Question 1

What is risk management and why it is important that an organisation implement effective risk management? Who has the primary responsibility for the effective implementation of a risk management program to identify and then manage or mitigate risks?

Question 2

What is meant by the term 'expectation gap'? Provide some examples of the expectation gap. What action has the Fiji auditing profession taken to reduce the expectation gap?

Question 3

Discuss at least five factors an external auditor considers when assessing the competence and quality of work performance of a client's internal audit function?

Question 4

What is meant by "professional skepticism" and why is it important for auditors to maintain such an attitude to their work.

CASE STUDY

Question 1

The audit partner has just advised you that he has been approached to accept the appointment of auditor to Games Limited. Games Limited is a manufacturer of gaming machines and has been named in a recent anti-corruption enquiry as having offered incentives to state government members to support a proposed bill which would allow an increased number of gaming machines in licensed premises. No charges have yet been laid against Games Limited or any of its employees. The audit partner explains to you that Games Limited's auditors were re-appointed for the current financial year at the Annual General Meeting held two months ago. However, Games Limited's managing director is unhappy with the existing auditing firm as the audit partner assigned to Games Limited has been changed.

Required:

The audit partner is unsure whether he should accept the appointment and has asked you to outline any ethical, legal and other factors to be considered in his decision about whether to accept the appointment for the current year, and to indicate the steps that need to be taken prior to the appointment.

Question 2

Z Pty Ltd is a large private company that manufactures special reinforced concrete and other products used in the construction of airport runways and heavy use motor vehicle freeways. During the course of the audit for the year ended 30 June 20X7, the government announced that it intends to scrap its proposed third runway project. You know that Z Pty Ltd's projections include a major share of the work expected to flow from this project.

The company has been experiencing some cash flow difficulties, although this is not unusual in the industry. Management has recently fully extended their overdraft facility in order to pay day-to-day expenses such as wages and salaries. The audit partner is concerned that the company may be facing going concern problems, but the managing director maintains that future capital expenditure can be cut back to alleviate the going concern issue. In addition, surplus assets can be sold to the growing Asian market and long-term debt can be rescheduled if necessary.

Required:

(a)Give examples of three other possible mitigating factors that have not yet been mentioned.

(b)What evidence should you obtain with respect to management's representation about the various mitigating factors presented in the question and identified in part (a) above?

(c)What would be the impact on the audit of a comfort letter from a related company promising to provide financial support in the event that Z Pty Ltd was unable to meet its debts?