Text PAQ 3.32

Understanding the client and its risks — audit planning

A key feature of this answer for you to note compared to PAQ 3.26 earlier, is the way that examples of the changes and factors are included rather than simply a list of factors from the standards … this is very important where the question is framed around a scenario that provides examples or illustrations of the factors for you to include … this is a good illustration of how you move from being able “regurgitate” facts to being able to “apply” those facts in a given situation – that means only use/apply the facts/factors that are relevant! Excellent practice for Assessment Task 2b!

Required:

• Identify the issues that potentially impact on the audit of Scooter Ltd.
• Explain how each issue affects the audit plan, by identifying the risks and the financial report accounts that require closer examination.
• Issues (notice how it is the changes, or “new” things that you need to be most aware of):

Change from good economic conditions (solid employment growth, rising petrol prices, easy access to credit for consumers) to financial crisis (recession with lower employment growth, falling petrol prices, difficult access to credit).
Changing conditions such as lower petrol prices and lower employment growth have slowed consumer demand for scooters. Consumer demand is also likely to be affected by less access to consumer credit for scooter purchases.
The changed economic conditions also likely adversely impact Scooter Ltd’s access to finance (tighter finance market, slower cash flow to service debt).

• Impact on audit plan

Greater risk of fraudulent financial reporting because of pressure on Scooter Ltd management to meet performance targets (either for bonuses or to satisfy bank covenants)

Likely impact on profit:

Sales revenue. Consider risk of fraudulent transactions, cut-off (sales from future period back-dated to the current period), revenue recognition issues (e.g. scooters loaned to potential customers recorded as sales despite generous rights of return)

Risk associated with finance company – scooter price inflated to be above $10,000 with ‘allowance’ granted later to customer.

Expenses: Consider risk that expenses post-dated to next period to improve current period profit.

Going concern risk – is business able to pay its debts as they fall due? What are the terms of finance between Scooter Ltd and its banks? Is Scooter Ltd locked into a lease on premises that are now too large?

Risk associated with staff layoffs – poor sales could lead to staff sackings not in accordance with relevant awards, risk of successful case for unfair dismissal.