Question

Your firm has been appointed for the first time to carry out the audit of ZZZ Construction, a small construction firm in Muscat, for the year ending December 31, 2019. Sarooj Construction has been in operations for the last five years. It was doing well on the first two years but competition affected the business and they started to struggle from the third year up to this year, their fifth year in operation. As part of knowing the business, you communicated with their previous auditor. Your communication revealed that previous test of controls done indicated material weakness in the cash receipts from customers and disbursement for expenses. As the business is small, zzz Construction was not able to build stability and has been facing continuous losses since last year. The owner has been trying hard to improve the situation. He hired a manager who has been given wide powers for hiring and firing the staff and make all significant business decisions. The owner is aware that weak financial position will prevent the company from obtaining financial assistance from banks especially now that they need it. Furthermore, the owner is considering creating an internal audit department to improve their internal control. The owner expects to receive a report on weaknesses on the design and implementation of internal controls on top of the usual audit of financial statements.
Required: Discuss matters that you would consider in developing the audit strategy for ZZZ Construction.
Write the answers by using computers and should be equal or more than 300 words.

Answer 1

Matters that would considered in developing the audit strategy for ZZZ Construction

Knowledge of the Business

· General economic factors and industry conditions affecting the entity’s business.

· Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit.

.The general level of competence of management.

Understanding the Accounting and Internal Control Systems

· The accounting policies adopted by the entity and changes in those policies.

· The effect of new accounting or auditing pronouncements.

.The auditor’s cumulative knowledge of the accounting and internal control systems and the relative emphasis expected to be placed on tests of control and substantive procedures

Risk and Materiality

· The expected assessments of inherent and control risks and the identification of significant audit areas.

· The setting of materiality levels for audit purposes.

· The possibility of material misstatement, including the experience of past periods, or fraud.

.The identification of complex accounting areas including those involving accounting estimates

Nature, Timing and Extent of Procedures

· Possible change of emphasis on specific audit areas.

· The effect of information technology on the audit.

· The work of internal auditing and its expected effect on external audit procedures.

Coordination, Direction, Supervision and Review

· The involvement of other auditors in the audit of components, for example, subsidiaries, branches and divisions.

· The involvement of experts.

· The number of locations.

.Staffing requirements

Other Matters

· The possibility that the going concern assumption may be subject to question.

· Conditions requiring special attention, such as the existence of related parties.

· The terms of the engagement and any statutory responsibilities.

· The nature and timing of reports or other communication with the entity that are expected under the engagement.