledge, identify the main account or group of accounts affected in the audit plan by the risks identified in (a).

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



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