1. You are an audit partner in the accountancy firm Yorvic and are about to undertake the audit of Trendy plc for the year ending 30 June 2019. You have been the audit engagement partner of Trendy since it was founded five years ago. You are planning the current audit and have collected the following information.

Background

Trendy was established five years ago by a fashion designer who admits that she knows more about fashion than finance. Trendy specialises in supplying independent fashion outlets in university towns and cities. The main reason for Trendy's success is providing up-to-date fashions at reasonable prices for the student market. In five years Trendy's turnover rose from 100,000 to 5 million and operating profit from 10,000 to 500,000. This year turnover is budgeted to be 6 million and operating profit 600,000.

Information related to the audit

From 1 January 2019, Trendy added a second warehouse. However, it has been difficult to recruit experienced warehouse staff. The warehouse manager has therefore had to authorise all goods received into the new warehouse and all goods dispatched from the new warehouse.

Trendy's success has depended on providing the right fashions at the right time. The recent weather however has been unfavourable and spring and early summer sales have been significantly down against budget and inventory at the warehouses has increased.

As a result of the poor weather sales at independent sales outlets are also down and a number of the outlets are finding it difficult to pay Trendy for the goods they have purchased.

In order to strengthen Trendy's financial team a new chief accountant was employed and was promised a bonus of 30,000 if operating profit reached 600,000. She left Yorvic three years ago having qualified as an accountant but was not involved with the Trendy audit.

Required

1. Identify and explainfiverisk factors for the audit of Trendy.(10 marks)
2. For each risk that you have identified discuss the appropriate audit response (procedures) that should be carried out and where appropriate identify internal controls you would advise Trendy to adopt, and how you would test those controls once implemented.