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You are an audit senior responsible for understanding the entity and its environment and assessing the risk of material misstatements for the audit of Rock for...

You are an audit senior responsible for understanding the entity and its environment and assessing
the risk of material misstatements for the audit of Rock for the year ending 31 December 2004.
Rock is a company listed on a stock exchange. Rock is engaged in the wholesale import,
manufacture and distribution of basic cosmetics and toiletries for sale to a wide range of stores,
under a variety of different brand names. You have worked on the audit of this client for several
years as an audit junior.

Required:
Describe the information you will seek, and procedures you will perform in order to understand the entity and its environment and assess risk for the audit of Rock for the year ending 31 December 2004.

Answers

Wilfred
Information and procedures: understanding the entity and its environment and risk assessment for Rock
(i) Understanding the entity and risk assessment is likely to involve a review of prior year
risk assessments as a starting point and the identification of changes during the year
from the information gathered that may alter that assessment.

(ii) Risk assessment procedures involve enquiries of management and others, analytical
procedures and observation and inspection. Members of the engagements team should
discuss the susceptibility of the financial statements to material misstatements.

(iii) Risk assessment also involves obtaining an understanding of the relevant industry,
regulatory and other matters including the financial reporting framework, the nature
of the entity, the application of accounting policies, the entity’s objectives and related
business risks, and its financial performance. This may involve:
A review of prior year working papers noting any particular issues that arose warranting
attention in the current year.
Discussions with the audit senior or manager working on Rock in prior years to establish
any particular problem areas.
Discussions with Rock (and their other advisors such as banks and lawyers) to establish
any particular problem areas.
A review of any third party information on the client such as press reports.
A review of management accounts, any financial information provided to the stock
exchange or draft financial statements that may be available to establish trends in the business.
A review of any changes in stock exchange requirements.
A review of systems documentation (either generated by Rock or held by the firm) to see if it needs updating.

(iv) Auditors should obtain an understanding of the control environment, the entity’s process for identifying and dealing with business risk, information systems, control activities and monitoring of controls.

(v) Risks should be assessed at the financial statements level, and at the assertion level, and identify significant risks that require special audit consideration, and risks for which substantive procedures alone do not provide sufficient, appropriate audit evidence.

(vi) Analytical procedures are often used to highlight areas warranting particular audit attention. In the case of Rock, they are likely to focus on inventory which is likely to have a significant effect on profit (there may be slow moving or obsolete inventory that needs to be written down) and on property, plant and equipment which (as a manufacturer and distributor) is likely to be a significant item on the balance sheet.

(vii) Risk assessment will facilitate the determination of materiality and tolerable error
(calculations are normally based on sales, profit and assets) that will be used in determining the sample sizes and in the evaluation of errors.
Wilfykil answered the question on April 12, 2019 at 08:56

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