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Question 1
The audit partner has just advised you that he has been approached to accept the appointment of auditor to Games Limited. Games Limited is a manufacturer of gaming machines and has been named in a recent anti-corruption enquiry as having offered incentives to state government members to support a proposed bill which would allow an increased number of gaming machines in licensed premises. No charges have yet been laid against Games Limited or any of its employees. The audit partner explains to you that Games Limited's auditors were re-appointed for the current financial year at the Annual General Meeting held two months ago. However, Games Limited's managing director is unhappy with the existing auditing firm as the audit partner assigned to Games Limited has been changed.
Required:
The audit partner is unsure whether he should accept the appointment and has asked you to outline any ethical, legal and other factors to be considered in his decision about whether to accept the appointment for the current year, and to indicate the steps that need to be taken prior to the appointment.
Question 2
You are the audit senior responsible for the audit of Sampson Limited. You are currently planning the audit for the year ended 31 December 20X7. During your initial planning meeting held with the financial controller, he told you of the following changes in the company's operations.
(i) Due to the financial controller's workload, the company has employed a treasurer. The financial controller is excited about the appointment because in the two months that the treasurer has been with the company he has realised a small profit for the company through foreign-exchange transactions in yen.
(ii) Sampson has planned to close an inefficient factory in country New South Wales before the end of 20X7. It is expected that the redeployment and disposal of the factory's assets will not be completed until the end of the following year. However, the financial controller is confident that he will be able to determine reasonably accurate closure provisions.
(iii) To help achieve the budgeted sales for the year, Sampson is about to introduce bonuses for its sales staff. The bonuses will be an increasing percentage of the gross sales made, by each salesperson, above certain monthly targets.
(iv) The company is using a new general ledger software package. The financial controller is impressed with the new system, because management accounts are easily produced and allow detailed comparisons with budgets and prior-period figures across product lines and geographical areas. The conversion to the new system occurred with a minimum of fuss. As it is a popular computer package, it required only minor modifications.
(v) As part of the conversion, the position of systems administrator was created. This position is responsible for all systems maintenance, including data backups and modifications. These tasks were the responsibility of the accountant.
(vi) The managing director has returned from the USA, where he signed a contract to import a line of clothing that has become the latest fashion fad in the USA. The company has not previously been engaged in the clothing industry.
Required:
For each of the scenarios above, explain how the components of audit risk (inherent, control or detection risk) are affected.