Question 1

Situation A: Eng Tech

1) Inherent Risk Assessment:

The inherent risk for Eng Tech should be assessed as high. The industry in which Eng Tech
operates is characterized by rapid technological advancements and intense competition.
Eng Tech’s products are slightly behind the market leaders, increasing the risk of
obsolescence and declining market share. Although the company's performance this year
places it in the second quartile in terms of profitability and financial position, the overall
industry dynamics and Eng Tech’s historical performance indicate a higher susceptibility to
financial misstatements, particularly in areas related to inventory valuation, revenue
recognition, and technological obsolescence.

2) Effect on Detection Risk:

Due to the high inherent risk, the detection risk must be set lower. This means that the
auditors will need to perform more extensive and rigorous audit procedures to reduce the
risk of not detecting material misstatements. This includes detailed testing of high-risk areas,
such as inventory and revenue recognition, and ensuring thorough review and corroboration
of management’s estimates and assumptions. Enhanced scrutiny and more extensive
substantive testing will be required to ensure the audit’s effectiveness.

Situation B: Aulia Services

1) Inherent Risk Assessment:

The inherent risk for Aulia Services is also high. The high ownership concentration, with
Aulia and his daughter owning 57% of the share capital, coupled with Mrs. Aulia's dominant
role in decision-making, significantly increases the risk of financial statement manipulation.
The board of directors' lack of independence and tendency to rubber-stamp decisions further
exacerbates this risk. These governance issues create an environment where management
override of controls is more likely, and related party transactions may not be properly
disclosed or monitored.

2) Effect on Detection Risk:

Given the high inherent risk, detection risk must be set lower. Auditors will need to
implement stringent audit procedures to mitigate the risk of undetected material
misstatements. This includes increased attention to related party transactions, rigorous
testing of significant management estimates, and enhanced procedures to verify the
authenticity and accuracy of financial reporting. The auditors should also consider involving
forensic specialists if there are indications of fraudulent activities or severe governance
issues.

Situation C: Cempaka Stores

1) Inherent Risk Assessment:

Inherent risk for Cempaka Stores should be considered high. The recent appointment of a
new finance director and financial controller introduces a risk of disruption and potential
weaknesses in internal controls. Additionally, the chairman’s reputation for aggressive
business tactics and a strong focus on meeting earnings forecasts may pressure
management to engage in earnings management practices, especially in light of the slower
sales experienced in the previous year. These factors increase the likelihood of material
misstatements in financial reporting.

2) Effect on Detection Risk:

To address the high inherent risk, detection risk must be reduced. Auditors will need to
perform more detailed and extensive audit procedures, particularly focusing on areas
susceptible to management bias such as revenue recognition, provisions, and estimates.
The audit team should also scrutinize any changes in accounting policies or estimates made
by the new financial leadership. Increased professional skepticism and thorough verification
of management’s assertions will be essential in mitigating the detection risk.

Situation D: Prominence Finance Limited

1) Inherent Risk Assessment:

The inherent risk for Prominence Finance Limited is high. The ongoing disagreements with
the CEO and controller over accounting issues, particularly related to the provision for
doubtful debts and the value of collateral, suggest a persistent risk of material
misstatements. The need for significant adjustments in prior audits indicates that
management's estimates and judgments may be overly optimistic or not adequately
supported by objective evidence.

2) Effect on Detection Risk:

Due to the high inherent risk, detection risk must be set lower. This requires auditors to
perform extensive and meticulous audit procedures, with a strong focus on the areas of
disagreement such as provisions for doubtful debts and collateral valuation. Auditors should
increase their use of external confirmations, perform independent valuations, and apply
heightened professional skepticism. Detailed substantive testing and corroboration of
management’s assertions with independent evidence will be crucial in reducing the overall
audit risk.
Question 2

16/8/19 Issue: Revaluation of Land & Buildings

● Impact on Audit Plan: further work on non-current assets.

● Auditor should assess the materiality of the revaluation (on non-current
assets and net profit)
● Auditor should reference AASB 116 to ensure the revaluation is appropriate
● Consider use of expert to perform independent valuations

17/10/19 Issue: Takeover of a Major Customer

● Impact on Audit Plan: intercompany transactions (Shakespeare Traders will

consolidate the new company)
● Ensure all intercompany balances eliminate at year-end
● Any large/unusual transactions around balance-sheet date should be
carefully reviewed to ensure cut-off is appropriate

15/12/19 Issue: Bonus Scheme

● Impact on Audit Plan: potential for profit manipulation

● Ensure sales cut-off is correct, provisions & liabilities are not understated and
accounting policies have been consistently applied.

16/02/20 Issue: New Factory

● Impact on Audit Plan: construction-in-progress account

● Costs for new factory at year-end must be properly accumulated and
recorded
● Auditor may visit construction site & obtain estimate of percentage of completion
● Consider use of an expert depending on materiality of new factory

17/05/21 Issue: Loan to Subsidiary

● Impact on Audit Plan: proper disclosure of loans to subsidiaries

● Discuss the loan with management & assess its collectability, careful
consideration is required to ensure the amount is actually a loan rather than a
payment to support the subsidiaries operations
Question 3

Accounting Classification Sources Brief Procedurs

Evidence

Bank Statements High reliance Third Party Verify statements

directly with the bank to
ensure they match the
client’s records. High
reliance due to the
independence of the
bank.

Vendor Invoices Medium reliance External Source Cross-check invoices

with goods received
notes and payments
made. Medium reliance
as they come from third
parties but may still be
manipulated by the
client.

Internal Financial Low reliance Auditee/Client Review and compare

report internal reports
prepared by the client's
employees. Low
reliance as they are
susceptible to bias and
manipulation without
external validation.

Confirmations of High reliance Third Party Send confirmations

Receivables directly to customers to
verify amounts owed.
High reliance due to
independent
confirmation from the
customer.

inventory Count Medium reliance Mixed (Client & Observe physical

Sheets Auditor) inventory counts and
compare with inventory
records. Medium
reliance as the auditor
participates, but initial
data is prepared by the
client.