25. ABC (Leasing) Ltd, leased equipment to small building contractors who could not afford to purchase business assets and often had been refused credit elsewhere. The business had grown rapidly with turnover doubling every year for the last three years. Since last year, lease debtors had increased by 300%. Unfortunately, the company had no formal system for re-possessing the assets leased to builders whose repayments were overdue. Further there was a 'performance-based' salary incentive scheme in operation for senior management, which was based on the turnover of the company and not linked to profitability. The company was run by a board of three directors. The managing director owned 80% of the shares of the business, and the other two directors held 10% each. The managing director had designed the internal control system for leased assets and had set up an audit committee comprising three local retired businessmen in order to liaise with the auditors. He considered that his time was too valuable to waste in dealing with the auditors. However, because of the weakness of the internal control systems, the auditor had to rely upon the managing director's explanation on several events, including the provision for bad debts. You have been asked by the audit manager to complete the final audit of ABC (Leasing) Ltd. within one week. Having assessed the amount of work, you feel that one week is insufficient even with two audit assistants. Your firm places great emphasis on the completion of audit assignments within a given time budget Required: (a) Describe the key factors which should influence the assessment of the inherent risk in ABC (Leasing) Ltd. (b) Explain the various matters which the auditor would normally discuss with an audit committee. (c) Compare the quality of the clients' representations as audit evidence with that of the analytical review. (d) Discuss the professional issues involved in allowing time budgets to restrict the scope of the audit of ABC (Leasing) Ltd. 25. ABC (Leasing) Ltd, leased equipment to small building contractors who could not afford to purchase business assets and often had been refused credit elsewhere. The business had grown rapidly with turnover doubling every year for the last three years. Since last year, lease debtors had increased by 300%. Unfortunately, the company had no formal system for re-possessing the assets leased to builders whose repayments were overdue. Further there was a 'performance-based' salary incentive scheme in operation for senior management, which was based on the turnover of the company and not linked to profitability. The company was run by a board of three directors. The managing director owned 80% of the shares of the business, and the other two directors held 10% each. The managing director had designed the internal control system for leased assets and had set up an audit committee comprising three local retired businessmen in order to liaise with the auditors. He considered that his time was too valuable to waste in dealing with the auditors. However, because of the weakness of the internal control systems, the auditor had to rely upon the managing director's explanation on several events, including the provision for bad debts. You have been asked by the audit manager to complete the final audit of ABC (Leasing) Ltd. within one week. Having assessed the amount of work, you feel that one week is insufficient even with two audit assistants. Your firm places great emphasis on the completion of audit assignments within a given time budget Required: (a) Describe the key factors which should influence the assessment of the inherent risk in ABC (Leasing) Ltd. (b) Explain the various matters which the auditor would normally discuss with an audit committee. (c) Compare the quality of the clients' representations as audit evidence with that of the analytical review. (d) Discuss the professional issues involved in allowing time budgets to restrict the scope of the audit of ABC (Leasing) Ltd