Auditing Standards state that “The auditor should plan and perform an audit with an attitude of professional

Question 1 (a) As part of the process of planning the external audit of High 5, a public listed company, for the year ending 31 October 2004, you have reviewed the minutes of meetings of the Board of Directors for the year to date. You have identified the following items likely to have a bearing on the assessment of audit risk and the design of audit procedures when drawing up the audit plan. (1) In order to encourage performance, a bonus scheme has been introduced for senior management. In total, 25% of the company’s reported profits before tax in excess of the previous period’s profits will be set aside to provide for bonuses. No bonus will be paid if profits do not exceed the previous period. (2) An internal audit department has been established. (3) In order to finance investment in new projects High 5 has taken out a substantial bank loan. The loan agreement states that the company’s gearing ratio (the proportion of loan capital to equity capital) must not exceed 30%. Last year’s financial statements had a gearing ratio of 20% and the latest monthly management accounts show a gearing ratio of 25%. Required: For each of the items (1) to (3) above: (i) explain how it might affect the assessment of inherent or control risk. (3 marks) (ii) consider how it might affect the design of audit procedures specific to that item. (6 marks) Assume each item is potentially material. Consider each item separately. (b) You are part of ...