Question 3: Case study on Revenue

You are auditing the revenue for a wholesale company for the year ended on 30 June 2021. In your conversations with management, you find that the customers are less keen to purchase their company’s products and competitors have higher demand for similar products. The managers think that is only temporary, as they are developing new products for release in 2025. Management also explain that they have the best professionals working for them compared with the market. You investigate the average wage and salary conditions of your client and find that they are paying approximately 25% above the wholesale industry average. Last quarter, a number of employees were fired based on sales performance targets. You assessed these targets using experts in wholesale. The conclusion from the experts is that the targets are unreasonable and unachievable due to the low quality of the products. The experts suggest that there is likely to be a significant negative impact on demand in the future for this company if the quality of the products remain at their current level. You discuss the experts’ report with management. Management reply to the feedback by asserting that that their company, their work and their products are the best on the market. Management suggest that the real problem is that cannot find the right customers. In your observations of the sales teams, you find that the current competitive environment in the wholesale market suggests the low level of customer service is leading to a significant increase in customer complaints. The following sale practices are noted: cash sales are registered monthly, sales leaders are very friendly, and one former salesperson is suing the company due to underpayment. One evening you were driving by the client’s premises at night and you decided to drop by to check a particular document. When you arrive, you see a group of people in the sales sales department celebrating. You approach a member of the sales team an inquire why they were celebrating. The response is that CEO was just replaced by a leader of the sales team.

Required: Evaluate the audit risk associated with this audit of revenue by identifying any risks concerning the potential for material misstatements in your opinion as an auditor. In your evaluation, suggest actions, activities or procedures that would be necessary to reduce the potential risk of misstatement.