Major Inherent Risks in Audit and Determining Preliminary Materiality

ACCT2004 Auditing and Internal Controls

Table of Contents
Question 1........................................................................................................................................3
The major inherent risks in audit.................................................................................................3
Discussion of considered factors while determining preliminary materiality.............................3
Question 2........................................................................................................................................3
Debtor confirmations as an audit evidence and its associated strength & weaknesses...............3
Whether debtor confirmations can be merely used as an audit evidence....................................3
Question 3........................................................................................................................................3
Ethical issues faced by Meg and requirements for compliance with APES 110.........................3
Audit report options available to Meg.........................................................................................3
Recommending a course of action...............................................................................................3
References........................................................................................................................................4

ACCT2004 1T2019 Assignment1
QUESTION 1
The major inherent risks in the audit
Inherent Risk is considered as the material misstatement risk in the financial statement taking
place because of omission as a consequence of factors, expect of control failures misstatement
because of lack of control are assessed in the assessment of control risk on a separate
basis(Hines, Masli, Mauldin, & Peters, 2015). Further, inherent risk is often stated to be greater
where a greater extent of judgement and assumption is engaged or where the entity is highly
complicated.
Audit risk is referred to as the provisional risk of improper audit opinion by the auditor if the
company’s financial statements are misstated materially. There are several rationales by which
audit risks takes place; the audit process undergoes certain inherent limitations which entail the
multiple risks types on it (Cannon &Bedard, 2016). Inherent risk is the major component of audit
risk that is subjected to the business entity because of its inherent nature. It is stated as the risk of
emergence of material misstatement within financial reports because of errors and failure,
wherein control failures do not count. Moreover, this risk type is present regardless of the audit
of financial statements. Henceforth, it is not practical to prevent such type of risk, even if the
assistance of formation of sufficient control in auditing procedures and improvised auditing
training are there (Callen & Fang, 2017).
By considering the case, it can be said that MaxSecurity has been facing some major inherent
audit risk, due to its comprehensive and complex manufacturing costing procedures. In relation
to the case, the inherent risk is particularly high due to the fact that the company operates in the
industry where the designs of the product are regarded as quite sensitive. Further, such vehicle
design of manufacturing company needs to be maintained and managed in a confidential manner,
all because of fierce competition in the carrier manufacturing industry and market. However,
auditors are required to act cautiously in analysing these risks and must assess them while
reviewing financial statements (Hopkin, 2018). Since the company has implemented a new
costing system for the replacement of an old system which was not effective and did not work in
aligned with the company needs.

ACCT2004 1T2019 Assignment2
The industry-related inherent risks are; defence- higher sensitivity of information related to
product and customer information. One more industry related risk is that the competitions are
likely to win the contracts of government. The entity-based risks are a higher dependency on one
product, specialized product’s nature, complicated cost calculation product and dependence on
export consumer forms risk in terms of revenue. The new costing system of inventory is also an
entity risk which further calls for more tests. The inherent risks involved in the MaxSecurity is
more, due to the informational sensitivity that revolves around its customers and product, and its
heavy reliance on the major product and complex pricing and costing methods. It can be
articulated that, higher inherent risks can eventually lower planned detection risk and materiality
(Zhang, 2018).
Discussion of considered factors while determining preliminary materiality
Preliminary judgement regarding materiality is, therefore, the maximum amount through which
the auditor considers the misstatement in financial statement and still not impacts the reasonable
user’s decisions (Lakis & Masiulevičius, 2017). Preliminary materiality assessment is conducted
on the basis of the assessment of auditor of the material misstatement risks (Ruhnke, Pronobis&
Michel, 2018). If the financial statement for the period of the audit is not accessible, the auditor
might develop an initial level of materiality on the basis of preliminary financial statement
amounts. In such case scenario, the MaxSecurity is required to consider the effects of recognized
or expected changes in its financial statements, inclusive of the considerable transactions or
alterations that are likely to be showcased in the financial statement at period end.
For obtaining a relevant assurance regarding if or if not financial statements are material
misstatement free, then the MaxSecurity must do the planning of audit procedures and perform it
investigate misstatement that, individual or in the integration of other related misstatements
would lead to financial statement misstatements. This comprises of being cautious while
conducting and planning those audit procedures meant for misstatements that can be material
because of both quantitative as well as qualitative factors (Graham, Bedard& Dutta, 2018). On
the other hand, it normally is not realistic to develop audit procedures to measure and monitor
material misstatement being based merely on qualitative factors.
Auditors establish a preliminary judgement regarding materiality to assist plan the suitable
evidence to yield. The lower the amount of the preliminary judgment, the more there is