Question 2

You are the audit senior responsible for the audit of Killer App Limited, a company registered in Australia. You are currently planning the audit for the year ended 30 June 2020. During your initial planning meeting, your audit team considered the following changes in the company's operations.

(i)Due to the Covid-19 pandemic, the company has allowed administration and accounting personnel to work from home. The company now makes extensive use of application controls in the financial accounting system to replace some general controls no longer feasible as a result of the change in the employees' working conditions.

(ii)In response to a dramatic drop in revenue in the tourism sector and to improve its cash flow situation, Killer App has passed a directors' resolution to enter into negotiations to sell some of its tourism related property investments in Victoria at a substantial loss.The negotiations will start before year end and disposal will be completed before the end of the next financial year.

(iii)To counter the dramatic drop in sales revenue as a result of the Covid-19 pandemic, Killer App will introduce bonuses for its sales staff in the 4^th quarter. The bonuses will be an increasing percentage of the gross sales, made by each salesperson, above certain monthly targets.

(iv)To reduce the operating costs, the company is using a new popular general ledger software package. Your initial tests of controls found that the new system required only minor modifications and produces reliable monthly management accounts. The new system allows for detailed comparisons with budgets and prior-period figures across product lines and geographical areas.The conversion to the new system occurred with a minimum of fuss.

(v)The company has made substantial investments in developing a computer application to scan and compare social media news coverage to flag 'fake news'. A social media giant has filed a 'cease and desist' application in the Australian high court. If the application is upheld, Killer App will not be able to sell the app on the major PC operating systems' app stores.

Required

Using Table 2 below, for each of the scenarios above,

a.Analyse and assess business and audit risk and, if applicable, briefly describe the specific component(s) of audit risk affected.

[5 x 1 marks]

b.Interpret the effect of the business and audit risk assessment on the overall audit approach and briefly explain the impact of the risk assessment on audit planning decisions. Reference the appropriate audit standard where applicable.