Read the information on Tonker Toy Company Ltd.

Tonker Toy Company Ltd.

The Tonker Toy Company Ltd. (Tonker) has experienced considerable success and steadily increasing profits over the past few years. However, the economic decline coupled with increasingly severe price competition have decreased Tonkers profits and liquidity significantly during the current fiscal year ending on 30 June 2014. In fact, most of Tonkers competitors have reported losses for the current year. Management believes that unless additional financing can be obtained, Tonker will face a possible cash flow crisis and loan defaults.

To obtain additional financing on the most favourable terms, management feels that the income statement for the current year would have to show increased profits relative to the prior year. Therefore, Tonkers financial controller, in collusion with the marketing Vice President, made up a substantial amount of fictitious June sales. Sales orders, shipping orders, bills of lading and invoices were prepared for nonexistent sales. The customers were real, but the sales and shipments were not. As a result, Tonker reported sales of about $2 million in the last three days of June, which is a traditionally slow sales month for the toy industry.

You have been the Manager in charge of the audit of Tonker for about five years now. In your past association with senior management at Tonker, you have noticed from past actions that they are willing to compromise their integrity in order to achieve their goal.

Answer the following questions.

(a) In general, describe four benefits or purposes auditors can obtain from audit planning. (6 marks)

(b) In Tonkas case, discuss how proper planning of the audit should lead to the discovery of this fraud. (6 marks)

(c) Describe the three components of audit risk in the audit risk model. Briefly explain the nature of each of the components of audit risk. (5 marks)

(d) Discuss four specific factors in Tonkers case that should affect the auditors assessed level of inherent risk. For each factor, comment on whether the factor would increase or decrease inherent risk. (8 marks)