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MA611: Understanding a Client to Identify the Risk of Material Misstatements - Auditing Assessment Answer

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Subject Code: MA611 Internal Code: 1AHBGJ

Auditing Assessment Answer

TASK: FOR SYDNEY CAMPUS GROUPS ONLY Company name ASX code Sector 1 AGL Energy Limited AGL Utilities 2 Bendigo and Adelaide BEN Financials 3 Coles Group COL Consumer Staples 4 JB Hi-Fi Limited JBH Consumer Discretionary 5 Origin Energy ORG Energy 6 Sonic Healthcare SHL Health Care 7 WorleyParsons Limited WOR Energy 8 Xero Limited XRO Information Technology The following are useful extracts from Chapters 5 and 6 of the prescribed textbook, Gay and Simnett et al. (2015 or 2018). You are encouraged to carefully read these chapters before commencing this assignment. Analytical Procedures Gay and Simnett et al. (2015, page 226; or 2018, page 210) state that; ‘ASA 315.6 (ISA 315.6) requires the auditor to apply analytical procedures at the planning stage as part of the risk assessment procedures. Analytical procedures may reveal aspects of the business about which the auditor was unaware, and assist in determining the nature, timing and extent of other procedures.’ Gay and Simnett et al. (2015, page 227; or 2018, page 211) state that; ‘While these procedures may be used at various stages of the audit, the most useful at the preliminary planning stage include: MA611
  • comparison of current balances in the financial report with balances of previous periods and budget amounts (simple comparisons)
  • computation of ratios and percentage relationships for comparison with previous years’ budgets and industry averages (ratio analysis).’
Gay and Simnett et al. (2015, page 235; or 2018, page 218) state that; ‘The auditor must decide which fluctuations are significant (emphasis added) and thus warrant investigation (see Example 5.10). The auditor must also be alert to the possibility that the absence of expected fluctuations may also need to be investigated. Each significant fluctuation (or the lack of an expected fluctuation) must be investigated to determine the reason for it.’ Risk of Material Misstatement (Inherent Risk) Gay and Simnett (2015, page 217; or 2018, page 201) state that; ‘When assessing the risk of material misstatement, in accordance with ASA 315.27 (ISA 315.27), the auditor must use their judgment to determine whether any of the risks identified are a significant risk. ASA 315.4 (e) (ISA 315.4 (e)) defines a significant risk as ‘an identified and assessed the risk of material misstatement that, in the auditor’s judgment, requires special audit consideration.’ (see Figure 5.8 on page 217). Gay and Simnett et al. (2015, page 251; or 2018, page 230) state that; ‘ASA 315.25(a) (ISA 315.25(a) requires the auditor to address the assessed risks of material misstatement (inherent risk and control risk) at the financial report level (emphasis added), while ASA 315.25(b) (ISA 315.25(b) requires the auditor to assess risks of material misstatement (inherent risk and control risk) at the assertion level (emphasis added). The levels of risk assessment are illustrated in Figure 6.2.’ Gay and Simnett et al. (2015, pages 252-253; or 2018, pages 232-233) state that; ‘ASA 315.A105 (ISA 315.A105) indicates that the risk of material misstatement at the financial report level (emphasis added) refers to risks that are pervasive to the financial report as a whole and therefore may affect many assertions.’ Further (on page 253 or 232), ‘. . . there are a number of factors that affect inherent risk at the financial report level’. Gay and Simnett et al. (2015, page 256; or 2018 page 235) state that; ASA 315.A109 (ISA 315.A109) indicates that the risk of material misstatement at the assertion level (emphasis added) for classes of transactions, account balances and disclosures needs to be considered because it directly assists the auditor in determining the nature, timing and extent of further audit procedures at the assertion level necessary to obtain sufficient appropriate audit evidence. MA611  Requirements For your approved company, having, as a minimum (see below), obtained the last two annual reports from your company’s website, complete the following requirements;
  1. Results of Analytical Procedures
Apply analytical procedures (simple comparisons and ratio analysis) to the financial report information of your company for the last three financial years. Explain how the results of your analytical procedures would influence your audit planning decisions for the audit for the last financial year.
  1. Risk of Material Misstatement (Inherent Risk) at the Financial Report Level 
Discuss fully your company’s inherent risk at the financial report level for the five factors discussed in Gay and Simnett.
  1. The integrity of management (i.e., the directors), b. Management (i.e., Director) experience, knowledge and changes during the period, c. Unusual pressure on management (i.e., the directors), d. Nature of the entity’s business, and e. Factors affecting the industry in which the entity operates.
  1. Risk of Material Misstatement (Inherent Risk) at the Assertion Level 
From your risk assessment (i.e., Requirements 1 and 2), identify three (3) specific account balances (not account classifications!) that you consider at significant risk of material misstatement. For each of the three account balances you identify: a) Explain why the account balance is at significant risk of material misstatement b) Explain the key assertion at risk of not being valid. c) Detail one (1) relevant substantive audit procedure to address the assertion at risk as identified in b) above and d) Detail one (1) relevant practical internal control that would mitigate the risk in relation to the assertion at risk as identified in b) above.  (a) Explain why the account balance is at significant risk of material misstatement. (b) Explain the key assertion at risk of not being valid. (c) Detail one (1) relevant substantive audit procedure to address the assertion at risk as identified in b) above. (d) Detail one relevant practical internal control that would mitigate the risk in relation to the assertion at risk as identified in b) above.
  1. Presentation Quality
Your assignment should be presented in a Report Format and as if it were to be presented to your audit team’s audit partner. Report Format means that your submission should be structured as follows; (i) Assessment Cover Sheet, signed by all group members. The Assessment Cover The sheet is downloadable from the Moodle site, or can be copied and pasted from pages 7 and 8 of this document. (ii) Executive Summary (on page 2). This should be no more than 200-300 words that summarize clearly and succinctly your detailed responses to the three requirements. (iii) Requirement 1 – Results of Analytical Procedures. (iv) Requirement 2 – Risk of Material Misstatement (Inherent Risk) at the Financial Report Level. Requirement 3 - Risk of Material Misstatement (Inherent Risk) at the Assertion Level. A key aspect in your group’s choice of format/layout should be to ensure you impart your key messages effectively (i.e., complete the requirements) and efficiently. It should be succinct, and use of tables, graphs and other types of presentation formats/layout is encouraged. At the end of each Requirement, including a Conclusion paragraph that sums up the key findings/issues. Hint; these Conclusion paragraphs may become the basis of your Executive Summary! Begin the Executive Summary and each Requirement on a new page. The report should be coherent and so consistency is expected throughout (e.g., formatting, language style, linkages between the requirements (to obtain 70 percent or more), page numbering). MA611  Note, groups who split up the requirements and work independently are likely to have more difficulty accomplishing this objective compared to groups who work on each of the parts collaboratively (i.e., as an ‘audit team’). An assignment that has been put together last minute will be obvious to the marker and, therefore, will earn little, if any, marks for this requirement.
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