Your audit firm has been approached by the Chief Executive of Panther plc with a view to taking on Panther as a new client. Panther plc is a company which manufactures hand-made sports cars of a single type, mainly for export to the USA, which has traditionally taken about 63% of production and more recently to China, which accounts for 24% of production.

Over the last year, however, new stringent exhaust emission laws in California have made it impossible to sell cars in that state without expensive modifications and this has resulted in delays in delivery. Further, the weakness of the Chinese Yuan relative to the British Pound has made vehicles expensive, and sales have suffered. As a result of these events, stocks of finished vehicles are unusually high, and production has been reduced to three days each week.

A dynamic young Chief Executive has recently been appointed. He admits to having little experience in the car industry but in recent press reports he has promised to reverse recent losses with new strategies, such as building a range of luxury sit-on garden mowers. The Board of Directors then called an Extraordinary General Meeting and removed the previous audit firm from office, asking your firm to replace them.

The new Chief Executive has also moved to install new management information systems and he immediately replaced the old computerised accounting system with an online cloud based system just three months before the year-end. Accounting staff did receive some training in the new system, but the recent death of the Financial Accountant has hampered the process and the draft financial accounts are likely to be quite late this year as a result.

Warned of the potential consequences of these events and the effect that extra audit work would have on the audit fee, the Chief Executive replied that he believed that the audit fee had been far too high in earlier years. He stated that he was in future looking for a much more streamlined and efficient audit.

Required:

1. Analyse the above case and identify areas of audit risk that appear to exist in connection with the audit of Panther plc. (10 marks)

2. Discuss the impact on the audit work and the issues that may be noted during audit planning given the risks identified above. (10 marks)

Explain the purpose of audit planning and suggest the main contents of the audit planning memorandum.