Question

2) The Audit firm Dewy, Cheatham, & Howe has been asked to perform an attest audit of Crook Puppy Investments (CPI) Ltd (an investment firm that has been registered with ASIC for 10 years).

Your early assessment of CPI Ltd indicates that it has a high-risk business environment (IR is very high = 0.90), poor to none existent internal controls (CR is medium = 0.60), and the detection of problems during any reasonable level of audit is very poor (DR is high = 0.74).

Required:
a) List and discuss what you need to consider before accepting the CPI Ltd audit engagement.
b) Show the audit risk model and use it to estimate and evaluate the audit risk of the CPI Ltd Audit engagement.
c) If your firm’s Audit Risk tolerance is 0.04, would you accept the audit? Explain.
d) If your audit firm accepts the audit, how would the information in part (b) be used to set the audit strategy?

Answer 1

Question: a) List and discuss what you need to consider before accepting the CPI Ltd audit engagement.

Answer: Befoer Accepting any Audit Assignment , more particularly when the Entity working in a highly risky enviornment, we must fully assess the entity by enquiring relting to Industry, Accounting Rules & Regulations applicabality,  Ownership Structure, Decision Making strategies, Internal Control Systems, Govt. Regulations, Govt. Compliance etc Working or performance of the company in past years, risk anticipated may be the issues, needs to be discussed before audit starts.

Question: b) Show the audit risk model and use it to estimate and evaluate the audit risk of the CPI Ltd Audit engagement.

Answer: We need to determine the total amount of risk associated with the audit job, and describes how these risks can be managed. First Risk is Assertions, Second is Business Risk, Third is Significant Risk.

Model can be prepared accordingly to eliminate all the 3 types of risks as under:

		AUDIT RISK MODEL
ASSERTIONS: We may verify with physical check or with accounting effect or with other
	cross verifications of all the imprtant assertions given by the management
	and the staff. Responsibilities whether performed properly or not.
BUSINESS RISKS: We may verify the decision process, decision authorities, proper documents
	procedure adopted, implementation timings and other relevant issues.,
SIGNIFICANT RISKS:		On the face, it it appears that assertions are wrong than specific audit
	considerations are to be given to particular area. We can fix up these risks in
	advance in our Audit Programmes.,

While deciding audit programme, we can decide all these three risk areas & cover in details to eliminate the possibilities of any audit faults.

Question: c) If your firm’s Audit Risk tolerance is 0.04, would you accept the audit? Explain.

If our Risk Tolerance level is just 0.04 only, we must decline the Audit Assignment , as in the aforesaid case the entity works in highly risky environment. Any Material misstatement in Accounting Reports may cause losses to the reputation of our Firm.

Question: d) If your audit firm accepts the audit, how would the information in part (b) be used to set the audit strategy?

Answer: If at all, our Firm accept the audit assignment, than we will prepare the Audit Risk Model as suggested in Answer B above with wide coverage of all the critical risks associated with the entity so as to complete our goal. Indepth study of entity and related laws and the operations of the entity will be audited at length from all aspects so as to avoid all the three risks to complete our audit work as per law.