Auditing Theory and Practice: Inherent Risks and Materiality Assessment

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s Note

1AUDITING THEORY AND PRACTICE
Table of Contents
Answer to Question 1......................................................................................................................2
Requirement A.............................................................................................................................2
Requirement B.............................................................................................................................3
Answer to Question 2......................................................................................................................5
Requirement A.............................................................................................................................5
Requirement B.............................................................................................................................6
References........................................................................................................................................8

2AUDITING THEORY AND PRACTICE
Answer to Question 1
Requirement A
Assessment of audit risk is an important step in audit profession. The auditors express
audit risk as wrong opinion on the analysis of the financial statements of the companies. Three
types of audit risks can be seen; they are Inherent Risk, Control Risk and Detection Risk.
Inherent risk considers as the risk of material misstatements of the financial statements caused by
errors and omission due to the internal control failure (Coetzee & Lubbe, 2014). Business entities
having complex business operations have higher inherent risks and internal control cannot
protect or detect inherent risks. All these aspects of inherent risk are applicable for MaxSecurity
Limited (MaxSecurity).
There are some major inherent risks in the business operations of MaxSecurity. The
complex nature of the manufacturing costing process of MaxSecurity indicates towards the
presence of inherent risks. In MaxSecurity, the presence of a complex manufacturing costing
procedure can be seen for the manufacturing of high-tech armor-plated personnel carriers. This
highly complex manufacturing process of MaxSecurity creates scope for errors as costing values
can be omitted in the process. These errors can affect the financial statements of the company
that can lead to the material misstatements in the financial statements (Ruhnke & Schmidt,
2014).
Apart from the above area, the presence of old costing system creates inherent risk in the
business operation of MaxSecurity. From the earlier discussion, it can be observed that
MaxSecurity uses a complex production process of high-tech armor-plated personnel carriers.
For this reason, the company requires an accurate advanced costing system in order to support