Ivy Bishnoi is preparing a report for the engagement partner of an existing client, Scooter Ltd., an importer of scooters and other low-powered motorcycles. Ivy has been investigating certain aspects of Scooters business. Scooter has a large customer base and uses reputable suppliers. Ivy has noted there has been a change in economic conditions over the past 12 months. She has found that Scooters business, which experienced rapid growth over its first five years in operation, has slowed significantly during the last year. Initially, sales of scooters were boosted by good economic conditions and solid employment growth, coupled with rising gas prices. Consumers needed transportation to get to work, and the high gas prices made the relatively cheap running costs of scooters seem very attractive. In addition, the low purchase price of a small motorcycle or scooter, at between $3,000 and $8,000, meant that almost anyone who had a job could obtain a loan to buy one. Management was well compensated during this time as bonuses are tied to net income. However, Ivy has found that the sales of small motorcycles and scooters have slowed significantly and that all importers of these products, not just Scooter, are being adversely affected. The onset of an economic recession has restricted employment growth, and those people who still have jobs are less certain of continued employment. In addition, the slowdown in the world economy has caused oil prices to fall, further reducing demand for this type of economical transport. Ivy has also discovered that, due to the economic slowdown, the finance company used by Scooters customers to finance the purchase of scooters and motorcycles has announced that it will not be continuing to provide loans for any type of vehicle with a purchase price of less than $10,000. To compensate for this, Scooter has loosened its customer return policies.

(a)

Which of the following are economy-level considerations that potentially have an impact on the audit of Scooter?

The change in economic conditions from good economic conditions, such as solid employment growth, rising oil prices, and easy access to credit for consumers, to a financial slowdown with lower employment growth, falling oil prices, and difficult access to credit.

Scooter has a large customer base and uses reputable suppliers.

Changing conditions such as lower oil prices and lower employment growth have slowed consumer demand for scooters. Consumer demand is also likely to be affected by less access to consumer credit for scooter purchases.

The changed economic conditions is also likely to limit Scooters access to financing (tighter finance market, slower cash flow to service debt).

Other competitors are also experiencing slowing sales.

Scooter has developed a poor reputation in the market.

What factors should the auditor consider during the risk identification phase with respect to related parties? (Several choices may be correct.)

Results of testing of transactions

Controls over the recording of transactions

Nature and type of transactions

Complexity of structure of ownership of related parties

Identification of related parties