PART A

The audit partner has just advised you that he has been approached to accept the appointment of auditor to Apex Limited. Apex Limited is a manufacturer of gaming machines and has been named in a recent anti-corruption enquiry as having offered incentives to state government members to support a proposed bill which would allow an increased number of gaming machines in licensed premises. No charges have yet been laid against Apex Limited or any of its employees. The audit partner explains to you that Apex Limited's auditors were re-appointed for the current financial year at the Annual General Meeting held two months ago. However, Apex Limited's managing director is unhappy with the existing auditing firm as the audit partner assigned to Apex Limited has been changed.

REQUIRED: The audit partner is unsure whether he should accept the appointment and has asked you to outline any ethical, legal and other factors to be considered in his decision about whether to accept the appointment for the current year, and to indicate the steps that need to be taken prior to the appointment. (10 marks)

PART B You are an assurance services senior at Clark & Associates and have noted the following independent issues in relation to the audit of Shine Pty Ltd:

(i) The accounting system at Shine Pty Ltd did not operate effectively during the first year of operations. Consequently, some general ledger accounts had to be based on estimates, as the actual data relating to these balances had been lost.

(ii) As a result of cost constraints, the directors of Shine Pty Ltd did not implement effective internal controls for debt collection. The debtors' turnover is 3.2 times.

(iii) Due to increased competitive pressures, Shine Pty Ltd has recently moved the manufacture of some of its clothing lines out of Melbourne into regional areas. While Shine Pty Ltd saves around 20% in costs, the manufacturing process takes longer and on several occasions late delivery has resulted in lost sales.

REQUIRED: (a) Describe the components of the Audit Risk Model. (2 marks)

(b) Explain the impact of each of these separate issues on your assessment of audit risk, the materiality level and the audit strategy that would be adopted. (8 marks)