Question

You have been assigned to the audit or Grain Crops Ltd (Grain Crops), a company that produces wheat, flour, yeast and other baker products. As with many other businesses, Grain Crops has been finding it extremely difficult to recruit and retain skilled factory staff. As a result, Grain Crops decided that staff in the most difficult-to-retain award categories will be rewarded with annual bonuses. These are calculated using a relatively complex formula that takes into account the employee’s length of service, award rate, seniority and estimated contribution to profit.

1. Identify the key account at risk of misstatement and the two key audit assertions at risK
2. Outline the audit procedures you would perform to gather sufficient appropriate audit evidence on each assertion.

Answer 1

a) Identify the key account at risk of misstatement and the two key audit assertions at risk

The auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis for identifying and assessing the risks of material misstatement, whether due to error or fraud, and designing further audit procedures.

the following risk assessment procedures:

1. Obtaining an understanding of the company and its environment.
2. Obtaining an understanding of internal control over financial reporting
3. Considering information from the client acceptance and retention evaluation, audit planning activities, past audits, and other engagements performed for the company
4. Performing analytical procedures
5. Conducting a discussion among engagement team members regarding the risks of material misstatement

6. Inquiring of the audit committee, management, and others within the company about the risks of material misstatement

The auditor should design and implement overall responses to address the assessed risks of material misstatement as follows:

1. Making appropriate assignments of significant engagement responsibilities. The knowledge, skill, and ability of engagement team members with significant engagement responsibilities should be commensurate with the assessed risks of material misstatement.
2. Providing the extent of supervision that is appropriate for the circumstances, including, in particular, the assessed risks of material misstatement.

b) Outline the audit procedures you would perform to gather sufficient appropriate audit evidence on each assertion.

The auditor should design and perform audit procedures in a manner that addresses the assessed risks of material misstatement for each relevant assertion of each significant account and disclosure.

In designing the audit procedures to be performed, the auditor should:

1. Obtain more persuasive audit evidence the higher the auditor's assessment of risk;
2. Take into account the types of potential misstatements that could result from the identified risks and the likelihood and magnitude of potential misstatement;
3. In an integrated audit, design the testing of controls to accomplish the objectives of both audits simultaneously:

1. To obtain sufficient evidence to support the auditor's control risk assessments for purposes of the audit of financial statements; and

2. To obtain sufficient evidence to support the auditor's opinion on internal control over financial reporting as of year-end.

   Note: AS 2201 establishes requirements for tests of controls in the audit of internal control over financial reporting.

The audit procedures performed in response to the assessed risks of material misstatement can be classified into two categories: tests of controls and substantive procedures.

For significant risks, the auditor should perform substantive procedures, including tests of details, that are specifically responsive to the assessed risks.

The audit procedures that are necessary to address the assessed fraud risks depend upon the types of risks and the relevant assertions that might be affected.