Question 1

Tech Wiz is operating in the technology industry for many year; however, this is the first time that Harper & Co. would be working with a client from this industry, hence no prior experience. The audit team is intrigued by this new audit. Talks were finalized and the partners accepted the engagement without doing any background information on the client. During the audit, many observations were made:

Tech Wiz Ltd has not been producing any new devices and as such revenue has declined by 10% and performing below industry level, there were no sale of fixed asset during the financial year. It was discovered that one of Tech Wizs major competitor has filed a patent for an improved version of the current product selling on the market, which could prove to be a game changer for the competitors position in the industry.

It was also observe at Tech Wiz that the same person who collects the cash post the entries in the journal, no vault is there to store cash overnight hence cash are kept in the registers. Journal entries are not authorized by management before posting it to the relevant books and ledgers. Audit schedules of the account that were requested are not being submitted to the auditors on time; cheques are only authorized by one person, which is the financial controller. While perusing the accounts, you have found that suppliers accounts have not being updated frequently; the same is for bank reconciliation. During the investigation it was revealed that there were an unusual amount of intangible assets that are unusual to the industry that the client operated in, no proper fixed asset registry was kept and as such, the auditor noticed a machinery that represent 45% of the balance sheet of the client. While assessing the control environment, auditors noticed that management overrides controls easily and that there is no internal audit department for a company that had multiple branches.

Required:

Briefly discuss two critical steps in the audit planning process for financial statement audit that Harper & Co. must do before commencing the audit. Make specific reference or contrast to what was done initially in the audit by the seniors. (4 marks)

Based on data in the case study, assess the clients business risk. Additionally, from your professional skepticism, does the likelihood of material misstatement exist?

(6 marks)

Identify the weaknesses in the system used by Tech Wiz Ltd. Make recommendation to alleviate each weakness identified. (10 Marks)

Design audit procedures to obtain sufficient and appropriate evidence for cash and bank; accounts payables and accounts receivables. (15 marks)

Discuss FIVE audit evidences that may be carried out to conduct the audit procedures in (4) above. (5 marks)

You have done your testing based on the audit procedures you have outlined, and you found that there were material misstatements in the balance sheet, and that machinery of significant value did not exist contrary to the claims of the directors. Your audit have outline this in a management letter and in several meetings but the directors were adamant that they were not going to make any changes to the financial statements.

Explain what audit opinion would be suitable based on the findings and the action of the directors. (5 marks)