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Risks and procedures in auditing plans

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1. BestSteel Ltd has been the largest metal pressing machine manufacturer in Australia since 2005, when it introduced a machine with technologies few years more advanced than those offered by its competitors. From
thereon, BestSteel has been driving out competitors out of the market by providing higher quality products at highly competitive prices. However, a new entrant to the industry has recently introduced its latest innovation.
Based on the competitor's advertisements, you are aware that the competitor's product is highly likely to be of better quality than BestSteel's and due to their high end machinery, their production costs are expected to be significantly lower. BestSteel's management has predicted that to the competitor's product, their demand will drop by at least 40%.

2. You are recently appointed as the auditor for Sprinkles Ltd. The accountant of Sprinkles has been notorious for finding loopholes in the legislations in order to make its clients' financial statements look presentable as desired by the clients themselves. In the past few years, Sprinkles has always been required by the Australian Tax Office to provide additional supporting information after the lodgement of its tax returns.

3. BPharm Ltd is a family-owned company operating chemist shops in Albany. Majority of the sales transactions are done in cash. BPharm is planning to expand to Denmark and Walpole. It is applying for a loan from the bank to get funding for the expansion. Before granting the loan, the bank requires BPharm to provide them with the audited financial statement.

(a) Identify and discuss why the above situations represents a risk.
(b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan.
(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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Solution Preview

Please see the answer within the attachment.

1) The risk associated with this case is Inherent risk.
(a) The situation in the case represents an inherent business risk and business risk is closely associated with this financial reporting risk and both in turn affect the audit engagement creating an audit engagement risk.
(b) Strong competition would lead to weak financials and due to this the firm would be motivated towards weak internal control system. Apart from this firm management may take advantage of some complex financial instruments to achieve desired financial ...

Solution Summary

The solution discusses the risks and procedures in auditing plans.