AUE3701 ASSIGNMENT 2 – SEMESTER 2 OF
2022
QUESTION 1
1. Preliminary audit engagement activities
(a) The audit firm should consider the integrity of the client.
There was no indication from the available information that their
integrity is compromised, and I PL seem to have a sound business
reputation and are not involved in an industry that the audit firm
would not like to be associated with.
If proven guilty, management’s integrity might be compromised if
they passed fraudulent accounting journals to increase profits.
(b) Ethical requirements relating to a new audit client is that the client
should be independent from the audit firm.
A family relationship exists between the audit firm and the audit client
(the partner and chairperson of the Board of I PL are husband and wife)
and therefore there is a threat to independence.
The threat should be assessed by the audit firm but as a minimum
the partner should not be involved in the audit.
However, even if this is implemented the audit firm might still not be
seen as independent from the public’s view which might influence the
credibility of the audit or the firm’s reputation may be harmed when the
threats to independence are made public.
I PL is also one of the largest clients of the audit firm and therefore the
firm’s independence might be questioned if they are dependent on the
audit client’s audit fees.
For academic need contact /0651609781
, (c) When a new audit client is accepted, the audit firm should consider
whether the audit team has the necessary skills, competence, and
resources.
It seems as if the audit team members including the partner do not have
the necessary skills and experience with auditing complex computerized
environments;
Based on this it might be difficult to perform the audit appropriately and
the audit firm should consider:
Not accepting the audit client.
Appoint audit team members with the appropriate skills and
experience in the audit of complex computerised environments;
and
Involve an expert in computer audits.
In terms of resources, it does not seem to be a problem as most of the
audit firms audit clients have December or September year ends.
(d) In general, whether I PL can pay the audit fee, which they seem to be
able to do as their turnover increased and their budget was achieved.
For academic need contact /0651609781
, QUESTION 2
2. Identification, description and assessment of the inherent risks of
material misstatement at the financial statement level for I PL for the year
ended 30 June 2022
(a) Description of inherent risks of (b) Inherent risk factor (c) Assessment of magnitude and
material misstatement (s) likelihood and assessment of
where on the spectrum of
inherent risk
1. The AFS may be materially 1. Susceptibility to 1. Magnitude is high as
misstated due to fraud as misstatement due management would benefit
management know that the new to management from a healthy financial
auditors have limited knowledge bias or fraud. position and potential for
of the entity and therefore might fraud is increased.
manipulate (overstatement or
understatement of account Likelihood is high as the
balances or classes of potential for fraud risk is
transactions) the AFS as they increased especially as the
think they won`t be caught. call up of loans are tied to
a good profit before tax.
The risk can be placed on
the upper / higher end of
the spectrum of inherent
risk.
This can also be classified
as a significant risk.
For academic need contact /0651609781
2022
QUESTION 1
1. Preliminary audit engagement activities
(a) The audit firm should consider the integrity of the client.
There was no indication from the available information that their
integrity is compromised, and I PL seem to have a sound business
reputation and are not involved in an industry that the audit firm
would not like to be associated with.
If proven guilty, management’s integrity might be compromised if
they passed fraudulent accounting journals to increase profits.
(b) Ethical requirements relating to a new audit client is that the client
should be independent from the audit firm.
A family relationship exists between the audit firm and the audit client
(the partner and chairperson of the Board of I PL are husband and wife)
and therefore there is a threat to independence.
The threat should be assessed by the audit firm but as a minimum
the partner should not be involved in the audit.
However, even if this is implemented the audit firm might still not be
seen as independent from the public’s view which might influence the
credibility of the audit or the firm’s reputation may be harmed when the
threats to independence are made public.
I PL is also one of the largest clients of the audit firm and therefore the
firm’s independence might be questioned if they are dependent on the
audit client’s audit fees.
For academic need contact /0651609781
, (c) When a new audit client is accepted, the audit firm should consider
whether the audit team has the necessary skills, competence, and
resources.
It seems as if the audit team members including the partner do not have
the necessary skills and experience with auditing complex computerized
environments;
Based on this it might be difficult to perform the audit appropriately and
the audit firm should consider:
Not accepting the audit client.
Appoint audit team members with the appropriate skills and
experience in the audit of complex computerised environments;
and
Involve an expert in computer audits.
In terms of resources, it does not seem to be a problem as most of the
audit firms audit clients have December or September year ends.
(d) In general, whether I PL can pay the audit fee, which they seem to be
able to do as their turnover increased and their budget was achieved.
For academic need contact /0651609781
, QUESTION 2
2. Identification, description and assessment of the inherent risks of
material misstatement at the financial statement level for I PL for the year
ended 30 June 2022
(a) Description of inherent risks of (b) Inherent risk factor (c) Assessment of magnitude and
material misstatement (s) likelihood and assessment of
where on the spectrum of
inherent risk
1. The AFS may be materially 1. Susceptibility to 1. Magnitude is high as
misstated due to fraud as misstatement due management would benefit
management know that the new to management from a healthy financial
auditors have limited knowledge bias or fraud. position and potential for
of the entity and therefore might fraud is increased.
manipulate (overstatement or
understatement of account Likelihood is high as the
balances or classes of potential for fraud risk is
transactions) the AFS as they increased especially as the
think they won`t be caught. call up of loans are tied to
a good profit before tax.
The risk can be placed on
the upper / higher end of
the spectrum of inherent
risk.
This can also be classified
as a significant risk.
For academic need contact /0651609781
