Your Audit Client Has a New Management Incentive Scheme in Place

question 18

Multiple Choice

Your audit client has a new management incentive scheme in place, with the bonus calculated on the basis of the increase in net profit over the previous year. The basis of the bonus will remain the same for the next three years. Your client has had a poor year and will not meet its budget or last year's net profit. Which of the following represents an inherent risk?

• A) Insufficient provisions.
• B) Next year's expenses taken up this year.
• C) Next year's sales incorrectly taken up this year.
• D) Overstatement of debtors.

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Definitions:

Moral Reasoning

The process of determining right and wrong in a given situation based on ethical principles and moral codes.

Permissive

An adjective describing a type of behavior or attitude that is tolerant, lenient, or not strict.

Authoritative

Describing a commanding and confident nature or approach, often associated with respect and compliance from others.

Parenting Style

The manner in which parents rear and interact with their children, often categorized into types such as authoritative, authoritarian, permissive, and uninvolved.