Professional Auditing: ACCT 6003 Risk Assessment of Adairs Limited

This report provides a detailed analysis of the audit of Adairs Limited, an Australian furniture company listed on the ASX. Part A identifies key information from the 2020 annual report, including the reporting date, auditor's report date, audit firm (Ernst & Young), audit partner, addressee of the report, type of audit opinion (unqualified), key audit matters (acquisition of Mocka Limited and fair value assessment), and compliance with Australian Auditing Standards (ASAs). It also details the assurance and non-assurance fees charged. Part B focuses on risk assessment, identifying factors impacting inherent risk (susceptibility to theft, complex accounting, accounting personnel knowledge), their impact on the audit approach, and components of the audit risk model. The report comments on Adairs' risk model and audit strategy, recommending improvements, and discusses the strengths and weaknesses of Adairs' internal control system. This document is available on Desklib, where students can find a variety of study resources, including past papers and solved assignments.

AUDITING

TABLE OF CONTENTS
PART A...........................................................................................................................................3
1 Name of the company and website of annual report................................................................3
2. Reporting Date of the financial statement...............................................................................3
3. Date of the auditors report......................................................................................................3
4. Name of the audit firms and audit partner signing the report.................................................3
5. To whom the auditors report addressed?................................................................................4
6. Type of audit opinion and its details.......................................................................................4
7. Key Audit Matters...................................................................................................................4
8. ASAs and other regulations the auditors report has complied with........................................4
9. Total assurance fees charges...................................................................................................5
10. Non-assurance fees charges..................................................................................................5
PART B............................................................................................................................................5
1. Identification and explanation of factors that have impact on the inherent risk.....................5
2. Risk factor impact on the Adairs Limited audit approach......................................................6
3. Components of audit risk model and comment on Adairs risk model....................................7
4. Comment and recommendation on overall audit strategy for the Adairs Limited..................7
5. Comment on the strength and weaknesses of the Adairs internal control..............................7
REFERENCES................................................................................................................................9

PART A
1 Name of the company and website of annual report
The name of the company selected for this present assessment is Adairs Limited which is
an Australian based furniture stores company (Haapamäki and Sihvonen, 2019). The annual
report 2020 of the company was gather from the website name investor.adairs.com.au having the
access link such as <https://investors.adairs.com.au>.
2. Reporting Date of the financial statement.
Reporting date means the last date on which the financial statements of the Adairs company has
prepared and relates. The financial statements of Adair Limited is prepared at the end of the
every fiscal year i.e., 28th June. Thus, the reporting date of the annual report 2019/ 2020 of the
Adairs company is
28th June 2020.
3. Date of the auditors report.
The auditors report date is the date on which the independent auditor of the company
issues the written letter describing their opinion on the truthfulness and fairness of the financial
statement. It includes whether the financial statement are free from the material misstatement or
not (Brown and et.al., 2020). Thus, the date of auditors report of Adairs Limited 2020 annual
report and financial statement is
28th August 2020.
4. Name of the audit firms and audit partner signing the report.
The name of the audit firms which has identified that whether the financial statement of
Adairs Limited has followed all UK Generally Accepted Accounting Principles are
Ernst and
Young (E&Y). Also, the audit parter who has signed the annual report of the company is
Joanne
Lonergan Partner.
5. To whom the auditors report addressed?
The auditor report is addressed to the particular group of the company thus it can be said
that the audit report prepared by the E&Y is addressed to the
directors of the Adairs Limited. It

means addressee of the auditor report of Adair Limited is their board of directors (Kend and
Nguyen, 2020).
6. Type of audit opinion and its details.
The audit opinion is a certificate which basically accompanies the financial statements.
After properly reviewing, the audit report of the company from its annual report 2020 indicate
that the independent auditor of Adairs i.e., E&Y has provided the
unqualified type of audit
opinion. This means that the consolidated financial position of the Adairs Limited is presenting
true and fair view which does not involve any fraud and error. Beside this it is also identified that
the company has complied all the Australian Accounting Standards (Kamyabi and Salahinejad,
2020).
7. Key Audit Matters.
The two most significant and key audit matters identifies after analysing and reviewing the
annual report of Adairs company are as follows:
 Firstly, it is analysed that the company has acquired Mocka Limited in the December
2019. The impact of which the goodwill of the Adairs Limited has arises which was
$48.409 million.
 Secondly, it is also identified that the auditors of the company has assessed the fair value
of the contingent consideration at 28th June 2020. The auditors have also reviewed the
sales and purchase agreement related to the acquisition of Mocka Limited.
8. ASAs and other regulations the auditors report has complied with.
The different ASAs and regulations complied by the auditors of the Adairs Limited
during the preparation of auditors report are as follows:
 ASA 200: overall objective of independent auditors and conduct of an audit in
accordance with Australian standards.
 ASA 210: Agreeing the term of audit engagement.
 ASA 500: Audit evidence.
 ASA 505: External confirmation.

 ASA 700: Forming and audit opinion and reporting on a financial report.
 ASA 701: Communicating Key audit matters in the report
 ASA 230: Audit Documentation etc.
9. Total assurance fees charges.
The total assurance fees charged by the E&Y i.e., auditors of Adair are $15000. This is a fixed
charge which is charge by the auditor from the company every year.
10. Non-assurance fees charges.
Besides of assurance fees, the auditors has also charged various non-assurance fees from
its client name Adairs Limited. These fees include additional legal cost, valuation cost, staffs
cost along with administration fees. This is basically different and additional from the fixed fees
which might vary from the period to period. This is variable in nature thus known as non-
assurance fees (Kamyabi and Salahinejad, 2020).
PART B
1. Identification and explanation of factors that have impact on the inherent risk.
Inherent Risk is basically the risk which is posed by an error or omission in the financial
statement of the company. This is generally other than the failure of internal control. Thus, after
reviewing annual report of the Adairs Limited, it is analysed that the factors impacting its
inherent risk are as follows: Susceptibility to theft or fraudulent reporting: The auditors have always faces the risk that
there might be chance of fraud and error in the financial statement of the company. As
per ASA 240, E&Y is unable to detect the fraud where management is involved thus they
have to properly planned their audit. Otherwise, the chance of wrong opinion on the
financial statement of Adairs Limited is high. Identification of theft in which
management of the company is involved is also a risk for the auditors. Complex accounting and calculation: In case if the clients has prepared its annual report
using the complex calculations and standards than this will causes internet risk. This is
basically one of the factors which has impact on the inherent risk of the auditors of the

Adairs Limited. From the review of the annual report of Adairs Limited, it is analysed
that the company frequently changes the policies of accounting and valulation method
along with using most complex calculation. These calculations are too difficult for the
partners of E&Y to understand which further affects their opinion.

Accounting personnel knowledge and experiences: After analysing and reviewing the
annual and audit report of the Adairs Limited, it is identified that the knowledge and
experience of their accounting professional are not up-to mark. This is another factor
which has impact on the inherent risk in the clients annual report. As per the ASA 260,
the auditors have to communicate this risk with the those charge with governance
(Jiraporn and et.al., 2018).
2. Risk factor impact on the Adairs Limited audit approach.
On the basis of the above identified risk factors, the impact of such factors over the audit
approach of Adairs Limited are as follows:
 As per ASA 260, the auditors of Adairs have to communicate the fraud related and
another misstated transactions in which management is involved to the those charge with
governance.
 The auditors also need to obtain the risk assessment procedures called substantive audit
procedures within the company. Beside this, the auditors have to select the partners
having the high knowledge of accounting concepts and caluclations.
 The auditors have to communicate with the personnel to understand their knowledge
level and match their report with the external confirmations as per ASA 505. In this way
this factor put impact on audit approach (Yang and Abeysekera, 2019).
3. Components of audit risk model and comment on Adairs risk model
The three components of audit risk model involve inherent risk, control risk and detection risk.Inherent risk : It is risk of material misstatement without considering internal controls.Control risk: It is a risk of material misstatement that could be prevented or detected by internal
control system.Detection risk: It is risk of material misstatement that is detected even by audit procedures after
the failure of internal control system.

Acceptable audit risk = Inherent risk * Control risk * Detection risk
After reviewing the annual report of the Adairs Limited, it is identified that the risk model of
Adairs is inherent risk. It is because the transaction and their calculation on the annual report of
Adairs is quite complex. Along with this, after analysing the calculation the auditors has also
analysed the knowledge of accounting professional which is also not up to mark. This arises the
risk that such calculations are not done by the internal accounting professional of the company
(Ishak and Nor, 2018).
4. Comment and recommendation on overall audit strategy for the Adairs Limited
From the analysis and review of annual report of 2020, it can be said that the audit
strategy of the auditors i.e., E&Y for the auditing of Adairs is quite well. However, the auditors
also need to further improve it in order to deal with the inherent risk which includes adopting
substantive audit procedures. It is also recommended to the auditors that they have to adopt the
preliminary substantive approach within their audit process to gather audit evidence as per ASA
500.
5. Comment on the strength and weaknesses of the Adairs internal control.
As per the ASA 260: communicating with management and those charge with
governance and ASA 265: communicating internal control deficiencies with management and
those charge with governance, the auditors analysed and communicate about the internal control
of the company. The strength and weakness of the internal control of Adairs Limited are as
follows:Strength
 One of the most significant benefit of the internal control is that it helps the independent
and external auditors of the company in controlling risk. It is also helpful in preventing frauds and generate prompt and accurate reporting.Weaknesses
 The weakness is such that the chances of failure in the implementation or performance of
internal control is also there.
 Poor security is also one of the reason behind the weakest internal control system (Isha
and Nor, 2018).

REFERENCES
Books and Journals
Haapamäki, E. and Sihvonen, J., 2019. Research on International Standards on Auditing:
Literature synthesis and opportunities for future research.
Journal of International
Accounting, Auditing and Taxation. 35. pp.37-56.
Brown, V. L. and et.al., 2020. Comments of the Auditing Standards Committee of the Auditing
Section of the American Accounting Association on the Concept Release, Potential
Approach to Revisions to PCAOB Quality Control Standards.
Current Issues in
Auditing. 14(2). pp.C1-C12.
Kend, M. and Nguyen, L. A., 2020. Big data analytics and other emerging technologies: the
impact on the Australian audit and assurance profession.
Australian Accounting
Review. 30(4). pp.269-282.
Kamyabi, Y. and Salahinejad, M., 2020. Using data envelopment analysis to examine
operational auditing efficiency in audited firms.
International Journal of Advanced Studies
in Humanities and Social Science. 9(1). pp.50-62.
Jiraporn, P. and et.al., 2018. Does board independence substitute for external audit quality?
Evidence from an exogenous regulatory shock.
Australian Journal of Management. 43(1).
pp.27-41.
Yang, Y. and Abeysekera, I., 2019. Duration of equity overvaluation and managers’ choice to
use aggressive underlying earnings disclosure and accrual-based earnings management:
Australian evidence.
Journal of Contemporary Accounting & Economics. 15(2). pp.167-
185.
Ishak, S. and Nor, M. N. M., 2018. Audit function, risk management and the significance of
audit opinion.
International Journal of Accounting. 3(13). pp.88-93.