ACCT3708 Week 3


Q1. What is the link between audit risk and engagement risk? How does the audit risk model allow the auditor to deal with these risks in the most cost effective manner?

Q2. Discuss the procedures that should be followed and the matters that should be considered when accepting a new audit engagement

Q3. What would you include in an engagement letter?

Q4. What is the key account and key audit assertion that is affected by each of the following accounting issues:

  • excessive bad debts
  • inventory purchased in foreign currencies,
  • unusual lengthening of the useful lives of assets,
  • capitalisation of research and development expenditure on failed projects
  • complex payroll calculations,
  • customers cancelling sales orders,
  • prepayment of insurance premiums,
  • changes in the fair value of shares held for investment purposes,

Q5. During the course of an audit engagement, an independent must address the concept of materiality. This concept is inherent in the work of the independent auditor and is important for planning, evidence gathering, error evaluation and the audit opinion-forming process.

  1. Briefly describe what is meant by the independent auditor’s concept of materiality
  2. Outline the relevance of materiality during each of the following stages of the audit process:
  3. a. Planning
  4. Evaluation of the results of audit testing c. Forming and audit opinion
  5. Discuss the process of setting the planning materiality for an audit
  6. Explain the concept of performance materiality

Q6. XYZ Ltd is a publicly listed company which has suffered from major sales declines, due to increased foreign completion, and has made a succession of losses over the past three years. During the year, its CEO resigned and was replaced by Chief Operating Officer (COO). The trial balance reveals that sales were $10,000,000 and the company made a loss of $500,000. At what level would you set planning materiality? Justify your answer.

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