You are conducting the audit of Terrific Tunnelling (TT) for the first time. The main business of TT is constructing underground tunnels for roads and trains, and they have three very large tunneling machines, each valued at $10 million. TT is currently exclusively working for the Happy State Government on constructing an underground rail network. The terms of this agreement are that the project will be finished in three years. Payments are made yearly in advance and TT has now received 100% of the payments due for the project ($50 million). The terms of the agreement state that if there are any delays the fee will be reduced by 2% per month. Unfortunately, one of the tunneling machines has encountered soft rock and may be seriously damaged. In addition, the accident has caused workers to be concerned that safety standards are not being met. All TT construction staff have gone on strike until new safety equipment is purchased and installed in the tunnels, which is estimated to cost around $3 million and take two months.

In order to reduce audit costs you are considering placing reliance on the TT Internal Audit Department. You have learned that earlier in the year the Internal Audit manager left the company. Since that time the Finance Director has also held the role of Internal Audit Manager.The Finance Director has extensive internal audit experience with a previous company and many accounting qualifications. You have reviewed a sample of Internal Audit files and have found them to be of high quality.

Required

1/ Identify two (2) business risks faced by TT. For each business risk, state the account balance affected, whether the account balance is likely to be overstated or understated, and the relevant audit assertion.

2/ State whether it would be appropriate to place reliance on the TT Internal Audit Department. Justify your assessment.