Sensation is a long-established family company that manufactures cosmetics. These are sold to customers who re-package and market them under their own brand names. The company has five manufacturing units spread across Asia Pacific and Europe. Sam, who had been managing director for 30 years, died just over a year ago. Paul has been promoted from sales director to take over as managing director, and a new sales director has been brought in from outside the company. The finance director, Benny, has recently moved from a full-time to a part-time role, as he wishes to spend more time with his family. He has announced his intention to leave within the next 12 months, and the company is seeking a full-time replacement. Profits have been falling over the last three years. The company wishes to gain a listing on the Stock Exchange, and all efforts are being focused on reversing the falling sales trend. A bonus scheme has recently been introduced, where certain managers and directors are paid a lump sum if production exceeds a certain level. You are the audit manager of DOC & Co. who is responsible for the financial statements audit of Sensation and are about to commence the planning for the forthcoming audit.

Required:

(a) Identify and discuss the factors or issues that you would consider when you assess the risk of material misstatements. Explain briefly.

(b) Before the commencement of any professional work on Sensation you drafted an engagement letter and sent to Benny for his signature. Explain four items which you included in that letter.

(c) DOC & Co. is required to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. Discuss how you should evaluate the reliability of audit evidence under ISA 500 (Clarified).