Question -
1. Chemmart Pty Ltd (Chemmart) is a family-owned company operating chemist shops in Perth. A large proportion of the sales transactions are conducted in cash. Chemmart claims on having strong control policies and procedures in place to monitor the employees handling cash transactions and safeguarding the cash. However, the proper implementation of those policies had been questioned by the previous auditor. As Chemmart is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain additional funding for the expansion. Before approving the loan, the bank requires Chemmart to provide them with an audited financial statement.
2. Blizzard Pty Ltd (Blizzard) is a manufacturer of computer hardware. The old costing system that was developed in-house, could no longer keep up with the complex and detailed manufacturing costing process that provides tender/bid submission costings and the company's comprehensive reporting requirements. As a result, Blizzard purchased and installed a popular off the shelf (not customized) costing system to support the highly sophisticated and cost sensitive nature of its product designs. Since this system had been utilised by many other firms in the industry, Blizzard have not thoroughly tested the adequacy of the features and controls inherent within the system. At the same time, the staffs are not feeling confident with the new system due to lack of training and supervision.
3. Pulp Pty Ltd (Pulp) has been in the paper manufacturing business for the last 15 years. It manufactures and distributes paper throughout the Australian continent. During the last five years, Pulp opened four new factories in three different locations, financed mainly from bank loans. Due to rapid growth in the company, the financial director John Brown 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 fund or resources on this plan.
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.