Question 4 (7 marks)

Assume that you are responsible for preparing an audit plan in each of the following three independent situations:

a) Management of your client Uttara Complex Ltd informs you that during the year the internal auditors discovered that a substantial amount of inventory had disappeared from one of its small branches. A number of local managers have subsequently resigned, although there were no prosecutions. The losses amounted to 3 per cent of the company's operating profit.

b) A new competitor of your client Phoenix Ltd entered the market two months before balance date, and since that time, selling prices have fallen significantly. Your enquiries have revealed that the industry expects heavy discounting to continue for the whole of next year.

c) Your client Jason Builder Ltd established an internal audit department in the second quarter of the year, consisting of four staff. The chief internal auditor is a former Big Four audit manager with 15 years' experience in the profession. He reports directly to the managing director, and he has no internal audit experience. Since joining the firm he has spent most of his time examining the internal control systems of the company. He is assisted by two new graduates and another staff member who has two years' internal audit experience and is presently in her third year of a part-time commerce degree.

Required:

How would the information provided in each case affect your audit strategy? Provide a brief explanation for each situation.