Bx3014 Auditing|Planning Stage Assessment Answer

During the course of an audit, three (3) letters are commonly used by the auditors. These are (i) letter of engagement, (ii) management representation letter, and (iii) management letter.
Required:
a)   Who issues these documents and to who?
b) At which phase of the audit are these documents executed?
c) Explain the difference between management representation letter and management letter. (3 marks) Question 2

"Audit risk is a function of inherent risk, control risk and detection risk. Auditors use audit risk model to decide quantity of evidence to be gathered for an audit." Required:

a) Explain and briefly discuss the terms inherent risk, control risk and detection risk.

b) You are the audit supervisor in a firm of Chartered Accountants. Following information is available for three unrelated clients:

Required:

Which client will require least amount of audit evidence? Justify your answer with supporting calculations

Assurance Question 3 (8 Marks).

Changi Print Manufacturing (CPM) is a company that makes components for the construction industry from girders to its largest project so far, a 3D printed five story building. It specialises in 3D printing using recycled concrete from which it processes and prints buildings and building products to client demand. Its products are used all over the world but in the recent past, the majority of its sales have been to international construction companies, particularly in India. The drop in the price of oil and the recent COVID-19 pandemic have slowed construction in India, and the expensive buildings CPM produces are declining in demand. In addition, some of the technology used by CPM has been copied by companies in Southern Europe, resulting in extreme price competition in this section of the construction industry for the first time.

CPM is highly geared. Two years ago the company borrowed a large sum of money to fund the purchase of new premises and the latest large-scale 3D printing equipment. The loan is due for renewal three months after year-end. One week before signing the audit report, the bank has still not agreed to renew the loan and CPM’s management has commenced negotiations with another bank.

Required:

Identify and discuss factors that would raise questions about the going concern assumption for CPM. Are there any mitigating factors?

Question 4 (5 marks)

a) Explain the difference between 'sampling risk' and 'non-sampling risk'. Give two examples of non-sampling risk

b) An auditor selected a sample of $4,588 out of a population of $7,114 and found misstatements totalling to $867. Calculate the projected error and explain what is the importance of the projected error to the auditor?

Question 5 (10 marks)

ASA 500 Audit Evidence mentions different procedures that can be applied by an auditor for obtaining audit evidence.

Required:

Identify and briefly discuss any five procedures. Provide an example of each of the five procedures identified.

Question 6 (7 marks)

As per ASA505 External Confirmations, an auditor may request for positive confirmation or negative confirmation.

Required:

a) What is the difference between positive confirmation and negative confirmation? Explain which one is more persuasive.

b) Under which circumstances might negative confirmation be accepted?

Question 7 (16 marks)

Saigon Trading Co. (STC) is a small and medium enterprise (SME) listed on the local stock exchange. It imports high quality textile goods manufactured in Vietnam and sells them to domestic users in neighbouring countries. STC started business in the year 2015 and has been profitable from the year 2016 onwards.

The financial statements for the years 2015 to 2018 were audited by EzAudit & Co, Chartered Accountants. Since the sole proprietor of EzAudit died in 2019, STC appointed DoubleCheck Chartered Accountants to audit the financial statements for the year ended 31 December 2019.

You are the audit manager at DoubleCheck with responsibility for this audit. Twelve junior auditors have been assigned to you and you have formed four groups to handle different segments as below-

Group 1- Purchases/ accounts payable

Group 2- Sales/ accounts receivable

Group 3- Warehousing/ inventory

Group 4- Expenses/ non-current assets

It is now March 2020 and the groups have completed their field work. You are having a meeting with them to analyse their findings, consider if more work would be necessary and also decide the type of audit report to be issued. Sales and profit before tax for the year and total assets as at year-end are $10m, $2.8m, $12m respectively.

Materiality threshold was set at 5% of profit before tax and 1% of total assets at the planning stage. Based on the inputs received from the four groups at the meeting, there is no need for any revision to this threshold at the conclusion stage of the audit.

A summary of all misstatements identified by the four groups reveals overstatement of profit by $270,000 and overstatement of assets by $204,000. STC's profit before tax of $2.8m fell short of target profit of $3.7m and the directors decided not to provide depreciation on non-current assets this year. They have however verbally agreed to provide depreciation on these assets for 2 years if there is sufficient profit next year. No provision has been made for doubtful debts as the directors felt all receivables will be recovered in full. However, after reviewing individual customer balances and consistent with prior years' practice, Group 2 felt a provision of $85,000 would be necessary. The directors are not in agreement and would not make any adjustment in the accounts.

Group 3 observed that inventory has been valued at cost without any consideration for net realisable value. Also, cut-off procedures were not properly followed which resulted in overstatement of inventory. Your team members attended the stock-take at year-end and, apart from valuation and cut-off issues, there were no other significant observations. Significant weakness in internal controls were noted in almost every area. It was observed that many of the misstatements could have been prevented if adequate internal controls were implemented and complied with.

You plan to discuss with the management these observations in the exit interview to be held next week but do not think they will be very keen to listen to these observations and make any changes in the financial statements. Your audit team members have a very poor impression about management attitude and integrity. They even think that DoubleCheck may not be appointed as the auditor for subsequent years if it insists on amending the financial statements as indicated in the observations stated above.

Required:

a) Decide on the type of audit opinion you plan to express and explain the basis for the opinion. (Note: You are NOT required to draft the audit report.)      

b) If the directors threaten not to appoint DoubleCheck as auditors for next year, will you make any change in the type of audit opinion? Why or why not?