Auditing Theory and Practice: Solutions to Case Studies

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

1AUDITING THEORY AND PRACTICE
Table of Contents
Introduction......................................................................................................................................2
Case 1...............................................................................................................................................2
Answer (A)..................................................................................................................................2
Answer (B)...................................................................................................................................4
Case 2...............................................................................................................................................6
Answer (A)..................................................................................................................................6
Answer (B)...................................................................................................................................7
Case 3...............................................................................................................................................9
Answer (A)..................................................................................................................................9
Answer (B).................................................................................................................................10
Answer (C).................................................................................................................................11
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................12

2AUDITING THEORY AND PRACTICE
Introduction
Aim of the task is to focus on 3 case studies provided in the assignment and suggesting
solutions for the required issues. In the first case the report will focus on the inherent risks
involved in the audit of MaxSecurity in industry as well as entity aspects. It will further focus on
the factors required to be taken into consideration while determining the preliminary materiality
for MaxSecurity. In the 2nd case the report will discuss weaknesses and strengths associated with
debtor confirmation to be used as the audit evidence. It will further analyse whether in addition
to debtor confirmation any other audit evidence can be collected in case of Chant and Partners.
In the 3rd case the report will discuss ethical issues that are currently faced by Meg faces and will
highlight the ways in which she is required to be complied with APES 110. It will further explain
the option of the company’s audit report and will recommend the appropriate course of action
(Nursasi & Maria, 2015).
Case 1
MaxSecurity Limited is the audit client of Smith & Associates for last 15 years and the
entity is based in Wollongong. The company is engaged into manufacturing high-tech personal
carriers those are armour plated. Main product of the entity is small yet powerful Terrain Master
that is of highly specialised nature and it carries on business only with the nations those have
recognised and the government that is elected democratically.
Answer (A)
Inherent risk is the likelihood that misstatement or omissions will exist in financial
statement owing to uncontrollable factors and will not be detected in the audit procedure.

3AUDITING THEORY AND PRACTICE
Auditing involves inherent risk specifically at the time of dealing with the complex transactions
those require higher level of attention while applying estimations in financial aspects. Inherent
risks do not consider the factors associated with lack of control rather the risks that a transaction
will take place if control is not applied (Coetzee & Lubbe, 2014). Hence, the inherent risk
provides warning of worst case scenario in case the control fails. In the given case of
MaxSecurity major inherent risks are as follows –
 Industry related risk – industry related major inherent risk is associated with nature of
product. The company manufactures the products which is of highly sensitive nature and
hence maintains highly secure environment. Inherent risk in this case is high owing to the
fact that the entity belongs to an industry where the designs of product are accounted for
as highly sensitive. Vehicle designs of each carrier manufacturing entity are required to
be confidentially maintained owing to high extent of competition in market. Hence, the
selling risk to the allies those will become the enemies in later period or the risk of
product on-selling to others are also associated with the type of product dealt in by
MaxSecurity (Ruhnke & Schmidt, 2014).
 Entity related risk are as follows –
 High level of dependency on one product that is of specialised nature is associated with
high level of dependency on the export customers that will generate risk of revenue
stream
 Pricing risk for the sophisticated product that is designed for meeting the specification of
the customers