Health operates chemist shops in Perth. A large proportion of the sales transactions are
conducted in cash. Health claims on having strong control policies and procedures in place to
monitor the employees handling cash transactions and safeguarding the cash. However, the
proper implementation of those policies had been questioned by the previous auditor. As Health
is planning to expand to Mandurah and Busselton, it is applying for a bank loan to obtain
additional funding for the expansion. Before approving the loan, the bank requires Health to
provide them with an audited financial statement. The unaudited figures of current year suggest
Health’s revenue to have increased significantly by 25 percent from last year while the gross
profit appears to have increased marginally by 5 percent.
News has been in the paper manufacturing business for the last 17 years. It manufactures and
distributes paper throughout the Australian continent. During the last five years, News opened
four new factories in three different locations, financed mainly from bank loans. Due to rapid
growth in the company, the financial director John Brown is keen to set up an internal audit
department. Currently the project appears to have stalled, as some of the senior executives do
not foresee the benefit of setting up such a department and are unwilling to commit any
additional fund or resources on this plan. The senior executives argue that they are competent
enough to monitor the internal controls of News.
From the above two scenarios please (250 words for each scenario)
(a) Identify and discuss the risks that may arise from each of the above scenarios. In your
explanation, please mention the components of the audit risk model affected.
(b) Identify how the audit plan will be affected and recommend specific audit procedures
to address these risks.