Question

The audit firm where you are on attachment has the audit client JCC, an importer and wholesaler of inexpensive, non-branded second hands clothes . It has a high turnover of staff, its accounting systems are old and out-of-date and its controls, including credit control, are poor. Accounting errors are frequent. Despite this, sales have increased. An economic downturn has resulted in a number of smaller customers being unable to pay their debts but this has been more than compensated for by an overall increase in sales of less expensive clothes. JCC’s customers comprise market traders, independent shops and Internet retailers. Required: Basing on the information given above describe the audit risks likely to be associated with the audit of JCC’s, the possible effect on the financial statement and an audit approach that is likely to reduce those risks to an acceptable level. (you may present you answer in the following format.

Statement from scenario	Type of risk(inherent, control or detection)	Possible effect on the financial statement	audit approach to reduce risks

Answer 1

Statement from scenario	Type of risk	Possible effect on the financial statement	Audit approach to reduce risks
It has a high turnover of staff	Control Risk	High turnover of staff results in new staff coming in and not knowing the process completely. Hence, this may result in incorrect financial statements being prepared and numbers in the financial statements are not correct.	Adequate training shall be provided to these new staff so as to eliminate the risks.
The accounting systems are old, out of date and the credit control are poor.	Control Risk	This may result in incorrect debtors aging and missing out some debtors.	Sample check shall be performed by manually computing the debtors balances to ensure the balances shown are correct.
Sales have increased	Detection Risk	There is a possibility of false sales may be recorded as there is a big increase in sales despite economic downturn which the auditor may fail to detect resulting in inflated sales and profit figures.	Sample check shall be performed by the auitors by matching the sales records with the physical delivery record.
The economic downturn has resulted in no of smaller customer unable to pay their debts.	Inherent Risk	It may result in inflated profit if adequate provision is not made on the debtors balance.	Auditors shall ask to assess the expected loss due to this and ask them to make adequate provision on the debtors outstanding balance.