You are a member of the audit team assigned to audit Rahim Manufacturing Berhad, a manufacturer of a spicy sauce that is popular among Malaysians.

Based on audit evidence gathered during testing of the companys internal controls, the auditor decides to increase the assessed level of control risk from that originally planned. As a result of this change, the auditor would need to adjust detection risk so that the overall audit risk level that is substantially the same as the planned audit risk can be achieved. The auditor assessed the risk of material misstatements to be 1 and audit risk to be 0.05. Inherent risk and control risk are identical.

Guidance to answer questions:

• Unless otherwise provided in the question, copy-and-paste answers from the following list (may be used more than once):
  • Risk of material misstatement
  • Inherent risk
  • Business risk
  • Control risk
  • Detection risk
  • Audit risk
  • Professional skepticism
  • Independence of auditor
  • Professional judgement
  • Controls exist
  • Controls do not exist
  • Controls are not working to prevent or detect misstatements
  • Controls are working to prevent or detect misstatements
  • Substantive strategy
  • Reliance strategy
  • Test of controls
  • Substantive procedures
  • Inspection of documents
  • Inspection of tangible assets
  • Recalculation
  • Observation of client employees
  • Inquiry of management and third parties
  • Analytical procedures
  • Substantive test of details
  • Reperformance

Required:

1. Based on the results of the internal control testing, describe whether internal controls were working or not working.
2. Based on your answers in (a), the auditor found more or less deviations that were expected during the test of controls.
3. If control risk increases following the test of controls, the auditor must adjust detection risk. In this case, describe whether detection risk should increase or decrease.
4. Based on your answer in (c), the auditor should increase or decrease substantive procedures.
5. Based on the information on risk of material misstatement and audit risk provided in the case above, calculate detection risk to 2 decimal points.
6. Assuming inherent risk and control risk to be identical at 0.3, and audit risk is 0.05, calculate detection risk to 4 decimal points.
7. Compare your answer in (e) against your answer in (f). When detection risk changed from (e) to (f), the auditor performs more or less substantive procedures.
8. Continuing from the discussion in (g), the auditor performs more or less test of controls.
9. Describe how the auditor assess inherent risk of the client.
10. When the auditor assesses control risk at maximum, describe the conditions of the internal controls of the client. .
11. Describe how the auditor assesses audit risk of the client.
12. Based on your answer in (d), the auditor is expected to perform substantive procedures. Describe the broad categories of substantive procedures that are most likely to be performed by the auditor.
13. When the auditor determines that the clients internal controls are working more effectively than originally planned, the auditor would revise his/her plan to reduce the amount of analytical procedures that he/she intends to perform. (True/False) .