Consider each of the following situations, which are independent of each other.

a) Your audit plan for sales places substantial reliance on the system of internal control and the use of analytical review. Your testing of the internal control system for sales has found a significant number of instances where customer 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 past sales levels.

b) You are carrying out the annual audit 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 companys profitability.

d) 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.

In each case

1. Identify how the situation impacts on audit risk

2. How does the situation effect audit planning?

3. How does the situation affect audit sampling?