Identifying audit risks

Your audit client, Titan Homewares, is an Australian proprietary company that derives most of its revenue from retailing homewares through its operations in all capital cities. Titan stocks a range of homeware products including china, cooking utensils, crockery, cutlery, glassware, kitchenware, picnicware and plastic containers.

You are in the process of assessing the risk of material misstatement at the financial report and assertion level as part of your audit planning for the year 20X7-X8. Through enquiries of management and others within Titan, observation and inspection and through performing analytical procedures, you have flagged the following information which in your opinion might affect the risk of material misstatement.

No.

Factor

1. On 12.08.20X7, in a move to provide incentives for better performance to store managers, the board decided to link their pay to performance. Under the new remuneration scheme, every store manager is now given a profit target to achieve and a bonus of $10,000 upon achievement of the target. The store managers are further eligible to 1% of profits if their store profits exceed the set profit target.

2. As of 15.09.20X7, the internal audit team was reduced from five accountants to three during the year. It now comprises of an internal auditor and two graduates. The internal auditor is a CPA with 4 years of experience in the internal audit department. While one of the graduates is working towards completion of the CPA program, the other plans to gain some work experience before deciding upon a future course of action.

3. The increased use of online shopping has instigated the move towards setting up an online store. On 05.01.20X8, the company engaged XYZ consultants to set up its online store. The board has started discussions to close its three loss making stores.

4. Due to increased competition from major department stores, which largely compete on price, the company decided to heavily discount its merchandise as of 25.02.20X8.

5. The company upgraded its central information system on 30.03.20X8. The system provider has trained the company's staff to effectively operate the system.

Q15

Required:

1. Identify whether each of the identified factors above would increase, decrease or have no effect on the risk of material misstatement (5 marks-1 marks for each factor)

i. Describe the impact of each on the financial report. (15 marks-3 marks for each factor)