Question

AP4.1 (LO 1) Basic Risk assessment Michael has drafted an audit plan for a new client. The client is Countrywide Capers, a party supplies rental business. Countrywide Capers earns 80% of its revenue from renting marquees, tables and chairs, lights, and other party equipment and 20% from sales of disposable table- ware, utensils, napkins, and tablecloths, Michael's plan shows that audit time is divided to reflect this revenue pattern (that is, 80% of the audit time is spent on the rental business and 20% of the time is spent on the retail business), Michael believes that the significance of the revenue activities should be the only driver of the audit plan because the client has no related parties and has a simple, effective corporate governance structure.

Answer 1

What analytical and substantive measures has been taken to provide proof that there are no related parties and that there are no concerns with the client’s corporate governance structure?

Is the danger of misstatement the same for a dollar of hire revenue as a dollar of retail revenue? The peril of material misstatement should motivate the audit plan.

The client is new, what KYC (know your customer) has been done to understand the client, its industry (both hire and retail elements) and the consequence of the economy factors on the client?

What is the early judgement of internal controls?

What are the substantial transactions and accounts?

Is the danger of fraud directly relative to revenue? If not, how should the work on fraud be assigned?

What influence would IT have on the dangers linked with the two sections of the business? How does IT show a connection to the rest of the client’s internal controls?

Are closing events the same for the two segments of the business?

Is there any going concern risk? What are the risks and mitigating factors that are likely to arise in a hire and retail company