Auditing

1. (a) Inherent risk is high due to the fact that the company is looking forward to expansion. As it is hard for PLK to get its loan for expansion because of its failure to pay the due debts, this may cause the directors to commit fraud concerning accounting numbers in the records and annual reports to make the company’s debt covenants ability to look better.

(b) In the audit plan, the focus will be on major accounts that can reflect a company’s past loans like bank loans, company bond issues, long-term leases as they accounts may be manipulated to make the debt covenants ability look good.

(c) The auditor can take a sample from purchase invoices, match the amount owed on invoices to the record on the accounts payable ledger, in order to detect whether certain debts have been understated.

2. (a) Inherent risk and control risk is high due to the resign of key employees and instalment of new accounting software. As the resign of key staff in accounting department, and the sales volume is increasing, so it is difficult for the entity to keep accounting records fully recorded. Moreover, key employees left the company makes it hard to ensure enough control is put into place because other employees might not be as experienced as them. Change from manual accounting system to a new IT system also increases the possibility that mistakes will be made.

(b) Almost all accounts are affected by the resign of those employees and use of new accounting system: not only main accounts like sales revenue and accounts receivable, but also other accounts like insurance expenses and rent as these accounts are not going to be checked by the key accountants and input of accounting data changing from manually to electronically also creates mistakes due to lack of familiarity.

(c) The auditor will need to talk to management regarding the potential problems while transferring from manual accounting system to IT system and their training plans for employees to get them familiar with...