JJ Hi-Fi Limited (JJH), an Australian listed company, has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in JJH's operations and consequently margins have been falling. Over the last 2 months, warranty claims on JJH's best-selling product line, M4 - a 'no frills' microwave oven, have increased from 1.5% to 4.5% of sales. This problem appears to relate to the glass turntable, which shatters if the oven is constantly used. The average cost of repair has risen by 20% to $200 per claim. While the bankers are presently happy to continue providing JJH with loan facilities, they do expect to see improved results in the next financial report.
Ultimate Fitness Limited (UF) is a family-owned company distributing gym equipment in Perth. Majority of the sales transactions are done in cash. UF is planning to expand to Melbourne and Sydney. It is applying for a loan from the bank to get funding for the expansion. Before granting the loan, the bank requires UF to provide them with the audited financial statement. The unaudited figures of current year suggest revenue to have increased significantly by 20 percent from last year while the gross profit appears to have increased marginally by 5 percent. You have been auditing UF for the past two years and have previously questioned the integrity of UF's accountant who has a reputation for adopting aggressive accounting practices to make the clients' financial statements look presentable as desired by the clients themselves.
Austfield Limited (Austfield) is a supermarket chain throughout Australia and has been operating since the last 10 years. Due to rapid growth in business, the finance director Mr. Moss Green is keen to set up an internal audit department. Currently the project appears to have stalled, as some of the senior executives do not foresee the benefit of setting up such a department and are unwilling to commit any additional funds or resources on this plan. To help achieve the budgeted sales for the year, Austfield is about to introduce bonuses for its sales staff. The bonuses will be an increasing percentage of the gross sales made, by each sales person, above certain monthly targets.
Required
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 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.