Question 4

For each of the four (4) key audit risks described in the table below complete the following:

(a)Identify the component (s)of audit risk affected and explain why it is an audit risk.

[8 marks]

(b)Identify the key account balance (s) affected.

[4 marks]

(c)Identify the prime audit assertion (s) to be tested.

[4 marks]

(d)Identify ONE audit procedure you would use in your audit program to address the reduce the risk of material misstatement.

[4 marks]

[Total for Question 4: 20 marks]

The situations are independent of each other and are to be treated separately in your answers.

Question 4 Answer:

Description of audit risk

Components of audit risk affected (1 mark) and explanation as to why it is an audit risk (1 mark)

Key account balance(s) affected (1 mark)

Prime assertion (1 mark)

Best audit procedure to reduce risk (1 mark)

(a) In the course of your preliminary analytical procedures, you identified that your audit client appears to have a significant debt recovery problem. Further investigations reveal that the company's debtor balance is so high because an employee was caught misappropriating cheques received from customers for payments of their accounts. Although the employee was subsequently dismissed, the audit partner in charge of the engagement plans to place no reliance on the controls in the accounts receivable area.

(b) As part of the audit of a major client's debtors system, a junior member of the audit team informs you, the engagement audit partner, that debtor sales are subject to credit approval.Credit checks are conducted on all new customers and credit limit checks are done on all existing customers.

Description of audit risk

Components of audit risk affected (1 mark) and explanation as to why it is an audit risk (1 mark)

Key account balance(s) affected (1 mark)

Prime assertion (1 mark)

Best audit procedure to reduce risk (1 mark)

(c) As part of the business risk assessment for a major audit client, the auditor reviews monthly newsletters of the client and discovered that six weeks prior to year-end, the payroll manager was dismissed because it was discovered he had included his wife and daughter on the payroll for the past five years.The auditor has decided not to rely on controls to reduce the risk of material misstatement for the payroll area.

(d) You are the audit engagement partner for a high-risk insurance company.The company has known going concern issues.As part of developing your audit plan you are reviewing your audit clients accounts payable system.You find that the duties of issuing cheques, recording cheques, and reconciling the bank statements are all done by the accounts payable manager, who has been with the company for 30 yrs.