Reference no: EM132698177

You are the audit supervisor of Seagull & Co. and are currently planning the audit of your existing client, Eagle Heating Co., for the year ended December 31, 2020. Eagle manufactures and sells heating and plumbing equipment to a number of home improvement stores across the country.

• Eagle has experienced increased competition and is facing significant pressure to meet sales targets. As a result, it has decreased the selling price of its products significantly since September 2020. The finance director has informed your audit manager that he expects increased inventory levels at the year end. He also notified your manager that one of Eagle's key customers has been experiencing financial difficulties. Therefore, Eagle has agreed that the customer can take a six-month payment break, after which payments will continue as normal. The finance director does not believe that any allowance is required against this receivable.

• In October 2020, the financial controller of Eagle was dismissed. He had been employed by the company for over 20 years, and he has threatened to sue the company for unfair dismissal. The role of financial controller has not yet been filled, and so his tasks have been shared between the existing finance department team. In addition, the purchase ledger supervisor left in August, and a replacement was appointed in the last week. However, for this period no supplier statement reconciliations or purchase ledger control account reconciliations were performed.

• You have undertaken a preliminary analytical review of the draft year to date statement of profit or loss, and you are surprised to see a significant fall in administration expenses.

Problem 1: Which of the following factors impact the risk of material misstatement at the account level in planning the audit of Eagle? Choose all that apply.

a) There is an expectation that due to slower sales, there may be more inventory on hand at the end of the year.
b) The financial controller of Eagle was dismissed in October and is threatening to sue the company for being unfairly dismissed.
c) There is increased competition in the industry, which puts pressure on management to meet sales targets.
d) In October 2020, the controller was dismissed, and his tasks are being shared between existing staff.
e)Preliminary analytical review of the draft statement of profit or loss has identified a significant fall in administration expenses.
f) One of Eagle's key customers has been experiencing financial difficulties and is taking a six-month payment break.
g) The purchase ledger supervisor left in August, and no reconciliations of supplier statements and the purchase ledger control account have been performed.