Question 1 [CLO 5] (5 Marks) (a) In accordance with International Standards on Auditing (ISA) 320, materiality and audit risk are interrelated and must be considered throughout the audit process. Why? Appraise your views. (3 Mark) (b) In the light of International Standards on Auditing (ISA) 315, why does an auditor need to know the client business? Discuss with the help of relevant examples. (2 Marks) Question 2 (CLO 5) (5 Marks) In an effective internal control system, certain elements work to support the achievement of an entity's mission, strategies and related business objectives. What are those elements? Discuss them. Select any corporation of your choice and link those elements to your selected corporation. Also evaluate how effectively your selected organization is dealing with them. (5 Marks) Question 3 [CLO 5) (15 Marks) Read the following two cases and answer the questions that follow: Case A: Cynthia Roberts, CPA, expresses the following viewpoint: "I do not believe in performing tests of controls and substantive tests of transactions for the sales and collection cycle. As an alternative, I send a lot of negative confirmations on every audit at an interim date. If I find a lot of misstatements, I analyse them to determine their cause. If internal controls are inadequate, I send positive confirmations at year-end to evaluate the amount of misstatements. If the negative confirmations result in minimal misstatements, which are often the case, I have found that the internal controls are effective without bothering to perform tests of controls and substantive tests of transactions, and the confirmation requirement has been satisfied at the same time. In my opinion, the best test of internal controls is to go directly to third parties." Required: Do you agree with her point of view? Why or why not? Justify your response with logical arguments. (5 Marks) 2 Case B Dodge, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Dodge is satisfied that the accounts are correctly summarized and classified and that allocations, reclassifications, and valuations are made in accordance with GAAP. Dodge is planning to use accounts receivable confirmation requests to obtain sufficient appropriate evidence as to trade accounts receivable. Required: a. Identify and describe the two forms of accounts receivable confirmation requests and indicate what factors Dodge will consider in determining when to use each. (2 Marks) b. Assume that Dodge has received a satisfactory response to the confirmation requests. Describe how Dodge can evaluate collectability of the trade accounts receivable. (3 Marks) c. What are the implications to a CPA if during an audit of accounts receivable some of a client's trade customers do not respond to a request for positive confirmation of their accounts? (2 Marks) d. What auditing steps should a CPA perform if there is no response to a second request for a positive confirmation