Audit and Assurance Assessment – 1

Star time 15:32 End time – 16:50

B – 1 and 2
ANSWER
Explanation of audit risk and its compnents
 1. 1.INHERENT RISK – the risk that an assertion to material misstatement there is no
internal control
2.
2. CONTROL RISK- The risk that a material misstatement that could occur in an
assertion will not be prevented, or detected and corrected on a timely basis by the
entity’s internal control system.
3.
3. DETECTION RISK -The risk that the audit procedures performed will not detect a
material misstatement that exists in an assertion.

Identification and Description of Six Audit Risks, and Auditor's Response

Minty’s trading results have been
strong this year and the company is
forecasting revenue of $85 million,
which is an increase from the
previous year.
Minty has invested $5 million in
updating machinery and expanded
warehouses
A new accounting general ledger
was introduced with a parallel run for
two months.
There is a risk of improper
recognition or overstatement of
revenue.
There is risk of incorrect
capitalization or expenditure
treatment
Transition errors could lead to
misstatements in financial
reporting. Incorrect account
balances or transaction records
Review revenue recognition
policies and procedures
perform substantive tests on
revenue transactions
compare forecasted revenue
to historical performance and
market conditions.
Review capital expenditure
documentation
assess compliance with
accounting standards
verify useful life and capacity
improvements.
test opening balances and
transactions during parallel
run period.

Minty has recently recruited a new However, there is a risk that Review the effectiveness of
credit controller to chase outstanding aggressive credit policies or the new credit control
receivables. inadequate credit checks could procedures implemented by
result in higher bad debts. the credit controller.

The finance director thinks it is not
necessary to continue to maintain an
allowance for receivables and so has
released the opening allowance of
$1·5 million.
Minty has incurred expenditure of
$4·5 million on developing a new
brand of fizzy soft drinks. and is
close to launching their new product
into the marketplace.
This decision poses a risk of
understated receivables if the
allowance was required to
cover potential bad debts
There is a risk that these
expenditures may not meet the
criteria for capitalization under
accounting standards
could be impairment risks if the
product does not achieve
expected sales
Evaluate the adequacy of the
allowance for doubtful
accounts by reviewing
historical collection data and
analyzing the aging of
accounts receivable.
Verify that expenditures meet
the criteria for capitalization
Review supporting
documentation and project
plans to ensure proper
accounting treatment and
disclosure
ANSWER
1. Inform to the both governance bodies about the conflict of interest.And recommend
one or both client can seek independent advoice.

2. Use seprate tem for engagement of each client to prevent confidential information

3. Make clear Guidelines for engagement teams regarding security and

confidentiality

4. Require partner of firm to sign confidentiality agreement to protect client

information.

5. Conduct regular monitering of the safeguard application by a senior individual not

involved in audit

ANSWER –

A - Factors for revise engagement letter –

1. A) changes in scope of nature or services or expanded oprection in to new sector
or acquired subsidiaries
2.
changes in key personal or government structure changes in board of directors

B- Matter –

1. Objective and scope of auditdefine the objective of audit and scope of work to
be perform

b) Responsibilities of auditor – outline audit standards and ethical requirements

c) responsibilities of management – providing access to information of

maintaining internal control and other require documents

d) Timing of audit - specify period covered by audit

e) reporting faramework – indicate the financial reporting framwork will be used

eg.IFRS , GAAP

f) Fee arrangements – detail the basis of fee terms for audit service

C- Sources

1 financial statement and annual reports – reviewing recent fincial statement

and annual reports provide
2 Minuts of meetings – review the minuts from board meetings audit committee
meetings and other governace meetings
3 Industry reports and market reports which provide competitive position risk
and economic envoirment
4 Regulatory filling and complinces -complience with local laws help to identify
regulatory risk and compliance issue
5 Understand company organizational structure and goverance framwork audit
committee help to access goverence releted risks

1. Completeness – this assertion relates to whether all transactions and

accounts that should be included in statement
2. Cutoff: This assertion relates to whether transactions have been recorded
in the correct accounting period
3. .Accuracy: This assertion concerns whether the amounts recorded for
assets, liabilities, revenues, and expenses are accurate
4. Classification: This assertion focuses on whether transactions have been
recorded in the appropriate accounts in the financial statements
1.CAPICITY -

Auditors need aresources, including skilled staff, technology infrastructure (computers,

software), and other resources to conduct audits efficiently

2. EXPERTIES – Auditor should have relevant knowledge of Auditing standards provide

guidelines

3. Conflict of Interest auditors to assess and address any potential conflicts of interest
before accepting the audit

4. Integrity of Management: Evaluating the integrity of management.

5. Complexity of Client Business: Assessing the complexity of the client's business helps
auditors determine the level of expertise and resources needed for the audit.