Question

Apart from the Inventory account, which other accounts and assertions are at risk of material misstatement for DD, and why?

What impact does the control risk assessment have on inherent risk and detection risk?

What is the auditor's preliminary assessment of control risk and why?

What impact does the control risk assessment (from the previous question) have on inherent risk and detection risk?

Which assertion is at risk for the inventory account?

Select one:
a. rights & obligations
b. accuracy, valuation and allocation
c. existence
d. completeness

What was most likely to bring the unexpected growth in reported revenues to the auditor's attention?

Select one:
a. preliminary enquiries of management
b. researching the client's industry
c. the preliminary analytical review
d. touring the client's facilities

You have completed a financial report audit and the following material event occurred: A large order from an overseas supplier was shipped FOB (free on board) from its port of origin on 1 June 2020. The order arrived on 20 July 2020. The purchase is not reflected in the 30 June 2020 financial report and management have refused to amend it.
What audit opinion would you issue, and why? (2.5 marks)

If your ability is not enough please don't tell me the incomplete question

Answer 1

Risk of material misstatement is the risk that any misstatements that exist in the financial statements being audited, could be material either individually or in aggregate.

Misstatement is a difference of an amount, classification, presentation or disclosure between:

· an item in the financial statements; and

· the requirement of the accounting standards in this regard

Misstatements in financial statements are material when they can reasonably be expected to influence the decisions taken based on those financial statements. Misstatement can be material either by magnitude or due the nature of the item.

Risk of material misstatement is a product of the following two risks:

· Inherent Risk

· Control Risk

Inherent Risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls. Inherent risk is generally considered to be higher where a high degree of judgment and estimation is involved or where transactions of the entity are highly complex.

Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements. Detection risk can be reduced by auditors by increasing the number of sampled transactions for detailed testing.

A preliminary assessment of control risk is often made prior to the performance of tests of controls. Tests of controls provide the basis for the auditor's determination of effectiveness in operation.

Control risk may be expressed qualitatively such as low, moderate, or high. Alternatively, the risk may be stated quantitatively as a percentage or a numerical probability such as .75 or 1.0. The initial assessment of control risk starts with the auditor’s understanding of the control environment followed by his knowledge of the accounting system.

Rights & obligations assertion is at risk for the inventory account.

The preliminary analytical review is most likely to bring the unexpected growth in reported revenues to the auditor's attention.

Assess the materiality of the error; if immaterial, it should be added to the schedule of unadjusted differences. The auditor should then assess whether this error results in the total of unadjusted differences becoming material; if so, this should be discussed with management; if not, there would be no impact on the auditor’s report

If the error is material and management refuses to amend the financial statements, then the audit opinion will need to be modified.