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Solutions: Homework Questions

1) An audit firm must meet three conditions before undertaking a new engagement or continuing an existing one: considering client integrity, being competent to perform the engagement, and being able to comply with ethical requirements. 2) Analytical procedures at the planning stage help auditors understand the business and identify risk areas. They reveal unknown aspects of the business and establish a baseline for evaluating the financial report's reasonableness. 3) Key fraud risk factors for a company include management incentives based on ambitious sales targets and the presence of small but high-value inventory items.

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Chiran Adhikari
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66 views3 pages

Solutions: Homework Questions

1) An audit firm must meet three conditions before undertaking a new engagement or continuing an existing one: considering client integrity, being competent to perform the engagement, and being able to comply with ethical requirements. 2) Analytical procedures at the planning stage help auditors understand the business and identify risk areas. They reveal unknown aspects of the business and establish a baseline for evaluating the financial report's reasonableness. 3) Key fraud risk factors for a company include management incentives based on ambitious sales targets and the presence of small but high-value inventory items.

Uploaded by

Chiran Adhikari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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SOLUTIONS

HOMEWORK QUESTIONS

5.1 Conditions that an audit firm must meet under APES 320.35 before undertaking a new engagement or
continuing an existing engagement include:

1 that it has considered the integrity of the client and does not have information that would lead it to
conclude that the client lacks integrity

2 that it is competent to perform the engagement and has the capabilities, time and resources to do
so

3 that it can comply with ethical requirements.

5.12 Analytical procedures at the planning stage of the audit assist in understanding the business and
identifying areas of potential risk. 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 audit
procedures.

They also give the auditor some knowledge of the business and a base against which to compare
subsequent evaluations of the reasonableness of the financial report.

6.19
Fraud risk factor Explanation
Management’s remuneration is Management has an incentive to overstate sales to achieve optimistic
heavily weighted by incentives performance targets and receive their bonus
based on ambitious sales levels
Small, high-value inventory Titanium bolts are small but very valuable and so could be stolen by staff
for resale

EXTRA QUESTION (NOT FROM TEXTBOOK)


1. Inventory is likely to be at-risk. It increased by a material amount (i.e. $13,545 > $11,000) and is a very
material account ($175,750). The account could be overstated (assertions: e.g. existence, valuation).

2. Sales revenue is also likely to be at-risk. It increased by a material amount ($19,403) and is a very
material account (approx. $311,543 annually). The account could be overstated (assertion: e.g.
occurrence).

Note: other correct answers are also possible.


ADDITIONAL QUESTION
6.20

Account Key assertion Explanation


Trade and other receivables Existence There is a risk that there may be fictitious debtors.
Trade and other receivables increased by 14%, while
revenue increased by less than 1%. It is unusual for the
debtors’ balance to increase without a similar
corresponding increase in revenue.
Deferred revenue Completeness There is a risk of overstatement for revenue and
understatement for deferred revenue. Deferred revenue
decreased by 30%, while revenue increased slightly. It
is unusual for deferred revenue to decrease while
revenue increases for a services business.

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