You have been the partner in charge of the audit of Pledge Ltd for many years. You have never given a qualified audit report because the internal control system of the company was satisfactory, the business in which the company engaged was quite stable and the results of the compliance and substantive tests indicated that the account balances were fairly stated.
In the current year's audit, you assigned a recently recruited staff as the senior in charge of the job and reporting directly to you. You informed the senior in charge that the time budget should remain the same as in previous years and he agreed that he would try his best to maintain the
same audit time frame. An interim audit was conducted and the following issues were reported. The company recently computerized its stock and general ledger systems, the chief accountant had resigned and the position was vacant for two months and a number of errors were detected in the compliance tests of the system. The original time budget was not revised despite the above findings. Because of the tight time budget, the computerized systems were not tested by the EDP auditors. The year end audit was completed just within the time budget. You were very pleased, as this implied effectiveness and efficiency of the audit team.
A few months after the year end, Pledge Ltd was experiencing financial difficulties. The newly appointed chief accountant fled and took with him $1 million cash. Subsequent investigation revealed that stocks had been overstated because incorrect prices had been used in the computer system and obsolete stocks were not adequately provided for. Sales and debtors were overstated as the chief accountant had falsified some sales invoices in order to maintain the sales volume at similar levels as in previous years. It was also revealed that the audit assistant responsible for auditing stocks, who was a fresh graduate, had only tested a few items. Errors in stock pricing revealed from this sample were concluded to be immaterial and no detailed work relating to subsequent sales of year end stock was carried out. Further, debtors' circularization was not carried out because of the time constraints.
Question: Outline eight deficiencies of the audit in the above case and elaborate with reasons.