Case 6: Preparing Audit Plans Background: Consider each of the following situations SEPERATELY since they are independent of each other. Required: Assume you are responsible for the preparation of an audit plan in each of the situations discussed below. In each case, describe how the situation posed would affect your audit plan and risk assessment. Include information regarding the nature and/or extent of audit evidence to be collected. REMEMBER when you are providing an opinion on how the situation affects your audit plan, also include information that supports your stated opinion. Please paraphrase all sources and provide cites of sources used.

a. Your audit plan for sales places extensive reliance on internal controls and the use of substantive analytical procedures. Your testing of the internal controls for sales has found a significant number of instances where clients' credit ratings have not been checked and abnormally large discounts have been given. The sales manager states that these changes have been the result of difficulties in maintaining sales levels. b. You are planning the annual audit engagement of a tractor retailer. You are aware of significant problems in the rural industry over the past six months and little improvement is in sight. c. Since the last audit your client has introduced a new management compensation scheme with the result that top managers' salaries are closely tied to the company's profitability.

d. Management informs you that during the year the internal auditors discovered that a

substantial amount of stock had disappeared from a small branch of your client. A number of

local managers have subsequently resigned although there were no prosecutions. The losses

equaled 1% of the company's profit before income tax expense.

e. Since your last audit the client has introduced a new IT system for inventory to replace the

old manual system. Management has indicated that the big advantage of the new system over the old one is that it provides information on inventory levels and gross margins for both

product lines and geographical area.

f. A new competitor of your client entered the market two months before year end and, since

that time, selling prices have fallen significantly. Your inquiries have revealed that the

industry expects heavy discounting to continue for the whole of next year.

g. There were no major disposals nor additions to plant and equipment during the period. Plant

and equipment is not a material balance and consists mainly of furniture and fittings.

Case 6: Preparing Audit Plans Background: Consider each of the following situations SEPERATELY since they are independent of each other. Required: Assume you are responsible for the preparation of an audit plan in each of the situations discussed below. In each case, describe how the situation posed would affect your audit plan and risk assessment. Include information regarding the nature and/or extent of audit evidence to be collected. REMEMBER when you are providing an opinion on how the situation affects your audit plan, also include information that supports your stated opinion. Please paraphrase all sources and provide cites of sources used. a. Your audit plan for sales places extensive reliance on internal controls and the use of substantive analytical procedures. Your testing of the internal controls for sales has found a significant number of instances where clients' credit ratings have not been checked and abnormally large discounts have been given. The sales manager states that these changes have been the result of difficulties in maintaining sales levels. b. You are planning the annual audit engagement of a tractor retailer. You are aware of significant problems in the rural industry over the past six months and little improvement is in sight. c. Since the last audit your client has introduced a new management compensation scheme with the result that top managers' salaries are closely tied to the company's profitability. d. Management informs you that during the year the internal auditors discovered that a substantial amount of stock had disappeared from a small branch of your client. A number of local managers have subsequently resigned although there were no prosecutions. The losses equaled 1% of the company's profit before income tax expense. e. Since your last audit the client has introduced a new IT system for inventory to replace the old manual system. Management has indicated that the big advantage of the new system over the old one is that it provides information on inventory levels and gross margins for both product lines and geographical area. f. A new competitor of your client entered the market two months before year end and, since that time, selling prices have fallen significantly. Your inquiries have revealed that the industry expects heavy discounting to continue for the whole of next year. g. There were no major disposals nor additions to plant and equipment during the period. Plant and equipment is not a material balance and consists mainly of furniture and fittings