Audit and Assurance Report: Independence, Credibility, and Risk

This report addresses critical aspects of audit and assurance, as outlined in the UGB238 assignment. Question 1 explores auditor credibility beyond independence, including audit firm size, competitiveness, and fees, along with detailed scenarios analyzing independence threats. Question 2 examines procedures for uncorrected misstatements, going concern indicators, and related audit procedures, along with the impact of management disclosures on the audit report. Question 3 focuses on audit risk, its components (inherent and detection risk), and the auditor's role in reducing it. The report utilizes examples and case studies to illustrate the concepts, providing a thorough analysis of the audit process and its implications for financial reporting.

Audit and Assurance

Contents
Audit and Assurance....................................................................................................................................1
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................5
Question 3...................................................................................................................................................8
REFERENCES..............................................................................................................................................12

Question 1
(a)
Audit integrity relates to the capacity of the independent auditors to conduct with fairness and
objectivity during his/her auditing activities. Public views on audit honesty rely more on their
understanding of external auditors than on legitimate autonomy.
Often included are:
1) Committee of the Audit:
The auditor shall consist of a defined number of members of the company's board of directors
whose main responsibilities are to help auditors remain independent of government, i.e. the panel
must optimal balance in several audit disputes rather than supervise them (Denisov,
Khachaturyan and Umnova, 2018).
2) Size of audit firm
The size of the audit firm is a vital aspect that reflects the auditor's independence. An auditor's
reputation is directly related to audit performance. As larger audit firms tend to have better
analytical facilities more efficient accounting resources, more advanced technology and more
skilled personnel that will be able to execute major company audits relative to smaller auditors,
audit firms will guarantee that they provide unbiased audit quality services. Large audit firms
have higher business consultants that allow them to satisfy management requirements, while
smaller companies offer tailored services because their consumer portfolios are lower and they
may be able to meet management requirements.
3) Competitiveness degree in the audit service sector
Competition has been described as an external force that affects auditors' autonomy. As the
consumer can access services from another auditor easily, many companies that compete in a
fiercely competitive world can fail to remain independent (Kend and Basioudis, 2018).
4) Tenure of audit firm that meets the interests of a particular client

The concept of audit firm refers to the amount of time taken to satisfy a given client's audit
criteria. In directly connecting the company with the interests of its clients, a long association
with a business and accounting firm is likely to arise, rendering it difficult for the internal audit
to take independent measures.
5) Auditing size and non-audit fees:
IFAC Codes of Ethics indicate that the scale of the customer measured by the volume of the fee
may cast some doubt about audit credibility. "The (overall) fee for customer must not exceed the
certain fraction of the global audit turnover, EFAA states clearly," The accountants did tend to
have been in collusion with management teams in trying to cover unlawful practices in situations
of accountability controversies (such as the Enron and WorldCom). The major reserve function
has been the money received from consumers by the accountants for non-audit charges.
(b).
(I) There is indeed a lack of discretion, such as the audit manager owning shares of the business
firm in this situation, which may influence the judgment of the auditor.
(ii) This situation is arbitrary in nature, but the customer is a significant source of revenue for the
auditor and the total benefit is 700,000, of which 100,000 will be obtained from the customer.
(iii) In this situation, there is also a shortage of external auditors, as the accountant has taken out
a loan from the same institution in which she is an auditor.
(iv) In the situation at hand, there is no question of the auditor's judgment, because the auditor is
asked to provide recommendations, so this is not an audit commitment, because there is no
necessity to validate the auditor's credibility and freedom.
(c).
External Auditor: The financial auditor is an audit firm who records, reviews and executes other
tasks for his business (Lu, Simnett and Zhou, 2019). External auditors are autonomous of
organizations in such a manner where certain businesses' financial records and internal
compliance systems should be impartially examined. Customers and creditors who want an
impartial analysis of the company's financial records deeply respect this internal audit opinion.

Internal Auditor: Internal auditors are trained business experts who carry out financial and
operational audits concerning financial regulation that are objective or neutral. It is their
obligation to ensure that corporations comply with regulations, comply with relevant procedures
and function as quickly as possible. A transparent and impartial data on entity should be obtained
as independent consultant.
(iii)
Threats: Self-interest is likely if the inspector is directly or indirectly interested in the
organization or depends on the consumer for a considerable payout. In this respect, there is a
self-interest risk in the first situation as the auditor earns approximately 7% of his overall
revenue from Bakers co.
Danger protection: The auditor should decrease their client reliance. This hazard may also be
safeguarded against by an external peer monitoring procedure or consultation with a 3rd person
or jurisdiction.
Danger: In this situation, there is a threat of freedom because Peter was a customer employee
who now needs an internal business audit. He can serve as an independent consultant, however,
as there is no prerequisite.
Safeguard against Threats: Business should take Peter's guarantee to offer impartial opinion or
substitute internal auditors who in some way have no personal disputes with corporate workers.
Question 2
(a). Procedures to be taken with respect to uncorrected misstatement
The magnitude of potential flaws must be taken into account and a large sample of inventory
should then be tested for the maximum downsides of error.
Possible mistakes should be presented to John Co managers to confirm why there are these
inventory anomalies.

The mistake can be compared with subjectivity in order to assess whether material is distinct
from mistake.
If not, to assess if the flaws are still relevant as an average, these other errors recorded after
inspection should be added.
(b). Going Concern Indicators:
A new competitor, Drums Concept Co (Drums), is entering the business and has gained
substantial market share from John by competitive pricing (Simetinger, 2018). There is a risk
that if Clarinet continues to lose customers, this will then reflect on future cash flows. In
addition, pressure may be exerted on John to will his competition expenses, which would impact
profits and cash flows).
A broad consumer halted the trade with John and moved the firm to Drums. Until this customer
is replaced, this may lead to a significant decline of future revenue and profits and a decrease of
expected cash flows.
Several John engineers left the organization and met Drums, and it was difficult to replace them
due to their experience and skills. In order to do this, the organization aims to produce innovative
innovations and requires professionally trained workers. The corporation can disrupt the
production of the commodity and deter the organization from increasing income, until adequate
workers are hired.
The main supplier of John's specialist tools has recently stopped trading. There is also a
possibility that if machinery is highly sophisticated, John could not be able to get these products
from other sectors, thereby affecting its trade capability. In terms of increasing John capital
inflows and deteriorating the cash flow forecast, other suppliers are more likely but may be more
expensive.
John needs to raise funds for the development of new products in order to increase market share
and ask his investors for more funding, but has refused to invest further. If John is unable to get
proper funding, the shareholders can find the Clarinet is too dangerous to invest in. They would
be concerned that John would not be able to give you an enough return on your savings,
suggesting cash flow problems.

The Clarinet direct debit has activity to improve over the course of the year. If the company is
hesitant to obtain replacement credit, it is unlikely that trading will advance if the bank does not
expand the overdraft. John's cash flow forecast shows a significantly poorer situation for the next
12 months (Kahyaoglu and Caliyurt, 2018). Unless cash outflows are managed by the company,
it will further increase line of credit and start running out of funds.
(c). Going concern procedure:
Get a market cash balance forecast and watch cash inputs and outflows. Evaluate the rationality
of conclusions and analyze the findings for management to understand why sufficient cash flows
are available to the company.
Conduct a cash flow sensitivity analysis to consider the net cash in/outflow protective margins of
the business.
Discuss the addition of new customers by the finance officer to replace one missing.
The post-year sales and order book of the research business to assess if trade volumes are
projected to rise in the face of increasing visibility of drums and forecast revenue estimates for
cash flow.
Discuss with executives if replacement models are eligible to substitute drummers.
Review all bank agreements, especially with regard to overdraft charges, to determine if any
agreements have been broken.
Check all loan messages to assess the possibility of overdraft renewal by the bank.
Research shareholder communications to see how any of them will revisit a raise in group
donations.
To help with the new product development, please speak to managers if they have contacted any
finance banks.
Contact the attorneys of the organization for any further dispute and request that they assess the
possibility of Clarinet having to compensate the consumer who plans to sue for lack of profits
(Kozlowski, 2018).

Conducting tests to determine those objects that could indicate or reduce the risk-issue potential
for possible events is not appropriate.
Study post-year board meetings to locate any issues that could indicate additional financial
difficulties for the group.
Examination of administrative accounts at the end of the year to assess if they conform with the
calculation of cash flow.
(D) The managers of John and Jane Co (John and Jane) have vowed to make public reports, but
the bearing on the inspection report of those disclosures will depend on how effective they are. If
the data is satisfactory, the audit report will be revised as a matter-specific emphasis is necessary.
Audit decision shall not be updated in this section; there shall be significant uncertainty and a
link to the declaration document of the board (Al‐Shaer and Zaman, 2018). It will be placed right
just after audit report. When leadership reports are not adequate, because a major mistake exists,
it is necessary to adjust the audit opinion. It will be an educated or unfavorable decision,
depending on the materiality. A section explaining the problem leading to the change must be
integrated right before the Opinion and this clearly describes the failure to communicate the
present uncertainty in issue. The Opinion causal agent be amended to read "except" or it shall not
be treated with integrity.
Question 3
(1) Audit risk is the risk that occurs in the company where the auditor presents an incorrect audit
at the time of the financial reports and is not appropriately matched. The key justification for the
audit is to subtract the audit risk successfully at a low level by accurate screening and appropriate
documentation (Zhang, 2019). The audit risk is primarily focused on the two components that fit
the things in the financial report and define risk. Audit vulnerability is the risk how an auditor
may not find mistakes or deception when reviewing the income reports of a corporation. With
the goal of reducing the degree of audit risk, auditors should raise the number of audit
procedures. A core aspect of the audit feature is the reduction of audit risk to a modest level, as
consumers of financial reports rely on auditors' guarantees when reviewing a company's
monetary reports. Audit risk is the risk that the bank documents are significantly inaccurate,
although the audit judgment notes that there are no substantive errors in the financial reports. The

aim of the review is, via proper testing and ample evidence, to reduce that risk exposure to an
acceptable low level. Since borrowers, owners, and other shareholders depend on the financial
statements, the risk assessment for a CPA business doing audit work can bear legal
responsibility. In two instances, it is graded as:
Inherent risk: the vulnerability of a declaration as to the class of operations, the balance of
accounts or the exposure of mistakes that may be information either individually or jointly with
other mistakes until the corresponding safeguards are focused. For example, compared to the
audit of a well-established specific process functioning in a fairly stable competitive market, the
level of risk in the audit of a recently created finance company with substantial commerce and
exposure to complicated intangible assets may be reported to be extremely higher.
Control danger: It is a kind of risk that misrepresentation happens due to mistake and deception
in the document and may be material, independently in comparison to other misrepresentation
would not be interpreted by the internal control of the company on a time basis (Martínez-
Ferrero and García-Sánchez, 2018). For example, in the case of a particular company in which
the division of responsibilities is not clearly defined and the financial reports are written by
people who may not have the requisite professional expertise in corporate finance, the level of
risk analysis could be greater.
Risk detection: This is the condition when the auditor is unable to recognize the factual
misrepresentations that exist in the financial statements of the company. In order to assess a
defect in the financial records, the auditor must obey the audit protocol. Sampling and non-
sampling risks are influenced by the identification risk. Detection risk is the risk that spatial
characteristics in the financial statements will not be detected by the auditors. In order to detect
material errors and fraud, regardless of whether due to fraud or mistake, an investigator must
extend audit process. Misinterpretation or deletion of crucial audit process may lead to the
auditor staying unnoticed in a material error.
(b) Audit risk and auditor's response:
Peter's has earned $5 million to upgrade, retain and repair a certain quantity of the food
development process. It really should be focused as a portion of program, plant and machinery

(PP&E) as per IAS 16 property if expenditure is graded under capital nature. If all expenses are
not correctly categorized so that time revenue and PPE may be under or overestimated.
Both 15 stock estimates will be able to be handled at the end of the year and they need to ensure
that they collect sufficient audit proof on stock counting controls, honesty and stock appearance
on any warehouses not inspected (Chaika, 2019). Stock is housed in 15 warehouses in which
Peter and some leased third parties are tightly owned. Inside the PPE, together with some
factories occupied by Peter, consideration should be granted. There is also a chance with over of
PPE and exaggeration of lease expense whenever all 15 warehouse are able to capitalize by
Peter.
Auditor's reaction: In order to assess the allocation of revenue as well as capital spending, the
auditor must evaluate adjustments in those costs. In addition, research can be carried out in order
to ensure the classification of financial results.
The auditor should analyze the locations with product that would be present for counts. That
would be some stock of content or with a background of substantial mistakes. If the auditor has
not visited this time, some issue occurs as a result of count to evaluate the degree of expectations
noted at the time of count and to consult with the management. Expected to support warehouse
records composed of PPE to guarantee possession of Peter and a warehouse can be decided by
the auditor.
(c) The auditing approach maps out the reach, timeline and direction of the audit and aids in the
creation of the auditing process. The relevant key areas can be taken into consideration here:
It is important to identify the core commitment characteristics that decide its reach.
It is important to identify the reporting objectives of the commitment to plan the audit date and
the duration of the communications expected.
The methodology should take into account the factors that are relevant as professional judgment
in the practices of the auditing firm of Peter Cola Co.

The results of the execution of the preliminary audit plan and whether information gained
regarding other responsibilities of Peter Cola Co is relevant should be regarded wherever
acceptable.
The form, time and scope of resources needed for audit implementation should be defined in the
audit schedule.
(d) The audit aspect is an intermediate audit until the end of the year. The auditor regularly
undertakes an interim audit of procedures that become difficult to perform at the end of each year
due to scheduling constraint.
Although the last audit will take place after the end of the year, it will conclude with the
formation of accountants and the publication of the audit report for the year as a whole
(Shalimova and Androshchuk, 2018). It is important to note that all provisional and complete
audit findings are taken into account in the full decision.
(e)
Procedures that can be enforced during a requires an independent include the following:
Examination and alteration of accounting system records by Peter Cola Co.
Conversations with executives on recent growth and all other changes in the company of Peter
Cola Co during past year update the institution's perception of the auditor.
Risk assessment that will have an impact on the final audit by Peter Cola Co.
Previous working on Mila's key processing times' revenue, purchases and inventory cycles and
credit management.
Enforce critical procedures with substantial gain and losing operation from year to date as long
as all content sales have stopped.

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