AAA SMART COURSE

KASHIF KAMRAN
LECTURE 8 (BLOCK 3 LECTURE 2)
Objective : Practice + continuation of syllabus area D
PRACTICE: SEPT 18 Q1 C
Using the information provided in Exhibit 5, evaluate the extract of the audit strategy prepared by Vulture Associates in
respect of their audit of Lynx Co and discuss any implications for the Group audit. (10 mark)

 EVALUATE- strategy – 1 mark per comment ( criticize/ shortcoming/ wrong/ issues)

 DISCUSS (where possible)- implication for group audit- 1 mark

Brainstorming
Controls effectiveness
We will place reliance on internal controls, which will reduce the amount of substantive testing which needs to be
performed. This is justified on the grounds that in the previous year’s audit, controls were tested and found to be
highly effective. We do not plan to re-test the controls, as according to management there have been no
changes in systems or the control environment during the year.

 We do not plan to re-test control – each year controls are to be evaluated for any changes from the last
year in terms of system design or its operations by performing walkthrough test to identify any changes and
if there are any changes this should be documented. (1)
 Further if there are any changes in the system, auditor should plan test of control on the particular system
where the changes have been brought in. (1)
 Moreover, test of control cant be skipped at all, even if controls are effective last year and there are no
changes , control should be tested on rotational basis that is some system should be test each year (1)
 according to management there have been no changes in systems- the auditor cannot just rely on
management statements on whether there are changes or not, it is the active responsibility of the auditor to
identify the changes himself. Management can be wrong/ fabrication/ conceal ? (1)
 Bison should discuss this issue with Vulture , and inform Vulture of changes needed in audit strategy and
performing the walkthrough test to identify changes and performing TOC for changes in any (1)
 Further Bison SHOULD discuss the need to document changes in system if any. (1)
Internal audit
Lynx Co has offered the services of its internal audit team to help perform audit procedures. We are planning to use
the internal auditors to complete the audit work in respect of trade receivables, as they have performed work on this
area during the year. It will be efficient for them to perform and conclude on the relevant audit procedures,
including the trade receivables circularisation, and evaluation of the allowance for trade receivables, which we
will instruct them to carry out.

 Can we take help from IA- Yes, after confirming the IA is independent, competent and experienced.
 We are planning to use the work of IA? Should Vulture check pre-requisites first?
 Perform procedures (IA) on receivables- Vulture should review and check the procedure perform and
conclude whether the procedure give sufficient appropriate audit evidence.
 Who will decide whether the audit procedure is relevant for audit or not?
 Risky areas cant be delegated to IA
 Decision and judgement should be taken by EA
 Confirmation letter should be circularized by EA

Sum up
 Pre-requisites of placing reliance on IA has not been checked by Vulture (1)
 Conclusion on relevant procedures shouldn’t be taken by IA rather Vulture (1)
 Risky areas like allowance cant be delegated to IA , it’s the responsibility of Vulture (1)
 Confirmation letters should be in custody of Vulture at least the selection of customer and receiving the
letters directly from customer should be in direct control of Vulture (1)
 Vulture should review the work performed by IA (1)

Assignment –
 (Sept 18 Q1c) make a proper answer – with 10 points in para form and email me aaamock@gmail.com
 (March 20 Q1B(i))- Do it yourself email me at aaamock@gmail.com
 June 15 Q1a – 6 marks
 Syllabus area D: Risk assessment

Audit risk / RoMM

 Audit risk consist of RoMM and Detection risk

 Exam paper- AAA
o Q: Evaluate audit risk?
o Q: Evaluate the risk of material misstatement?
 RoMM?
o Inherent- susceptibility of an account balance or an assertion to a misstatement assuming there are no
control in the organization
 Susceptibility- possibility/ chance/ doubt
 Assuming no control ( builds auditor professional skepticism to identify risk in FS)
 Inherent- by default/ integral or an embedded of the FS
 Massaging the figure
 Fabrication of FS
 Window dressing of FS
 Management bias to show better result
o Assets- overstatement
o Liabilities – understatement
o Income – overstatement
o Expenses- understatement
o Control – that control fails to prevent or detect a misstatement
 Weak internal controls
 No internal audit department
 No audit committee
 Few NEDs
o IR+CR= RoMM in FS
 Misstatement
o Difference between reported and required
o Reported in FS-
 Amount (recognize)
 Classification
 Disclosure
 Presentation
 Detection risk-
o Failure of the auditor to detect a misstatement

 VERY IMPORTANT (AUDIT RISK)

Where you are asked to evaluate audit risks in an exam, much of your answer would be the same as for a
requirement asking for risks of material misstatements as these form the major part of audit risk. The
difference here is that detection risk is now also relevant.
 Examples of detection risk could include a recent appointment as the auditor (FIRST YEAR AUDIT/ NEW
AUDIT CLIENT), inexperience in a client’s new market (Dec 14 Q1) or time pressure for the audit.

Assignment: Read March 2020 Q1 part a (case study)