Question 4

(7 marks)

You are currently involved in planning for the audit of Spot Light Ltd (SLL), a national company producing curtains and blinds. The curtain and the blind market is highly competitive, and SLL has been experiencing declining sales over the past three years. Cost-cutting has proven very difficult, as the cost of materials used in the companys production lines has increased each year. SLLs bank has continued to provide SLL with loan facilities; however, it has indicated that it expects to see improved results in the next financial report and has placed a number of quite restrictive covenants in SLLs lending agreements. Recent articles appearing in the financial press concerning SLLs expected financial results have been very pessimistic about its likely performance.

Required: Based on the information provided:

(a) Discuss the overall impact on audit risk. Which specific component(s) of audit risk would be affected? (4 marks)

(b) In refer to Question No. 5, for each matter explains from 1 to 3, outline how each matter considers as fraud audit risk factors in relation to Colette Hayman Ltd (CHL)s case study ( 3 marks)