QUESTION 1 (23 Marks)

A. The following are various activities an auditor does during audit planning:

Determine the likely users of the financial statements

Identify whether any specialists are required for the engagement

Send an engagement letter to the client

Tour the clients plant and offices

Compare the key ratios for the company to those for industry competitors

Review managements risk management controls and procedures

Review accounting principles unique to the clients industry

Identify potential related parties that may require disclosure

Required:

For each procedure, indicate which of the first four parts of audit planning the procedures primarily relates to (1) accept client and perform initial audit planning (2) understand the clients business and industry (3) assess clients business risk; (4) perform preliminary analytical procedures. (8 Marks)

B. You are an audit supervisor of Ali and Ahmad CPA and are currently planning the audit of your client, Al-Ehsan Co (Ehsan) which manufactures decorative magnets. Its year end is 31 December 2018 and the forecast profit before tax is $96 million. During the year, the directors reviewed the useful lives and depreciation rates of all classes of plant and machinery. This resulted in an overall increase in the asset lives and a reduction in the depreciation charge for the year. Inventory is held in five warehouses and on 28 and 29 December a full inventory count will be held with adjustments for movements to the year end. This is due to a lack of available staff on 31 December. In October, there was a fire in one of the warehouses; inventory of $09 million was damaged and this has been written down to its scrap value of $02 million. An insurance claim has been submitted for the difference of $07 million. Ehsan is still waiting to hear from the insurance company with regards to this claim, but has included the insurance proceeds within the statement of profit or loss and the statement of financial position. The finance director has informed the audit manager that the October and November bank reconciliations each contained unreconciled differences; however, he considers the overall differences involved to be immaterial. A directors bonus scheme was introduced during the year which is based on achieving a target profit before tax. In order to finalize the bonus figures, the finance director of Ehsan would like the audit to commence earlier so that the final results are available earlier this year.

Required:

Based on the above describe FIVE audit risks, and explain the auditors response to each risk, in planning the audit of Al-Ehsan Co (Ehsan) (15 Marks)