You are the auditor for Sigma Pty Ltd.As part of your preliminary work, you have obtained the following information: Current Year (unaudited)Previous Year(audited)Industry averagei) Current ratio (Working capital ratio)1.912.352.91ii) Receivables turnover57 days51 days73 daysiii) Inventory turnover72 days65 days96 daysiv) Gross profit margin20%18%20%v) Net profit margin4%4%6%In addition you have found that:The financial controller resigned during the year and the company has yet to hire another financial controller. The accounts of the current year were prepared by the assistant accountant.For situation mentioned above:i). Which component of the Audit Risk Model (ARM) would be affected, and how?ii). Discuss how your audit plan would be affected.Note:Prepare your answers in a tabular format as follows:Component of ARMEffect on Audit Plan

The Audit Risk Model (ARM) is a fundamental concept in the field of auditing. It's a framework that…

Answered: You are the auditor for Sigma Pty Ltd.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

You are the auditor for Sigma Pty Ltd.
As part of your preliminary work, you have obtained the following information:

	Current Year (unaudited)	Previous Year(audited)	Industry average
i) Current ratio (Working capital ratio)	1.91	2.35	2.91
ii) Receivables turnover	57 days	51 days	73 days
iii) Inventory turnover	72 days	65 days	96 days
iv) Gross profit margin	20%	18%	20%
v) Net profit margin	4%	4%	6%

In addition you have found that:

The financial controller resigned during the year and the company has yet to hire another financial controller. The accounts of the current year were prepared by the assistant accountant.

For situation mentioned above:

i). Which component of the Audit Risk Model (ARM) would be affected, and how?

ii). Discuss how your audit plan would be affected.

Note:
Prepare your answers in a tabular format as follows:

Component of ARM	Effect on Audit Plan

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