MIA Investments is a publicly-traded financial technology (FinTech) company that operates throughout Australia. The company offers Robo-advising services to investors that prefer financial advice or investment management online with moderate to minimal human intervention. MIA Investment was founded in 2002 as an investment management firm and capitalizes on a growing investment community that prefer to rely on Robo-advising services offered by algorithms without speaking to a human. In July 2019, MIA's longest serving CEO, George Wysocki, resigned. The departure of the former CEO was purely due to family reasons. MA quickly appointed a new CEO, Joe Black. The new CEO made some changes including the installation of new IT systems related to financial reporting. The company enjoyed a steady growth over the years, often recording about 10% increase in revenues. However, MIA faced a number of challenges in recent years. The sector has become highly competitive as it attracts a growing number of small business start-ups, with leading investment management firms already controlling a large share of the market. Broader macroeconomic factors resulting from COVID-19 crises have impacted investors' trust in capital- markets, further posing unpredictable challenges to the industry. These challenges are likely to remain in the foreseeable future. In addition to this, the Australian Securities and Investment Commission (ASIC) charged three firms that offer Robo-advising services for making false statements about investment products in February 2020. Based on the charges and the findings of the commission, ASIC decided to conduct an industry-wide investigation on the FinTech industry. The lead investigator, David Adam, was asked about their ongoing investigation and he said that preliminary findings of our investigation 18 United States) The Audit Team The audit team assigned to MIA Investments is composed of five (5) people including an IT auditor as follows: Audit Partner: Omar . Audit Manager: Sarah Audit Senior: Maria . Auditor: Ali . IT Auditor: Peter The audit partner, Omar, has been the audit partner on the MIA Investments audit for 5 years. Omar's wife bought a small number of shares in MIA Investments. Omar is aware of this ownership but he considers it immaterial. Sarah and Maria have been on the MIA Investment audit team for 3 years. Ali is new to the audit team for MIA and has no experience in the audit of financial technology firms. Ali is excited to join the audit team for MIA because his long-term friend is a marketing manager at MIA and is hoping to catch up with his friend. Ali's friend has no role in the accounting or finance functions at MIA. The audit firm hired Peter, the IT auditor, on part-time basis, to provide expert opinion on the MIA's complex algorithm-based transactions. Peter is a highly sought-after expert who gives invited guest lectures at both industry forums and leading Australian universities about new trends in the FinTech industry. Peter and Zack Davis - the CFO of MIA - went to the same university and have since become close friends. The audit team commenced planning the audit on MIA in the middle of October 2019. In recent vears. MIA has offered the audit team some investment training in the financial technology --4-v. Corporate Governance at MIA Board of Directors MIA's Board of Directors consists of 5 directors, 3 of whom are independent non-executive directors. The other two are executive directors (the CEO and CFO). The chairman of the board is an independent non-executive director. The Board of Directors met 6 times during the financial year, with all members in attendance at all meetings. This is in line with the Australian Securities Exchange (ASX) governance principles and recommendations. Audit Committee MIA has an audit committee. The audit committee consists of 3 independent directors and 1 executive director (the CEO), and is chaired by an independent director. The audit committee met 4 times during the year. While the audit committee members have industry knowledge and experience, they do not have accounting or financial expertise. Internal Audit Function MIA does not have an internal audit function. As a result, the CFO assumes all internal audit duties including the review of significant purchase transactions. The audit committee and the board are of the view that there is no need to establish an internal audit function at this point in time. The senior auditor (Maria) conducted analytical review procedures during the planning sta of the audit. The results of the review are noted below: The financial performance of MIA Investment for the Financial Year ending 30 June 2020 at the upper end of what the market has predicted. The earnings per share is consistent with forecasts of all current analysts. In addition, all key financial performance indicators such profitability, liquidity and debts are favourable compared to the company's major competit Below are the highlights of the Company's current year financial performance: Revenue increased by 5% compared to last year. Accounts receivable increased 18% relative to last year. Earnings before tax increased by 6% since last year. Cash and cash equivalents increased 11%. O Profitability and liquidity ratios remained relatively favourable and stable. Funds under management (FUM) grew 20% since last year. Advertising expense decreased by 50% since last year. 15 118 Risk Assessment . . The audit partner, Omar, along with all audit team members met with the CFO of MIA, Zack Davis, virtually over Zoom. The following issues were discussed in the meeting: Omar, asked permission from Zack Davis, to record the meeting for the purposes of their record, Zack Davis declined, adding he would prefer the audit team to take notes instead Omar agreed Zack Davis made it clear that the ASIC investigation is troubling particularly in the wake of the COVID crises, but also noted that the management team is confident that there will be no charges against the firm. Sarah noted that the ASIC industry-wide investigation could have a contagious effect' on the share price of MIA whether or not MIA is charged, and that Mr. Davis should consider disclosing such potential effects to forewarn investors, and pre-empt future litigation risks Mr. Davis pushed back arguing that he, and the management team, are not too keen to speculate on future events that are difficult to quantify. He added that this is not necessary and is probably not in the best interest of all stakeholders. Mr. Davis convincingly argued that the ongoing COVID crises, which clearly caused the firm's revenue to only increase 5% from last year, and the ASIC investigation are once in a lifetime' events. He added that it is the underlying economics of the firm rather than these one-off events that is informative to investors' decisions. Mr. Davis further stated that "let's not forget that, as Omar knows, we are a financially . . O 1 CO2 Tests of controls As part of the audit, Ali tested the controls over accounts receivable as this an important asset account for MIA. Ali selected a sample of 25 transactions that had already been checked by the controller at MIA. Ali also checked the calculations himself to verify the effectiveness of the controls over the accounts receivable. Ali found no inconsistencies or errors and concluded that the internal controls were appropriate. Ali decided no further audit work was required. Peter tested the efficacy of the IT environment, focusing on algorithms used by MIA. He selected a sample of 12 investment accounts with different algorithms that reflect MA's alternative investment options. Peter checked the back-end questionnaire coding for these transactions. The purpose of this test is to ensure that the design of the algorithm is diverse enough such that it accommodates varying investment needs. Peter noted that the algorithm's pool of investment advice is remarkably biased toward long-term equity investments, and offers limited investment options regardless of investors' risk profile. Peter thinks this practice of "algorithm tempering" may stem from deliberate management strategy to induce and tie investors longer-term investments. Despite his concerns, he concluded that the systems used at MIA are reasonably appropriate. a) Explain the impact of a lack of an internal audit function at MIA Investments on your assessment of audit risk, the materiality level and the audit strategy that would be adopted. (4 Marks) b) With reference to the Tests of Controls performed by Peter over the IT environment, describe the appropriateness of Peter's conclusion that 'the systems used at MIA are reasonably appropriate'. (3 Marks) c) Assuming inherent risk is HIGH and control risk is LOW for MIA Investments, assess detection risk. (2 Marks) d) In an audit engagement where inherent risk is HIGH and control risk is LOW, what audit strategy would you expect the audit team to use. Justify your 18 E MIA Investments is a publicly-traded financial technology (FinTech) company that operates throughout Australia. The company offers Robo-advising services to investors that prefer financial advice or investment management online with moderate to minimal human intervention. MIA Investment was founded in 2002 as an investment management firm and capitalizes on a growing investment community that prefer to rely on Robo-advising services offered by algorithms without speaking to a human. In July 2019, MIA's longest serving CEO, George Wysocki, resigned. The departure of the former CEO was purely due to family reasons. MA quickly appointed a new CEO, Joe Black. The new CEO made some changes including the installation of new IT systems related to financial reporting. The company enjoyed a steady growth over the years, often recording about 10% increase in revenues. However, MIA faced a number of challenges in recent years. The sector has become highly competitive as it attracts a growing number of small business start-ups, with leading investment management firms already controlling a large share of the market. Broader macroeconomic factors resulting from COVID-19 crises have impacted investors' trust in capital- markets, further posing unpredictable challenges to the industry. These challenges are likely to remain in the foreseeable future. In addition to this, the Australian Securities and Investment Commission (ASIC) charged three firms that offer Robo-advising services for making false statements about investment products in February 2020. Based on the charges and the findings of the commission, ASIC decided to conduct an industry-wide investigation on the FinTech industry. The lead investigator, David Adam, was asked about their ongoing investigation and he said that preliminary findings of our investigation 18 United States) The Audit Team The audit team assigned to MIA Investments is composed of five (5) people including an IT auditor as follows: Audit Partner: Omar . Audit Manager: Sarah Audit Senior: Maria . Auditor: Ali . IT Auditor: Peter The audit partner, Omar, has been the audit partner on the MIA Investments audit for 5 years. Omar's wife bought a small number of shares in MIA Investments. Omar is aware of this ownership but he considers it immaterial. Sarah and Maria have been on the MIA Investment audit team for 3 years. Ali is new to the audit team for MIA and has no experience in the audit of financial technology firms. Ali is excited to join the audit team for MIA because his long-term friend is a marketing manager at MIA and is hoping to catch up with his friend. Ali's friend has no role in the accounting or finance functions at MIA. The audit firm hired Peter, the IT auditor, on part-time basis, to provide expert opinion on the MIA's complex algorithm-based transactions. Peter is a highly sought-after expert who gives invited guest lectures at both industry forums and leading Australian universities about new trends in the FinTech industry. Peter and Zack Davis - the CFO of MIA - went to the same university and have since become close friends. The audit team commenced planning the audit on MIA in the middle of October 2019. In recent vears. MIA has offered the audit team some investment training in the financial technology --4-v. Corporate Governance at MIA Board of Directors MIA's Board of Directors consists of 5 directors, 3 of whom are independent non-executive directors. The other two are executive directors (the CEO and CFO). The chairman of the board is an independent non-executive director. The Board of Directors met 6 times during the financial year, with all members in attendance at all meetings. This is in line with the Australian Securities Exchange (ASX) governance principles and recommendations. Audit Committee MIA has an audit committee. The audit committee consists of 3 independent directors and 1 executive director (the CEO), and is chaired by an independent director. The audit committee met 4 times during the year. While the audit committee members have industry knowledge and experience, they do not have accounting or financial expertise. Internal Audit Function MIA does not have an internal audit function. As a result, the CFO assumes all internal audit duties including the review of significant purchase transactions. The audit committee and the board are of the view that there is no need to establish an internal audit function at this point in time. The senior auditor (Maria) conducted analytical review procedures during the planning sta of the audit. The results of the review are noted below: The financial performance of MIA Investment for the Financial Year ending 30 June 2020 at the upper end of what the market has predicted. The earnings per share is consistent with forecasts of all current analysts. In addition, all key financial performance indicators such profitability, liquidity and debts are favourable compared to the company's major competit Below are the highlights of the Company's current year financial performance: Revenue increased by 5% compared to last year. Accounts receivable increased 18% relative to last year. Earnings before tax increased by 6% since last year. Cash and cash equivalents increased 11%. O Profitability and liquidity ratios remained relatively favourable and stable. Funds under management (FUM) grew 20% since last year. Advertising expense decreased by 50% since last year. 15 118 Risk Assessment . . The audit partner, Omar, along with all audit team members met with the CFO of MIA, Zack Davis, virtually over Zoom. The following issues were discussed in the meeting: Omar, asked permission from Zack Davis, to record the meeting for the purposes of their record, Zack Davis declined, adding he would prefer the audit team to take notes instead Omar agreed Zack Davis made it clear that the ASIC investigation is troubling particularly in the wake of the COVID crises, but also noted that the management team is confident that there will be no charges against the firm. Sarah noted that the ASIC industry-wide investigation could have a contagious effect' on the share price of MIA whether or not MIA is charged, and that Mr. Davis should consider disclosing such potential effects to forewarn investors, and pre-empt future litigation risks Mr. Davis pushed back arguing that he, and the management team, are not too keen to speculate on future events that are difficult to quantify. He added that this is not necessary and is probably not in the best interest of all stakeholders. Mr. Davis convincingly argued that the ongoing COVID crises, which clearly caused the firm's revenue to only increase 5% from last year, and the ASIC investigation are once in a lifetime' events. He added that it is the underlying economics of the firm rather than these one-off events that is informative to investors' decisions. Mr. Davis further stated that "let's not forget that, as Omar knows, we are a financially . . O 1 CO2 Tests of controls As part of the audit, Ali tested the controls over accounts receivable as this an important asset account for MIA. Ali selected a sample of 25 transactions that had already been checked by the controller at MIA. Ali also checked the calculations himself to verify the effectiveness of the controls over the accounts receivable. Ali found no inconsistencies or errors and concluded that the internal controls were appropriate. Ali decided no further audit work was required. Peter tested the efficacy of the IT environment, focusing on algorithms used by MIA. He selected a sample of 12 investment accounts with different algorithms that reflect MA's alternative investment options. Peter checked the back-end questionnaire coding for these transactions. The purpose of this test is to ensure that the design of the algorithm is diverse enough such that it accommodates varying investment needs. Peter noted that the algorithm's pool of investment advice is remarkably biased toward long-term equity investments, and offers limited investment options regardless of investors' risk profile. Peter thinks this practice of "algorithm tempering" may stem from deliberate management strategy to induce and tie investors longer-term investments. Despite his concerns, he concluded that the systems used at MIA are reasonably appropriate. a) Explain the impact of a lack of an internal audit function at MIA Investments on your assessment of audit risk, the materiality level and the audit strategy that would be adopted. (4 Marks) b) With reference to the Tests of Controls performed by Peter over the IT environment, describe the appropriateness of Peter's conclusion that 'the systems used at MIA are reasonably appropriate'. (3 Marks) c) Assuming inherent risk is HIGH and control risk is LOW for MIA Investments, assess detection risk. (2 Marks) d) In an audit engagement where inherent risk is HIGH and control risk is LOW, what audit strategy would you expect the audit team to use. Justify your 18 E