Auditing Risk and Auditor's Response

This study material provides an in-depth understanding of auditing risk and auditor's response. It explains the concept of inherent risk and risk of regulation. It also discusses how auditors detect risks and respond to them. The material covers various scenarios and provides insights into the auditing process.

UGB238 AUDIT AND
ASSURANCE 2020/21

Table of Contents
INTRODUCTION...........................................................................................................................3

Question 1
A) Matters other than independence
The credibility in auditing involves the ability of impartial auditors to perform their auditing
practises reasonably and critically. Public opinion on audit integrity is based not only on a legal
autonomy but on their perception of independent audit.
1) Commission of Audit:
An auditor shall contain a designated amount, in lieu of monitoring, of the accountants of the
committee of members of the company whose key duties are to help auditors remain truly
independent.
2) Audit business scale
The size of the auditing business is an important aspect of the external auditors. An auditor's
credibility contributes to the performance of the report. The larger audit firms seem to be having
better analytical equipment and efficient accounting resources, more advanced technology and
much more professional professionals performing major corporate audits in compared to larger
accounting firm (Barr-Pulliam, Brown-Liburd and Sanderson, 2020). While large auditing firms
have a larger portfolio of clients that allow them to satisfy management criteria, smaller firms
have tailored services when they have narrower client ranges and must meet management needs
in desired time.
3) Participate in auditor sector competition
Competition was considered as an environmental force affecting the freedom of auditors. Since
the customer has convenient access to some other investigator's services, many businesses in a
dynamic environment cannot stand alone (Kend and Basioudis, 2018).
4) Auditing company which meets the needs of a specific customer
The audit company definition covers the period required to meet the auditing standards of a
single customer. A long relationship with a corporation and accountancy would certainly occur,
making it impossible for the Independent Auditor to pursue autonomous action, by binding the
company closely with the needs of its customers.
5) Scale and non-audit costs auditing:
IFAC Ethical principles suggest that an audit integrity should be challenged by a custodian's
scale as determined by the amount of the fee. The accounting professionals appeared to still be in
partnership with executive committee to try and conceal unlawful activities in transparency

circumstances. 'The (total) consumer charge does not surpass a certain portion of a global audit
scale,' says EFAA.
B) Following situations in the context of the independence of the auditor
I )The External Auditor owning shares throughout the business model, as shown in this situation,
is ineffective and can influence the judgement including its Accountant.
(ii) this situation is arbitrary in nature, but significant throughout this regard is that consumers
are the audit committee' main sources of revenue as the tax contribution is 700 000, 100 000 of
them being owed from customers.
(iii) In this situation there is a loss of external auditors since the accountant has loaned from the
investigator's own fund.
(iv) There really is no judgement of the accountant in such a situation, so the examiner is
required to offer advice, so there is no obligation to control the inspector's autonomy and
independence.
C) Explain the concept of objectivity, with reference to:
i) External Accountant: The international investigator is an auditing organisation that tracks,
investigates and does other business duties (Lu, Simnett and Zhou, 2019). Audit committees
which are performing their audit role externally are self-employed by companies in a form that
impartially reviews the financial statements and processes of internal enforcement of those firms.
This executive management recommendation is entirely consistent with clients and borrowers
that want an unbiased review of books of accounts.
ii) Internal Auditor: Internal audit become professional professionals who perform impartial or
neutral accounting and organisational financial regulatory audits. They are duty-bound to ensure
that businesses conform to legislation, respect the necessary protocols and work as efficiently as
possible. An unbiased contractor should be supplied with fair and accountable reports on the
organization.
(iii)
Threats: Whether an inspector is explicitly or indirectly involved or depends on the consumer for
substantial compensation, there is a risk of personality. There is a chance of personality in this
respect during the first situation because the accountant earns approximately 7% of his overall
profits from Bakers co.

Safeguard against threats: Auditor must reduce the consumer reliance this hazard may also be
safeguarded by external quality monitoring processes or meetings with third parties or
authorities.
Danger: in this situation, there seems to be a possibility of freedom since Peter is a consumer
worker, who now needs to perform a business auditing firm. It will, however, function as an
independent consultant, because it is not mandatory for independent investigation to determine
the extent of independence.
Safeguarding for Threats: Peter should be guaranteed to give impartial advice and substitute an
in-house inspector who has no personal disputes with the employees of the company.
Question 2
(a). Processes to be practised in the face of errors
It is important to consider the extent of possible errors and a broad product inventory can then be
checked for full error losses.
The John Co managers could have made errors to explain that such stock irregularities occur.
In order to estimate whether the content is different from of the error the error should be
contrasted with objective reality.
Otherwise the, such additional errors reported during review must be applied to decide if the
faults are still significant as normal.
(b). Indicators of Concern Going:
A new rival, Drums Design Co (Drums), joins the enterprise and has by competitive price
considerable profit margin from John (Simetinger, 2018). If Clarinet keeps losing its clients,
there is a possibility that this will weigh on potential cash flows. Furthermore, John will be
forced to compensate for the costs in rivalry that will impair income and working capital).
A broad customer stopped John's exchange and brought the business to Drums. This will lead to
a major reduction in potential sales and earnings and a reduction in projected cash flows, before
this client has been replaced. Many other John engineering retired, encountered percussion but
whose knowledge and talents made it impossible to substitute them. Towards this end, the
company is dedicated to developing creative technologies and needs specialised staff. The
company will interrupt commodity development and disable the company from boosting revenue
before sufficient staff are recruited.

Recently, the leading provider of both the John equipment ceased trading. There seems to be a
risk whether John cannot procure those goods from other industries if the equipment is extremely
advanced and hence has an effect on its trading potential. Other vendors are much more
probably, but is much more demanding in terms of growing the John economic growth and
weakening the working capital outlook. In plan to enlarge customer base and appeal for more
money from investors, John must collect resources for future product growth, and that he has
declined to spend any more. In case John cannot obtain sufficient finance, Clarinet is too risky
for its investors to participate through. They are worried that John could not recover the savings
sufficiently, indicating issues with working capital. Cash flow concerns indicated and over
duration of each year, Clarinet debit card will increase. It is doubtful that the corporation can
forward trade when the institution doesn't really increase the overdraft if it is reluctant to get
alternative credit. John's deposit account prediction reveals a much worse 12-month condition
(Kahyaoglu and Caliyurt, 2018). If the organisation cannot control liquidity outflows, the current
account will be elevated higher and the money will be lost.
(c). Going concern procedure:
Have a deposit account outlook for the economy and view assets and financing activities.
Measure the significance of the findings and interpret the outcomes to justify whether the
company has appropriate investment returns.
Run a working capital balance review to take care of the company's net money in/outflow ratios.
Discuss if the financial officer will recover the missing one with new clients.
The consulting company's post-year profits and contract book measures the increase of currency
values as barrels are gradually noticeable and the expected income for working capital is
anticipated.
Chat with administrators if alternate styles are available for bank loan.
To decide if any arrangements are being violated, examine all banking contracts, specifically
with respect to overdraft fees.
Review all mortgage communications to decide whether the bank will extend overdraft.
Mails from the study shareholders to see if one revisits a rise in group contributions.
Please feel free to contact management if you have approached some financial banks to support
the new profit opportunities.

Contact the counsel in charge of any such disagreement and recommend that they decide whether
the customer who intends to complain for a loss of benefit is obliged to pay Clarinet (Kozlowski,
2018).
It is not necessary to carry out experiments to detect any artefacts that may suggest or minimise
significant risk for future incidents.
Research post-year internal audit to detect any concerns which might suggest extra financial
problems for the company.
Organisational accounting analysis at year-end to determine whether they agree with both the
cash flow estimate.
(d) John's as well as Jane Co (John's as well as Jane's) administrators have promised to disclose
their findings, but how successful they are depends on the information sheet of these disclosures.
In the case that the information are acceptable, it would entail a review of the investigation report
mostly as particular focus. Throughout this paragraph there will be considerable confusion and
ties to the Board statement documents (Al‐Shaer and Zaman, 2018). Examination
recommendation should not be changed in that section. It is put directly after the financial
statement. If leadership results are not satisfactory or there is a substantial fault, the assessment
judgement has to be changed. Dependent mostly on meaningfulness, it is an informed or
unfavourable option. A part describing the issue contributing to the adjustment has to be
incorporated directly even before recommendation which specifically demonstrates that the
actual confusion is not conveyed. The reason that makes of the viewpoint should be changed to
read 'but' or not be viewed integrally.
Question 3
(1) Auditing risk means the risk arising in a business however at the period of recession
reporting, the auditor is presenting an inaccurate audit which is incompatible. Auditing the threat
at a reduced rate of predefined categories and reporting is the primary reason for the inspection
(Zhang, 2019). The audit risk reflects mainly on the specific accounting information that match
into the issue and identify risks. Weakness in audits seems to be the possibility of an auditor
noticing no flaws or dissatisfaction when evaluating a company's income statements.
Accountants must boost the range of audit process with a view to decreasing the amount of risk
management. The lowering of the risk management to a low level is the standout part of that
same audit function as quarterly information customers depend on auditing assurances when

analysing monetary results in businesses. The disadvantage of auditing is the risk of substantially
incorrect bank statements, as the audit decision states that perhaps the bank documents are
without serious failures. The goal of the system is to determine this overall risk to a reasonable
low level through adequate monitoring and detailed documentation. The managing risk of a CPA
company doing annual audit may be legally liable, because it is creditors, owners as well as other
stakeholders who rely on financial accounts. It is defined as: In 2 situations:
Inherent risk: a declaration's weakness with respect to the camera of activities, the balancing of
accounting or the disclosure of errors, which may be details either directly or in combination
with other errors before the necessary safety precautions have been focussed. For instance, the
potential risk throughout the review for a newly formed financial business with a large trade and
an access to difficult fixed assets can be seen to be incredibly high relative to the examination of
even an existing particular method running on a reasonably stability in the competitive
environment..
Danger of regulation: There is a measure of insurance that a misunderstanding or
disappointment in the report might arise and also that the mischaracterization might be factual,
but it will not be perceived by internally control of a firm on a timely basis, regardless of any
misrepresentations (Martínez-Ferrero and García-Sánchez, 2018). For instance, the degree of risk
management will be raised where a single organisation is not specifically identified as a division
of tasks and financial statements are prepared by individuals with no technical experience in
wealth management.
Risk detection: That really is the situation where the accountant cannot understand the
substantive flaws found in the statement of financial position. The investigator must comply with
the examination process to determine a flaw in the financial statements. The detection
vulnerability impacts testing and non-sampling risks. The hazard of failure is the danger that
perhaps the accountants will not identify spatial features of the income statement. An auditor
must expand the auditing procedure to identify content defects and theft, whether caused by error
or fraud. Misunderstanding or suppression of a vital audit mechanism may contribute to a
material misstatement of the audit.
(b) Audit risk and auditor's response:
The certain amount of food production has been spent by Peter's to update, maintain and restore
a given amount. Maybe it should be oriented as an aspect of the scheme, plant and machinery

(PP&E) in compliance with IAS 16, as expenditures are listed as resources. When not all costs
are adequately classified in order to minimise, or overestimate, the time as well as PPE income.
The two 15 inventory estimations should be processed at the conclusion of last year and must
guarantee that perhaps the report is conducted controls, integrity and inventory in factories which
are not checked are audited properly (Chaika, 2019). In Inventory, Peter as well as some licensed
3rd parties have 15 warehouse in which they are closely owned. Evaluation must be provided
inside the PPE along with certain plants inhabited by Peter. There's now a risk of over-EPP and a
rise in leasing spending if Peter can capitalise on these 15 warehouses.
The response of the accountant: the investigator needs to determine changes in those expenses
and calculate the distribution of wealth and economic expenditure. Furthermore, analysis should
be conducted so that financial statements can be categorised.
The auditor should assess the positions of the inventory for counts. There will be an inventory of
material or a history of significant errors. If the accountant has not checked every time, there is a
concern because of the amount of requirements noted during the counting as well as the planning
done. The accountant can agree on supporting the storage documents made up of PPE to ensure
Peter's custody and a storage facility.
(c) The method to audit sets out another audit program, pacing and course and assists in the
establishment of the review process. Here it is interesting to evaluate the related main areas:
The key interaction features which define their scope are essential to recognise.
The monitoring targets of the audit engagement and the planned correspondence period should
be defined.
The approach should address considerations pertinent to the consulting company of Peter Cola
Co as just a directing style. Where appropriate, the effects of implementation of the formal
auditing process as well as whether details about Peter Cola Co's certain obligations is relevant
must be taken into account.
The examination plan shall identify type, time including range of resources necessary for the
auditing process.
(d) The element of an audit shall be an interim audit until around the remainder of every year.
The accountant periodically conducts an intermediate examination of processes that, due to
schedule limitations, become impossible to conduct at year-end.

Although a final audit takes place just after conclusion of each year, it concludes on accounting
preparation and the release of the year-round investigation report (Shalimova and Androshchuk,
2018). It's indeed worth remembering that perhaps the determination in its entirety calculates
both preliminary and detailed audit results.
(e)
Processes that really should be applied during an autonomous process include:
Review and modification of Peter Cola Co cost accounting documents.
The faculty's view of the auditor is updated by consultations with management on recent
development and just about any other improvements in Peter Cola Co's market for at least year.
Danger estimation which would have an effect on Peter Cola Co's exit interview.
Earlier work on the sales, transactions and product periods and credit risk management central
processing times of Mila.
Enforce vital processes throughout the year through large gains and lack of service as long
because all product sales cease.

REFERENCES
Denisov, I.V., Khachaturyan, M.V. and Umnova, M.G., 2018. Corporate social responsibility in
Russian companies: Introduction of social audit as assurance of
quality. Calitatea, 19(164), pp.63-73.
Kend, M. and Basioudis, I., 2018. Reforms to the Market for Audit and Assurance Services in
the Period after the Global Financial Crisis: Evidence from the UK. Australian
Accounting Review, 28(4), pp.589-597.
Lu, M., Simnett, R. and Zhou, S., 2019. Using the Same Provider for Financial Statement Audit
and Assurance of Extended External Reports: Choices and Consequences. Available at
SSRN 3361616.
Simetinger, F., 2018. Audit and Assurance Specifics in Cloud-Based Industry 4.0
Environment. Journal of Systems Integration, 9(3), pp.7-17.
Kahyaoglu, S.B. and Caliyurt, K., 2018. Cyber security assurance process from the internal audit
perspective. Managerial Auditing Journal.
Kozlowski, S., 2018. An audit ecosystem to support blockchain-based accounting and assurance.
In Continuous Auditing: Theory and Application (pp. 299-313). UK: Emerald Publishing
Limited.
Al‐Shaer, H. and Zaman, M., 2018. Credibility of sustainability reports: The contribution of
audit committees. Business strategy and the environment, 27(7), pp.973-986.
Zhang, D., 2019. Audit assurance and tax enforcement. Journal of Accounting in Emerging
Economies.
Ji, X.D., Lu, W. and Qu, W., 2018. Internal control risk and audit fees: Evidence from
China. Journal of Contemporary Accounting & Economics, 14(3), pp.266-287.
Martínez-Ferrero, J. and García-Sánchez, I.M., 2018. The level of sustainability assurance: The
effects of brand reputation and industry specialisation of assurance providers. Journal of
Business Ethics, 150(4), pp.971-990.
Chaika, O., 2019. Monomial Variables in English Audit Terminology. International journal of
philology, 10(1), pp.100-108.
Shalimova, N. and Androshchuk, I., 2018. Approaches To The Interpretation Of The Term
“Historical Financial Information” As The Criterion For The Classification Of Audit,
Review, And Other Assurance Engagements. Baltic Journal of Economic Studies, 4(3),
pp.333-342.