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1. Assess the company’s business risk. Obtain the Management Discussion Analysis report that accompanies the financial statements and review it to gain an understanding of the business and its risks to answer the following questions. What business in the company in – how does it make money? What are its managers’ main strategic objectives? What business risks does it face that could prevent it from meeting its strategy? Discuss one or more business processes that are likely to be important in this business considering its strategy and significant risks, and why these would be most important. Refer to CAS 315 to guide your business risk assessment. In particular, CAS 315 paragraphs 11, 25 and 26, the relevant risk factors listed in its Appendix, and chapters 5 & 6 of the text will be useful for preparing this risk assessment. Assess the overall risk of material misstatement in this company’s financial statements, giving the reasons for your assessment. (15%)
2. Recommend the audit risk level your firm should accept for this engagement (note: you do not need to consider IR, CR and DR in this part as they are addressed elsewhere), and the materiality level appropriate to use for planning purposes. Justify your choices. (10%)
3. Discuss, in general terms, the type, extent and complexity of the information systems you might expect to be used in the company’ accounting and internal control systems, given the nature of its operations and information reporting requirements, and to address its key risks. Indicate any impact on the overall control risk assessment for this company. (5%)
4. Review at least two of the company’s main accounting policies, including those for revenue recognition, and plus one or more others that seem most critical in this business. Comment on their appropriateness, i.e., are the policies chosen by management conservative, aggressive, in line with its industry, etc? Assess the understandability and transparency of the company’s overall financial statement presentation and disclosure – how clearly and completely does it communicate key information to users? (10%)
5. Report the results of relevant analytical review procedures for this company and explain the impact of these findings on your audit approach. Summarize your findings in the report and provide details in an Exhibit. Indicate the impact of these findings on your risk assessment. (10%)
6. Based on your research and business risk assessment above, identify one or more “key audit areas” that the firm’s partners should focus their attention on, and their impact on your audit approach and work effort. A key audit area is an account balance, transaction class, disclosure, or business process where you think there is a particularly high risk that the company’s financial statements will be materially misstated, or where it will be particularly challenging to gather appropriate evidence regarding one or more assertions to lower audit risk to an acceptable level. Explain specifically how the business risks and other company factors you identified might lead to higher risk of material misstatement in this company’s financial statements, or audit evidence gathering challenges. (15%)
7. Summarize your preliminary overall audit strategy (see CAS 300) to help the partners assess the auditability of the company and the time and skill requirements of audit staff if the firm accepts the engagement. This includes your recommendation on whether to use a substantive approach or a combined approach. If combined, indicate which accounting cycle(s) you would expect to test controls in, and whether timing of control testing would be at interim and year end or year end only. (10%)
8. Identify the one important accounting process (for example revenues, purchases, inventory production, etc.) that you think will produce the highest high risk of material misstatement in this company. List the financial statement transactions and balances in this accounting cycle, and the assertions related to them. Apply the audit risk model and assess the risk components for the key assertions (*i.e. assess risk of material misstatement at the assertion level). List specific audit procedures to be performed in this process, following your overall audit strategy and your risk assessment for the balance and transactions in this process. (10%)
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