Audit and Assurance | Assignment-1

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student
Name of the University
Author Note

1AUDIT AND ASSURANCE
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................2
Answer to Question 3.................................................................................................................3
Answer to Question 4.................................................................................................................4
Answer to Question 5.................................................................................................................6
References..................................................................................................................................8

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Answer to Question 1
Auditing Standard ASA 315 is about Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment (Auasb.gov.au 2020).
Paragraph 6 of ASA 315 states the procedures of risk assessment that shall include enquiries
of management, analytical procedures as well as observation and inspection.
According to Paragraph A14 to A17 of ASA 315, the auditor performs analytical
procedures because it helps to know the facts or any misleading activity, which he/she is not
aware about. This includes both financial as well as non-financial information. Analytical
procedures help to identify the existence of unusual events or transactions and the matter
related to amounts, ratios and trends that indicate to have implications of audit (Richstein and
Farrenkopf 2015). Auditors may identify any unusual relationship within the process that
helps them to identify the risk of material misstatement, especially due to fraud.
As for example: In this case, Morris Ltd. has obtained a loan so that they can maintain
current ratio more than 1.3 and the audit analytical procedure may be done in the form of
ratio analysis to know the accurate figures. This will help the auditors to know the actual
truth so that to find any misrepresented figures and thus, maintains transparency.
Answer to Question 2
ASA 315 (paragraph 6) includes enquiries of management in the analytical
procedures which states the internal audit functions of individuals and others who can assist
the auditor with information to make a judgment of material misstatement because of fraud or
error. This includes involvement and two-way communication to identify hidden risks.
Professional skepticism refers to an attitude of the auditor, which consists of a
interrogative mind and being alert to all the circumstances that may indicate possible material
misstatement because of any error or fraud and a critical assessment of audit evidence (Wang

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and Fargher 2017). Any outcomes of the processes are not as same as from expectations, and
then the discussion must be done with the management. A certain amount of scepticism is
required on the time of having a discussion since the management does not have the intention
to spend time to delve into a deep explanation and could be hiding some fraudulent activity
(Siriwardane, Kin Hoi Hu and Low 2014). Otherwise, the questions may arise with the
auditors.
As for example: The scandals in the year 2008 at Enron, Tyco, and Stanford bank
have resulted in financial collapse. Recent issues affecting Wells Fargo, Mitsubishi materials
and Volkswagen have raised questions to auditors about being skeptical in work.
Answer to Question 3
Planning materiality refers to the misstatement amount set by an auditor at the initial
or planning stage of an audit on the basis of materiality to the financial statement (Baldauf,
Steckel and Steller 2015). The auditors use planning materiality to assess the misstatement
that could mislead the users while making their decisions.
In the case of Morris Ltd, an auditor is required for planning materiality for the Total
Assets, as it is very high as compare to the previous year. Therefore, the choice of planning
materiality is based on the Total assets at 1% of Morris Ltd. for both the years.
Planning materiality on 1% 2019 2018
Total Assets
(0.5% - 1%)
19119 * 1%
= 191.19
10662 * 1%
= 106.62
The amount calculated above for both the years shown an increase in Total Assets by
84.57 in the year 2019. Inventories are an important component of the assets that comes
within the current assets. It has found that the manufacturers shipped some inventories and
goods transferred to Morris at the time when loaded in Malaysia. It appears that some goods

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have damaged and shipping company is investigating upon this case. However, Morris has
included worth AUD 200,000 in the balance sheet. The amount also affects the
increase/decrease in the current ratio of the Morris (Audsabumrungrat, Pornupatham and Tan
2015). Therefore, the auditor may investigate the following figures stated by the company in
their financial statements related to their assets that can misguide the users.
Answer to Question 4
Morris ltd. has indicated a strong intention to raise their additional capital. As in the
year 2018, the debt to equity ratio of the company was 1.48. However, it has been increased
in the year 2019 to 3.18. Company has acquired a loan of 1,144 so that to reduced its current
ratio to 1.3 in the year 2019, as it was 3.7 in the year 2018. It is notable by the auditor to look
into the inventories as it is highly affecting the current ratio of the company. As in the year
2019, the quick ratio of the company is 0.19 that is calculated after deducting the value of
inventories from the current assets. Thus, the value of inventory is influencing too, the
current ratio.
In this matter, the auditor might follow up a proper analytical procedure so that to get
to know the points of the management as well as the others related to it. The auditor can
connect with the shipping company to know the truth (Messier 2014). This helps to know
whether the figures are correct or it is misrepresented intentionally or through any error.

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Answer to Question 5
Apart from all the financial information, an auditor has to give attention to other
areas. As Morris Ltd has setup, a new web-based system for online sales. The IT manager has
informed the company about the existence of some teething problems. Further, some of the
customers have taken legal action due to severe adverse effects of the capsules. The situation
shows a high ignorance of the problems that have suffered by the common people.

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In this case, the company has not disclosed the side effects of the capsules for their
short-term benefits or they have not given attention to the initial problems. This also reflects
the unethical conduct of Morris. ASA 310 (Para 14.a) states an understanding of the control
environment. The management of Morris comes within this para due to discarding culture of
honesty and ethical behaviour (Blouch, Ulrich and Michenzi 2016). The auditors have to find
non-financial issues along with the financial related to the Morris.

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References
Auasb.gov.au 2020. online Auasb.gov.au. Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf Accessed
10 Jan. 2020.
Audsabumrungrat, J., Pornupatham, S. and Tan, H.T., 2015. Joint Impact of Materiality
Guidance and Justification Requirement on Auditors' Planning Materiality. Behavioral
Research in Accounting, 28(2), pp.17-27.
Baldauf, J., Steckel, R. and Steller, M., 2015. The Influence of Audit Risk and Materiality
Guidelines on Auditor’s Planning Materiality Assessment. Accounting and Finance
Research, 4(4), pp.97-114.
Blouch, W.E., Ulrich, T.A. and Michenzi, A.R., 2016. Effectiveness of Auditing Curricula
Revisted. Journal of Business and Accounting, 9(1), p.37.
Messier Jr, W.F., 2014. An approach to learning risk-based auditing. Journal of Accounting
Education, 32(3), pp.276-287.
Richstein, H.J. and Farrenkopf, E., SAP SE, 2015. Methods and systems for performing
analytical procedures by interactions with visual representations of datasets. U.S. Patent
8,996,978.
Siriwardane, H.P., Kin Hoi Hu, B. and Low, K.Y., 2014. Skills, Knowledge, and Attitudes
Important for Present‐Day Auditors. International Journal of Auditing, 18(3), pp.193-205.
Wang, I.Z. and Fargher, N., 2017. The effects of tone at the top and coordination with
external auditors on internal auditors’ fraud risk assessments. Accounting & Finance, 57(4),
pp.1177-1202.