You are the audit supervisor of Nandan & Co and you are currently planning the audit for one of your existing client Caster Island Co, for the year ending 31 December 2015. Caster Co is a famous five star hotel.
Caster Co has experienced increased competition in recent years, in order to maintain its sales and customers it has decreased selling price of its food & beverages items and accommodation prices significantly since August 2015. The finance director has also notified your manager that he expects increased inventory level at the year end. The finance director also informed the audit manager that one of the Caster Co.’s key customers as been experiencing financial difficulties, therefore the customer is given six month payment break, after which payment will continue normal. The finance director does not believe that any allowance is required against this receivables.
In October 2014 the financial controller was terminated. He was employed by the business for over 20 years and he has threatened to sue the company for unfair dismissal. The position of the financial controller has not yet been filled and so his task has been shared between the existing finance team. In addition the purchase ledger supervisor left in September and a replacement has been appointed in the last week. However for this period no supplier statement reconciliation or purchase ledger control account reconciliation were performed.
You have undertaken a preliminary analytical review of the draft year to date statement of profit and loss and you are surprised to see a significant fall in administrative expenses.
Explain five audit risk and the auditor’s response to each risk in planning the audit of Caster Co.