In chapter 3, you were required to research the key market forces, as they relate to Cloud 9’s operations. The topics you researched included the general and industry-specific economic trends and conditions; the competitive environment; product, customer and supplier information; technological advances and the effect of the internet; and laws and regulatory requirements. The purpose of this research is to identify the inherent risks for this client. The auditor needs to identify which financial report assertions may be affected by these inherent risks. Identifying these risks will help determine the nature of the audit procedures to be performed.

Management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of a financial report. Auditors use assertions for account balances to form a basis for the assessment of risks of material misstatement. That is, assertions are used to identify the types of errors that could occur in transactions that result in the account balance. Consequently, further breaking down the account into these assertions will direct the audit effort to those areas of higher risk. The auditors broadly classify assertions as existence or occurrence; completeness; valuation or allocation; rights and obligations; and presentation and disclosure.

Required Based on your results from researching the client and its industry for the case study questions in earlier chapters, discuss the inherent risks in the audit of Cloud 9. Identify the associated financial accounts and assertions that would be affected and provide an assessment of ‘high’, ‘medium’ or ‘low’ in relation to the likelihood and materiality of the risk occurring.

PART 2 Other auditors and experts W&S Partners will need the assistance of auditors in China and the United States and derivatives experts to complete the Cloud 9 audit.

The other auditors will be asked to provide evidence about the inventory shipped to Australia from the production plants in these countries. Although the inventory is shipped FOB (free on board), there have been several occasions where the shipping agent was unable to place the inventory on a ship. In these cases, the inventory is stored in the shipping agent’s warehouse until a vessel is made available. Suzie has some concerns about the quality of the warehouses because if the goods are damaged they could become worthless and the value of ‘goods in transit’ will be overstated.

In addition, Suzie has asked Jo Wadley (the partner) for help in choosing an expert to help with valuation aspects of the audit of the derivatives. Jo has provided her with three names of experts in the field, but she has had no personal experience with any of them. Suzie must make a choice and engage the expert soon in order to be sure that the expert opinion will be received in time to complete the audit.

Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.

Required

(a) Explain the procedures for engaging component auditors to perform the work on the inventory in China and the United States.

(b) Advise Suzie on engaging the derivatives expert. Discuss the qualities the expert must possess.

What steps must Suzie perform? What should she tell the expert about the engagement? What must the expert provide to Suzie so that she can be sure she has sufficient appropriate evidence about the derivatives? Can the expert do all the work on derivatives, or must Suzie perform any other procedures?