Question 3 a) A staff auditor was listening to a conversation between two senior auditors regarding the audit risk model. The following are some statements made in that conversation regarding the audit risk model. You are required to discuss whether you agree or disagree with each of the statements. 1. Materiality is a concept that can be applied quantitatively or qualitatively. In essence it is a concept used to ensure that the auditor gathers sufficient evidence to render an opinion on the financial statements without adversely affecting the decision of a reasonable person relying on the financial statement. 2. Control risk refers to both (a) the design of controls and (b) the operations of controls. To assess control risk as low, the auditor must gather evidence on both the design and operation of controls. 3. Audit risk should vary inversely with engagement risk: the higher the risk being associated with the client, the lower should be the audit risk taken. 4. In analysing the audit risk model, it is important to understand that much of it is judgmental. For example setting audit risk is judgmental, assessing inherent and control risk is judgmental and setting detection risk is simply a matter of the individual risk preferences of the auditor. 5. Detection risk of \50 implies that the direct test of the account balance has a \50 chance of not detecting a material misstatement and that the auditor is relying on the assessment of inherent and control risk to address the additional uncertainty regarding the possibility of material misstatement. Examiners: Dr Rita A. Bekoe \\& Dr Edem E. S. Welbeck Page 3 of 4 3 marks each: 15 Marks from material misstatements. The auditor must assess materiality in planning the audit to ensure that sufficient audit work is performed to detect material misstatements. You are required to: When the auditor sets his materiality at the planning stage, can it change in the course of the audit? Explain. 5 Marks (TOTAL MARKS: 20) Question 4 Ghana Sugar Company Limited a private company has been in operation for many years. Owing to a rising need to raise additional capital the shareholders have passed a resolution to convert the company into a public company and list it on the Ghana Stock Exchange. You have been contracted to help the Directors to carry the resolution through. During your preliminary discussion with the Directors you realised that they were not very conversant with the listing rules of the Ghana Stock Exchange and you drew their attention to the establishment of an Audit Committee as a condition for listing on the Ghana Stock Exchange. The Directors agreed to discuss the establishment of the Audit committee at the next emergency meeting and invited you to be present. You are required to: a) Recommend the composition of the audit committee and describe its responsibilities to the Directors. 10 Marks b) Explain how an audit committee could improve the effectiveness of the work of the external auditor. 5 Marks