Revision question on audit risk and meaning of audit rotation

You are planning the audit of Dangote ltd for the year ended 31 December 2018. the company manufactures and sells product made from imported timber. In recent years the company has expanded into the manufacture of quality children’ gardens swings and slides which are sold with a 10 year guarantee. Most sales are to domestic customers, but the company also has the small export market which has grown steadily over the last few years.

At the planning meeting with the finance director the following matters were discussed:

Operating activities.

During the year, the company revenue increased by 20% and the gross and operating margins increased by 5% and 2% respectively. Inventory and trade receivable balances are significantly higher than the previous year as result of this increased activity. Online ordering on the company’s website commenced in January 2017. internet order has grown steadily but only still represent a small percentage of the total of the company’s sales. However, the company continue to invest in the website to maintain its peed and ease of use for customers.

Payroll.

Following the successful implementation of new computer system two years ago, payroll processing , which had been outsourced for many years, were brought back in house in march 2018. Management was unhappy with the service provided by the external payroll company and cancelled the contract. additional staff has been recruited to process the payroll.

Managing director (MD)

The managing director has announced his intention to sell his 100% shareholding in dangote in order to concentrate on his other business interests. Negotiation are under way with the potential buyer for his shares.
REQUIREMENT:
  • Using the information provided, discuss the key audit risks and recommend an appropriate auditor’s response to each risk in planning the audit of Dangote.
  • Explain the substantive procedures which the auditor should perform to confirm the accuracy and completeness of Dangote payroll charge.
  • Discuss briefly what is meant by audit rotation and outline its supposed benefits and drawbacks.
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