You are the senior auditor in charge of the audit of Potholders Ltd, a retailer of garden pots and gnomes. Your audit firm has been auditor for the last four years. Historically, the firm has had a competent and qualified internal audit team upon whose work you have placed significant reliance. Management is well respected and is viewed to have high integrity, although there was some friction last year when the auditor discovered sales cut-off errors, which reduced profit and had an adverse impact on management bonuses under the new bonus scheme. While the company has been very profitable, drought and water restrictions have placed pressure on management to maintain profitability. In planning the audit you become aware of the following facts:
1. There is a cash shortage caused by recent business expansions and falls in cash inflow.
2. The accounts payable balance has increased by 30 per cent on last year.
3. Days in debtors has increased from 45 days to 63 days.
4. Due to the difficulty of maintaining sales levels, credit checks are not always carried out.
5. Internal audit department staff levels have been halved.
6. After a recent series of thefts, control over inventory has been tightened. When goods are received they are counted and inspected and, after a pre-numbered goods received advice is prepared, the goods are moved to an enclosed storage area with adequate security, including closed-circuit TV. Goods are released from the store only upon receipt of a properly authorised requisition form.
7. In the past, all purchases were made centrally at head office. However, store managers are now asked/allowed to purchase direct from local suppliers in order to obtain inventory at lower prices and avoid transport costs. Some store managers in North Queensland are importing from Indonesia.
Required:

1. Identify each component of audit engagement.
2. Outline the facts that increase inherent risks and the facts that increase or decrease control risk