ASSIGNMENT OF AUDITING THEORY AND PRACTICE

Running Head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the student
Name of the university
Student ID

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AUDITING THEORY AND PRACTICE
Table of Contents
Introduction......................................................................................................................................2
Case 1...............................................................................................................................................2
Answer (A)..................................................................................................................................3
Answer (B)...................................................................................................................................4
Case 2...............................................................................................................................................5
Answer (A)..................................................................................................................................5
Answer (B)...................................................................................................................................7
Case 3...............................................................................................................................................7
Answer (A)..................................................................................................................................7
Answer (B)...................................................................................................................................9
Answer (C)...................................................................................................................................9
Conclusion.....................................................................................................................................10
Reference list.................................................................................................................................11

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AUDITING THEORY AND PRACTICE
Introduction
The main aim of this project is to focus on 3 case studies provided in this assignment. In
the first case, report is focused in the inherent risk involved in the audit of Max Security
considering both industry and entity risk. Then it focused on the factors that are required to be
taken in consideration while determining the preliminary materiality of Max Security. In the
second case report is discussed about the weakness and strength associated with the debtors
confirmation as audit evidence. Then it is further discussed about the possibility to use debtor’s
confirmation as audit evidence by chant and partners. In the third case the report is discussed
about the ethical issues that are currently faced by Meg faces and will also highlight the way
required to comply with APES 110. It will also further explain the options of the company’s
audit report and will also recommend the appropriate course of action (Fung, 2014).
Case 1
Max Security limited is the audit client of Smith & Associate for the last 15 years and the
entity is based on Wollongong. The company is engaged into manufacturing high-tech personal
carrier armour plated. The main product of the entity is small yet powerful terrain master that is
of highly specialized in nature and it carries on business with the recognized nation and the
government that is democratically elected (Power & Gendron, 2015).
Answer (A)
Inherent risk is the risk occurs by an error, misstatement and omission in a financial
statement due to uncontrollable factors other than a failure to control. In audit inherent risk is
likely to occur when the transaction is complex or high degree of judgment is required. This
misstatement is not easy to catch in audit. Inherent risk does not consider the factors that are

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AUDITING THEORY AND PRACTICE
associated with lack of control rather than the risk of transaction that will take place if control is
not applied. In the given case of Max Security major inherent risk are as follows –
 Industry related risk – Major industry related inherent risk is associated with the nature of
the product. Company manufactures the products which are of highly sensitive in nature
and maintain highly secure environment. In this case inherent risk high owns to the fact
that entirely belongs to an industry where design of products is accounted as highly
sensitive. Vehicles design for carrying manufacturing entity is required to be confidential.
Therefore the selling risk to the allies will become the enemies in later period or risk of
selling to others is also associated with the type of product dealt in by Max Security
(Griffin & Wright, 2015).
 Entity related risk are as follows –
o Dependency on one product is high which is of specialized nature and high
dependent on export customers that will generate risk of revenue.
o Sophisticated product having pricing risk is designed to meet the specification of
the consumers.
o New costing system for inventories after replacing the system is always
associated with risk.
o Document adequate is required for trending.
o Product design and costing system may raise question.
o Risk is always associated with the waste management systems.