Audit – Assignment Case Study Part 1
A. Identify and support six significant audit risks and identify their major or medium risk. Only include identified minor risks if insufficient significant risks. [Marks: 42]
Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statement is materially misstated. Audit risk is assessed within three components: Inherent risks, Control risks and Detection risks.
_MSI is a listed company and therefore is a client subject to specific regulation and the financial information and audit reports are matters of public interest as all the stakeholders of the company may claim an interest in them. The company was listed on the Australian Stock Exchange in 2005 and is subject to inherent risk. As stated in ASA200.38 and ISA 200.29, an inherent risk is “the possibility that a material misstatement could occur in an assertion, either individually or when aggregated with other misstatement, assuming there are no related controls” and a control risk is “the risk that a material misstatement could occur in an assertion, either individually or when aggregated with other misstatements, and not be prevented, detected, or corrected on a timely basis by the entity’s control structure”. Inherent risks and Control risks are referred in the Auditing Standards as a combined assessment of the risk of material misstatement. In this case study, Mining Suppliers Ltd (“MSI”) is a manufacturing company which sells to a wide range of mostly Australian and overseas mining companies for both Australian and overseas operations. From this fact, one inherent risk can be determined. Indeed, the company trades overseas and transactions in foreign currency may not be translated at the correct rate. This can result in an overstatement or understatement of the sales of goods and therefore the Income Statement will not show a clear and fair view of the business. The financial statement assertions will be...