Question 1
a) Risk indicators b) Description of audit risks of material
misstatement at the financial statement
level,
1. Organisation of Happychef being sued by 1, This is an inherent risk as there is already
Mr Wok, executive director. negative publicity for the company due to
numerous reports in the media. The AFS might
also be materially misstated as entity is facing
liable legal damages. This might indicate not
properly accounting for and/or disclosing the
going concern assumption.
2. Loss of significant customers and 2, Risk is inherent due to AFS may be materially
suppliers. misstated as an error occurring due to
fraudulent activities in the sales budget for the
past nine months leading it to not achieving
targets. The entity might oppose a going concern
threat due to hiding fraudulent reporting.
3. The entity made changes accounting 3, This control risk may result to AFS being
software. materially misstated in error of old accounting
system transferring the financial data to the new
accounting system, this might not be 100% tested
and ineffective at a later stage.
4. New audit clients 4, The following risk exist
- The services of AU & DIT Incorporated
were discontinued and newly appointed
auditors of the company was ISA
Incorporated. This is detection risk to AFS
being materially misstated due to error,
as there were a different auditors prior
resulting to the opening balances that
might be incorrect.
- The AFS may be materially misstated due
to error, as material misstatements could
go undetected because they are not
familiar with the client. References
5. Using work of a third party. 5, The entity may inherent the risk by appointing
Comtech Incorporated to perform specialised
audit. The third party might be competent and
appropriately qualified to perform the audit of
the entity therefore, the AFS might be materially
misstated.
6. Management’s integrity being 6, As the entity looses customers due to poor
questionable. economic environment leading to control and
inherent risk, the AFS may lead to materially
misstated due to error and fraud the control
environment might be compromised by the
a) Risk indicators b) Description of audit risks of material
misstatement at the financial statement
level,
1. Organisation of Happychef being sued by 1, This is an inherent risk as there is already
Mr Wok, executive director. negative publicity for the company due to
numerous reports in the media. The AFS might
also be materially misstated as entity is facing
liable legal damages. This might indicate not
properly accounting for and/or disclosing the
going concern assumption.
2. Loss of significant customers and 2, Risk is inherent due to AFS may be materially
suppliers. misstated as an error occurring due to
fraudulent activities in the sales budget for the
past nine months leading it to not achieving
targets. The entity might oppose a going concern
threat due to hiding fraudulent reporting.
3. The entity made changes accounting 3, This control risk may result to AFS being
software. materially misstated in error of old accounting
system transferring the financial data to the new
accounting system, this might not be 100% tested
and ineffective at a later stage.
4. New audit clients 4, The following risk exist
- The services of AU & DIT Incorporated
were discontinued and newly appointed
auditors of the company was ISA
Incorporated. This is detection risk to AFS
being materially misstated due to error,
as there were a different auditors prior
resulting to the opening balances that
might be incorrect.
- The AFS may be materially misstated due
to error, as material misstatements could
go undetected because they are not
familiar with the client. References
5. Using work of a third party. 5, The entity may inherent the risk by appointing
Comtech Incorporated to perform specialised
audit. The third party might be competent and
appropriately qualified to perform the audit of
the entity therefore, the AFS might be materially
misstated.
6. Management’s integrity being 6, As the entity looses customers due to poor
questionable. economic environment leading to control and
inherent risk, the AFS may lead to materially
misstated due to error and fraud the control
environment might be compromised by the
