This is the third year in which Fu Lu Bu Accountants perform an audit of Green Lawns Ltd. The company has carved out a new market niche for the delivery of lawn and garden supplies, including links with local companies that provide lawn services. The company issued shares two years ago and raised sufficient capital to continue operations through three years. The company has shown no profits in its first three years. Revenue growth has been 100%, 55% and 30%, respectively, over the last three years. The current year revenue is $200 million. The auditor has examined current cash flow and has serious reservations about the ability of the company to remain a going concern without either some profitability or an infusion of cash. The company has responded with the following management plan:

i. Another public offering of shares to raise $100 million in capital, which will be equal to 30% of the existing shares outstanding.

ii. Sign an agreement with at least 50 more local distributors during the year.

iii. Improve warehousing and distribution to cut at least 20% off the distribution costs.

iv. Increase sales by 50% through more advertising, coupons and better marketing to existing customers.

v. Eliminated the internal audit department at a saving of $500,000.

vi. Lay off 20 administration, finance and sales staff including the senior accountant, and streamline services to be more efficient as well as cut hourly wages by $2.

vii. Set tight performance goals for each manager and promised a bonus of 20% of their salary if they meet the performance objectives. The performance objectives relate to increased profitability and meeting existing volumes.

REQUIRED

a. The auditor is required to evaluate the effectiveness of managements plan. What action does the auditor take (including the type of opinion to be issued) if the auditor does not believe that managements plan will be effective? (4 marks)

b. Explain the likely effects on internal control of three of the activities listed in the managements plan. (6 marks)

c. Select four of the activities in the managements plan. For each activity, indicate the audit procedures that should be performed to assess each part of the plan. (10 marks)