Audit Risk Assessment and Client Retention for Arrium Limited (MPA803)

This report provides a preliminary audit risk assessment of Arrium Limited, a mining and materials manufacturing company. It examines the company's engagement risk, focusing on audit risk, client's business risk, and auditor's business risk. The report identifies weaknesses such as the lack of proper internal controls and the use of assumptions in financial reporting, leading to inherent and control risks. It assesses the suitability of Arrium Limited as an audit client, concluding that the company is suitable due to its financial reporting control assurance program, which supports the mitigation of risks. The report emphasizes the importance of understanding these risks for client retention decisions and highlights the key attributes influencing the nature of audit risk.

Running Head: AUDIT THEORY AND ASSURANCE
AUDIT THEORY AND ASSURANCE
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Executive Summary
The main purpose of this report is to identify the engagement risk associated with
Arrium Limited Company. The study is evaluated by analysing the company’s annual report.
It has been found that suitable company as an audit client. The company has a financial
reporting control assurance for controlling their effectiveness. This is a program that supports
the clients for controlling the risk involved in audit process. The three type of risk involved in
this company is audit risk, client’s business risk and audit business risk. Audit risk is
considered as the high level of risk of business due to lack of proper internal control.

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Introduction
The report will focus on the risk assessment of Arrium Limited for making client
retention decision. The paper will discuss on the type of engagement risk that is associated
with this company. The main objective of this report is to identify the engagement risk
associated with Arrium Limited Company.
Discussion
Back ground of the Company
Arrium Limited is a Mining and material manufacturing company that is established
in Australia. It is a type of public listed company and is traded in the Australian Stock
Exchange. The company is established in various locations of world like New Zealand,
Mexico, USA, Indonesia and many more. The main products of this company are iron ore
and steel products.
Engagement Risk
Engagement risk is the risk of Arrium Limited that is related to the audit engagement.
It is related to the reputation of the clients that can result into loss of their association. Arrium
limited is exposed to various types of engagement risk that can harm the reputation of the
clients. Some of this risk are:
 Audit Risk- Arrium Ltd has a risk of client’s effectiveness. The audit activities of the
company deals with the disclosure of the company’s financial report. The auditors
identifies the related misstatement while preparing the financial report. This means
that they identifies any type of fraud or error involved in the financial statements. The
auditor is considering the internal control for preparing the financial statement but
they are preparing this not for effective internal control of the company. This is one of

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the weakness of the company (Annualreports.com, 2020). It has been seen that the
audit process of the company is deal with many of the inherent risk. This means that
material misstatement is associated with the auditor. Assumptions have been made
while reporting certain elements like intangible assets. The value of goodwill amount
has simply been done on the basis of assumptions (Brodsky, 2018). The value has
been identified by simply using the forecast of cash-flow transactions. The estimation
of time value of money is done while calculating the discount rates of the cash flow
(Hopper & Iwasaki, 2017). The efficiency of input cost and price of the steel has been
simply adjusted in the company’s gross margin. The value of raw materials have also
simple written on the basis of estimation. The industry growth rate in the market has
also been estimated in their growth margin (Bower et al., 2017). Estimation of income
tax is also done on deferred tax and tax liabilities. This means that an unqualified
opinion has been issued in the audit process. The auditor has done inherent risk while
reporting the financial statement. This means that the financial statements are not
correct materially, even if the auditors had given the opinion that the financial reports
disclosed are free from material misstatement. There is also control risk associated in
the business operations. It is possible that defect in products can be raised in
manufacturing process (Annualreports.com, 2020). High risk is involved in this type
of risk because, it is found that there is lack of proper internal control. This is a sign of
high risk engaged in the company.
 Auditor’s business risk- There is a risk of failure in the product that has been
managed. The auditor’s simple estimate the cost of the input and simple write the
price of steel on the basis of estimation. This means that the company may fail to
improve their sales due to defect in the product. Risk is also related to the continuous
expansion of the supply chain process (Mande, Son & Song, 2017). Inherent risk is

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related to the use of resources. This may cause risk for the business and auditors will
be unable to detect the material misstatement due to the assumptions of cost input
with the raw materials, inputs or price of the steel. Low risk is involved in auditor’s
business risk because, there is less evidence of defect in the product (Hoepner et al.,
2018). This means that the chances of fraud in this type of risk can be negligible and it
may not cause any harm to audit client.
 Client’s business risk- The auditors are not involved in accepting the material
misstatements and effectiveness of the internal control before disclosing the financial
statement. This shows that the auditors are unwill to accept that that there is material
misstatement in the financial statement. This means that this risk is involved that the
client may fail to achieve their objective (Mohamad-Nor & Abidin, 2016). Medium
risk is related to this, not too high and not too low.
Key attributes for audit risk
 Inherent risk- The financial statements are not correct materially.
 Control risk- Defect in products can be raised in manufacturing process.
Suitability of Arrium Ltd as an audit client
Arrium Ltd is suitable as an audit client because the internal auditors have been
reported as effective in controlling their financials. The company has a financial reporting
control assurance for controlling their effectiveness. This is a program that supports the
clients for controlling the risk involved in audit process (Thaler & Levin-Keitel, 2016). It also
works with external auditors for minimising the effort of doing their work and explore their
knowledge by sharing it with external auditors and external’s knowledge with them. Hence, it
can be seen that Arrium Ltd is suitable company as an audit client.

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Conclusion
Therefore, it can be concluded that Arrium Ltd is suitable company as an audit client.
The company has a financial reporting control assurance for controlling their effectiveness.
This is a program that supports the clients for controlling the risk involved in audit process.
This program also share knowledge between the auditors. Auditors can be more engaged in
doing their work. The three type of risk involved in this company is audit risk, client’s
business risk and audit business risk. Audit risk is considered as the high level of risk of
business due to lack of proper internal control.

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References
Annualreports.com. (2020). Retrieved 20 April 2020, from
http://www.annualreports.com/HostedData/AnnualReportArchive/a/ASX_ARI_2015.
pdf
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Hoepner, A. G., Oikonomou, I., Sautner, Z., Starks, L. T., & Zhou, X. (2018). ESG
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Hopper, T. D., & Iwasaki, Y. (2017). Engagement of ‘at-risk’youth through meaningful
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Mande, V., Son, M., & Song, H. (2017). Auditor search periods as signals of engagement
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Mohamad-Nor, M. N., & Abidin, S. (2016, March). An Analysis of Engagement Risk
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Thaler, T., & Levin-Keitel, M. (2016). Multi-level stakeholder engagement in flood risk
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