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 priorperiod 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. [10 marks] Question 2 You are the audit senior on the audit of EasyFit Pty Limited, a large manufacturer of shoes. EasyFit Pty Limited’s main market lies with 18 to 24 year olds. This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below: Industry average EasyFit Pty Limited Ratio 20X7 20X6 20X7 20X6 1 Current ratio 2.84 3.27 1.89 2.24 2 Receivables turnover ratio 4.9 4.6 6.3 7.0 3 Inventory turnover ratio 3.7 3.8 5.0 5.5 4 Return on total assets 7% 5% 13% 11% 5 Net profit ratio 0.06 0.06 0.04 0.04 6 Gross margin 0.20 0.26 0.20 0.18 Required: Explain the general meaning of each of the above ratios, discuss the conclusions that you can draw about EasyFit’s financial position and identify potential audit risks to be investigated further.