Lead to Risk of Material Misstatement
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Added on 2020-04-07
Lead to Risk of Material Misstatement
Added on 2020-04-07
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AUDITING THEORY AND PRACTICE1
ContentsPart A...............................................................................................................................................3Part A-1........................................................................................................................................3Part A-2........................................................................................................................................3Part A-3........................................................................................................................................3Part A-4........................................................................................................................................4Part B...............................................................................................................................................6(a): Business Risk........................................................................................................................6(b): How it may lead to risk of material misstatement................................................................6Part C...............................................................................................................................................8(a): Deficiency and explanation...................................................................................................8(b): Control..................................................................................................................................8(c) Test of Control.......................................................................................................................8Part D.............................................................................................................................................102
Part A Part A-1 Ethics in business management and business organisation is the prime factor that shall beconsider by auditor before accepting the audit or audit engagement. Auditor has overallresponsibility of verifying financial position and other unethical practices involved in thebusiness. In this case, management and Pharmaceuticals Ltd are involved in the practice of spillof toxic chemicals into a nearby river. Therefore, protecting the public interest is the key ethicalmatter that shall be considered by auditor before accepting the engagement (Duska, et. al, 2011).Since management and Pharmaceuticals Ltd involve in unethical practice, therefore, beforeaccepting audit public interest ethical practice shall be should be considered.Part A-2 In this case, no further course of action has been taken regarding Pharmaceuticals Ltdadjustments that are identified during the audit and reported to the management. Errors inaccounting for hedging are small and not materially misstated. In this case, further course ofaction is to make adjustments in the financial statement and same shall be reported in audit report(Merle, et. al., 2014). For identified control weakness, the auditor shall recommend new treasureror new internal control system to be placed in the Pharmaceuticals Ltd. Part A-3 An audit can be defined as the process of identifying material misstatement in the financialstatements and objective of the audit is to issue an opinion on true and fairness on client’sfinancial statements. On the other hand, review engagement is very much different from auditingi.e. in review engagement objective is to provide opinion on whether financial statements can betrusted or not. It depends on audit engagement, whether the auditor is appointed for auditor forreview engagement. In this case, Billings & Associates has been appointed for an audit ofReaction Pty Ltd as Billings & Associates has issued audit engagement prior to thecommencement of the audit. Since Reaction Pty Ltd is not available with complete documentsrelated to accounts receivable. In this case, auditor (Billings & Associates) has planned to issue3
modified auditor’s report because of scope limited. The contention of management (Reaction PtyLtd) that the engagement becomes review engagement as they are required to have an audit. It can be conducted that, the contention of management is wrong and if review engagement isrequired then audit engagement shall be according to review engagement (Arens, 2010). Sinceinitial audit engagement is for audit, therefore management cannot demand review engagement.Part A-4 1:Threat: Self-review threatJustification: In this case, the auditor has finalized the financial statement of the Hail Pty Ltd(client organisation) after client prepared the financial statement during the year. Another self-review factor, in this case, is also proving because management of Hail Pty Ltd has admitted thatthey had limited knowledge of identifying and calculates impairment. Now, while auditing, theauditor is required to review or verify their own work i.e. all the adjustments provided to client’sfinancial statement (Ianniello, 2015). Safeguard: Client (Hail Pty Ltd) shall have the final decision on the outcome of the work doneby auditor or auditor’s firm. In this way, non-audit services to the client shall be mi minimisedand audit shall not conduct auditor should not provide opinion on impairment figure in thefinancial statement. 2:Threat: Advocacy ThreatJustification: In this given case, Travel Time Ltd (client organization) has required the auditor topromote or recommend Travel Time Ltd to their other audit clients and help them to recoverfrom the bad time that they are facing. Auditor has also accepted the proposal from the TravelTime Ltd and agrees to promote the business of client i.e. Travel Time Ltd. In this situation,there is advocacy threat that auditor can face and is not allowed according to auditing principlesand standards (Li & Wu., 2017). 4
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