Beruflich Dokumente
Kultur Dokumente
Week 10
Question 1
Briefly explain FOUR matters that should be considered by external auditor before
accepting a new audit client
Refer page 105, 8.2.1
Snapshot :
1)
2)
Technical competence.
3)
Resources available.
4)
5)
Risk assessment => pose a significant danger to auditor's reputation ?? => Audit
business risk
6)
Replacement of previous auditors => contact previous auditor and find out why =>
professional clearance .
7)
1)
Qualification to act as an auditor. Determine if the auditors are independent of the client
and able to provide the desired service.
2)
Technical competence. Determine whether the auditors have the necessary expertise,
technical skills and knowledge of the industry to carry out an effective audit especially if the
client business is in a specialized industry.
3)
Resources available. Auditors should determine whether they have resources (e.g. audit
staff, audit techniques ) to perform the audit work and complete the audit engagement within
the deadline.
4)
Ethical matters. Auditors should determine if they accept the client would violate any
applicable regulations and standards or face any ethical threats to the independence of
the auditor.
5)
Risk assessment. Auditors should consider if they accept the client and the risk associated
to the client would pose a significant danger to the auditors reputation. When auditors
assess the risk, they need to consider the following:i)
ii)
Whether is there any unusual item or going concern problem faced by the client
6)
Replacement of previous auditors. If this is the first year audit, auditors should consider
the reasons for resignation of the previous auditor. Auditors should contact the previous
auditor to find out is there any serious disagreement with directors over accounting matters.
7)
Question 2
Yes House, a limited liability construction company has recently instructed your firm to act
as the companys auditors. Professional clearance has been obtained from the previous
auditors and an engagement letter has been issued.
It is now 1 December 20x8 and your firms audit partner has asked you to visit the company
in order to obtain as much relevant knowledge as possible for use in planning the audit of
the companys accounts for the year ending 31 July 20x9.
a)
An audit engagement letter should be addressed to the directors of the company. If the client
requires other services, the scope of these services should be set out clearly.
Auditor should perform the following steps to ensure acceptance of engagement letter.
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ii)
Draft and sign the letter before commencing any part of the assignment.
iii) Receive the clients written resolution on acceptance to confirm to engage the auditor.
iv) Review the engagement letter every year to make any change.
b)
Explain the purposes of an audit engagement letter, state when such a letter should
be issued to an audit client.
Served as a contract => To clearly outline the terms and conditions agreed by both parties (
audit firm and audit client) => define the objective, scope of audit and the form of report
2)
3)
4)
5)
6)
Every auditor should send his client an engagement letter which sets out the auditors duties and
responsibilities before commencement of audit work.
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c)
d)
Explain with reasons three examples of knowledge you would wish to obtain prior to
31 July 20x9 in order to assist in the planning of the audit.
1)
The viability and stability of the clients business in order to assess the audit risk
2)
3)
The effectiveness of accounting system and internal control system to assess the
control risk.
4)
5)
Whether is there any unusual item or going concern problem faced by the client to
determine to risk of material misstatement.
6)
7)
Explain why good audit planning is essential for carrying out an effective audit.
Reasons for audit planning:
1)
2)
3)
Able to delegate the audit work to various audit staff so to carry out the audit more
effective and efficient manner.
4)
5)
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Question 3
You are an audit senior of a small accounting firm. Your audit manager has requested you
to prepare brief notes on the following issues for your audit juniors.
a)
b)
Explain with TWO (2) reasons the importance of keeping complete audit working
papers.
1)
Working papers can help in the supervision of the audit work. The engagement
partner needs to supervise the work delegated by him has been properly performed.
Hence, by asking audit staff to produce detailed working papers, he is able to monitor
the process of auditing.
2)
Working papers will provide, for future reference details of audit problems
encountered.
3)
4)
Good working papers can help in planning and control the process of auditing.
5)
The preparation of working papers encourages the auditors to adopt a high quality
of auditing.
Describe TWO (2) types of audit working papers files and explain TWO (2) reasons of
splitting the working papers files.
Audit files can be separated into 2 types:- (1) permanent audit file (PAF) & (2) current audit
file (CAF).
Permanent audit files are to :1)
2)
3)
give audit staff who are new to the audit information regarding the clients affairs
and the nature of audit.
Current audit files are audit files contain information relating primarily to the audit of a
single (current) period. The objectives of the current audit file are to:
1)
2)
3)
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c) Briefly describe the following types of working papers and their function:
1)
2)
Audit plan= An audit plan will set out the overall strategy while the detailed
procedures will be given in the audit program.
Audit program = An audit program consists of detailed instructions (detail audit
procedures) that instruct the auditor to collect the evidence.
3)
Working trial balance= A working trial balance links the amounts in the financial
statement to the audit working papers.
4)
Question 4
When planning an audit, the auditor must assess the level of risk, materiality for the
engagement and the going concern of the client. Explain how the auditor judgment about
these affects auditors planned audit procedures.
Snapshot :
=>
Audit risk high => Materiality level adjusted to low => increase volume of audit
checking => more substantive procedures.
2)
Going concern => break up basis (net realizable value) => ensure full disclosure on
going concern issues have been disclosed by the management in the explanatory
note.
Note :
Net Realizable value = Inventory market value - Costs to complete and sell goods
=>
=>
Summarize all the costs associated with completing and selling the inventory
=>
Net Realizable value = Inventory market value - Costs to complete and sell goods
At the audit planning stage, if the auditor assesses the level of risk as high, the materiality level will
be adjusted to low level in order to increase the volume of audit checking. The auditor will use
more substantive procedures in gathering audit evidence rather than test of control. If the clients
going concern status is in doubt, the financial statements should be prepared in the break up
basis. Auditor has to ensure full disclosure on going concern issues have be disclosed in the
explanatory note.
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Question 5
Arnod is a long established family limited liability company which manufactures cosmetics.
These are sold to customer who package and market them under their own trade names.
The company has recently undergone some management changes following the death of
its managing director. Gill, formerly the sales director is new managing director. A new
sales director from outside the company has been appointed.
The finance director and company accountant, Dick is now 65 and has recently negotiated
a part-time contract of employment with the company. The company will appoint a full time
accountant to replace Dick after next financial year end.
Profit has been declined in the last two years and the company is seeking to improve
profitability prior to a possible listing on its stock market. An incentive scheme has been
recently implemented with the aim of improving productivity within the company. Certain
managers and all directors will be paid a bonus based on the production achieved above a
pre-determined level.
Required:
You are the audit senior for the audit of Arnold and you are about to commence planning
the audit.
Identify the factors which should be considered when assessing the inherent risk of the
company. Include your overall conclusion as to whether you consider the inherent risk to
be high, medium or low.
Snapshot :
1)
Change in management => Gill, sales background => may not possess the required
experience and knowledge =>Increase the risk of deliberate or unintentional
misstatement => High inherent risk
2)
Part time accountant => proper handover of duties from Dick to the new full time
accountant => low inherent risk
3)
Excessive bonuses => Production achieve above the pre-determined level =>
dishonest , illegal or unethical acts => affect truth and fairness of F/S => High inherent
risk
4)
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5)
Over-production => risk of inventory obsolescence and having slow moving inventory
=> High inherent risk
1)
Change in management. There were changes in management during the period and new
management team might not possess the required management experience and knowledge.
This will increase the risk of deliberate or unintentional misstatement in the financial
statements.
2)
Part time accountant. The appointment of a full time accountant while Dick is still a parttime company accountant would enable a proper handover of duties to the new accountant.
This would ensure the new accountant who takes over the job is familiar with the companys
accounting system and is therefore able to handle his job competently. Timely and proper
preparation of accounting records could therefore be enhanced.
3)
4)
Potential overstatement of profitability. In order to target for a possible listing on its stock
market, the company is planning an expansion and employing strategies to improve on
profitability. There is a real risk of over-trading, i.e. the business will exhaust its cash
resources too soon as a result of rapid growth. In such circumstances, there is a risk that
creditors will go unpaid and that the business will be forced into liquidation.
5)
Overproduction also increases the risk of inventory obsolescence and having slow moving
inventory.
Conclusion: Based on the factors identified above, the inherent risk of the company appears
to be high as a whole.
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