Audit homework:

You have been assigned by your audit manager to assess the risk of material misstatement of an important client, Mohan Logistics Berhad.

Mohan Logistics Berhad is fast-growing logistics company providing delivery services from businesses to consumers. The companys business expanded rapidly during the Covid-19 pandemic when the population in the Klang Valley was forced to lockdown and work-from home for an extended period of time, and people increased their shopping online instead of going to the physical stores. Although the companys shares are listed on Bursa Malaysia, the company is controlled by the founder, Dato Mohan and his family who collectively owns 55% of the companys issued shares. Dato Mohan acts as the chairman of the board of directors while his son, Suresh, serves as the chief executive officer. Through the astute leadership of Dato Mohan, the company is expanding its business to other major cities in Peninsular Malaysia such as Penang, Ipoh and Johor Bahru. He personally makes all major decisions with little consultation with the other directors, and his son would execute the instructions without question. Most of the directors are either members of Dato Mohans family or long-standing friends. During the quarterly board meetings, the board approves all decisions made by Dato Mohan and his son without asking any probing questions.

Question: (a) Describe the meaning of the risk of material misstatement in the financial statements, and the auditors response to this risk.

(b) Based on the Mohan Logistics Berhad case, identify the risk factors and for each of the risk factor, explain how the risk of material misstatement should be assessed, and the implications of your assessment on detection risk.