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The document identifies various risks of material misstatement, including overstatement of revenue recognition and misstatement of tax provisions, assessing their inherent risk factors and implications. It discusses risks at the assertion level related to inventory, such as existence and valuation, and outlines aspects affecting the overall audit strategy for EPS, including business nature and regulatory environment. Additionally, it details the composition of an audit committee and highlights integrity and ethical issues related to an individual named Roz Naidoo.

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leratobaloyi386
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17 views4 pages

test 1

The document identifies various risks of material misstatement, including overstatement of revenue recognition and misstatement of tax provisions, assessing their inherent risk factors and implications. It discusses risks at the assertion level related to inventory, such as existence and valuation, and outlines aspects affecting the overall audit strategy for EPS, including business nature and regulatory environment. Additionally, it details the composition of an audit committee and highlights integrity and ethical issues related to an individual named Roz Naidoo.

Uploaded by

leratobaloyi386
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Test 1

(a) Identified Risk of Material Misstatement and Related Inherent Risk Factor(s):
• Overstatement of Revenue Recognition: This relates to the inherent risk factor of
complex calculations due to the complexity involved in recognizing revenue
accurately.
• Misstatement of Tax Provisions: This is related to the inherent risk factor of
accounting estimates as tax provisions involve significant estimation and judgment.
• Inadequate Disclosure of Contingent Liabilities: This is associated with the inherent
risk factor of accounting policies as the disclosure of contingent liabilities depends
on the application of appropriate accounting policies
• as the disclosure of contingent liabilities depends on the application of appropriate
accounting policies.
(b) Assessment of Inherent Risk of Material Misstatement:
• Overstatement of Revenue Recognition: The magnitude is high due to the potential
impact on financial statements, while the likelihood is moderate as it may result
from complex calculations and judgment. Therefore, the assessment places this risk
on the higher end of the spectrum of inherent risk.
• Misstatement of Tax Provisions: The magnitude is moderate as it can impact tax
expenses, and the likelihood is high due to the complexity of estimating tax
provisions. Hence, the assessment positions this risk in the moderate range of
inherent risk.
• Inadequate Disclosure of Contingent Liabilities: The magnitude is moderate as it can
affect the financial position, and the likelihood is low as it may result from
inadequate application of accounting policies. Consequently, the assessment locates
this risk in the moderate range of inherent risk.

Identified Risk of Material Related Inherent Risk


Magnitude Likelihood Assessment
Misstatement Factor(s)

Overstatement of Revenue
Complex calculations High Moderate High
Recognition

Misstatement of Tax Provisions Accounting estimates Moderate High Moderate

Inadequate Disclosure of
Accounting policies Moderate Low Moderate
Contingent Liabilities

2.

Risks of Material Misstatement at Assertion Level


Existence: There is a risk that the reported inventory does not exist, leading to an
overstatement of assets.
Completeness: There is a risk that some inventory is not recorded, leading to an
understatement of liabilities and expenses.
Valuation: There is a risk that inventory is not valued correctly, leading to misstated assets
and cost of goods sold.
Rights and Obligations: There is a risk that the company does not have legal ownership of
the inventory, leading to misstated assets and liabilities.
Presentation and Disclosure: There is a risk that inventory is not properly presented or
disclosed, leading to misinterpretation by users of the financial statements.
These risks are related to the assertions of existence, completeness, valuation, rights and
obligations, and presentation and disclosure.

3.
Aspects Affecting Overall Audit Strategy for EPS
Aspects Affecting Scope
Nature of Business: Understanding the nature of EPS’s business operations is crucial for
determining the scope of the audit. Different industries have varying risk profiles and
regulatory requirements.
Complexity of Transactions: The auditor should consider the complexity of EPS’s
transactions, including revenue recognition, expenses, and financial instruments, as this
complexity can impact the audit scope.
Regulatory Environment: Changes in regulations or compliance requirements can
significantly impact the scope of the audit, necessitating a thorough understanding of
relevant laws and regulations.
Aspects Affecting Timing
Reporting Deadlines: The auditor must consider EPS’s reporting deadlines, such as
statutory filing requirements and expectations of stakeholders, to ensure the audit is
completed in a timely manner.
Availability of Information: Timing is affected by the availability of necessary financial and
non-financial information. Delays in obtaining data can impact the audit timeline.
Resource Constraints: The availability of both EPS’s and the auditor’s resources can affect
the timing of the audit, especially if there are competing priorities.
Aspects Affecting Direction
Risk Assessment: The auditor should consider the results of risk assessment procedures to
determine the direction of the audit strategy, focusing on areas with higher inherent and
control risks.
Materiality: Understanding materiality thresholds guides the direction of the audit strategy,
ensuring that the audit focuses on areas with the greatest potential impact on the financial
statements.

4.

Here’s a breakdown of the typical composition of an audit committee:

Independent Directors: Members should be independent of the company and its


management to ensure objectivity.
Financial Expertise: At least one member should have financial expertise, such as
accounting or financial management experience.
Industry Knowledge: It can be beneficial for members to have industry-specific knowledge
to better understand the company’s operations and risks.
Regulatory Understanding: Familiarity with relevant regulations and accounting standards
is crucial for effective oversight.
Risk Management Skills: Members with risk management experience can contribute to
evaluating the company’s risk profile.

5.

Integrity: Roz Naidoo’s actions compromised her integrity by engaging in unethical


behavior, such as misrepresenting financial information or engaging in fraudulent activities.
Objectivity: Naidoo failed to maintain objectivity by allowing personal bias or conflicts of
interest to influence her professional judgment and decision-making.
Professional Competence and Due Care: Naidoo did not demonstrate the necessary
professional competence and due care in performing her professional duties, leading to
errors or negligence in her work.
Confidentiality: Naidoo breached the principle of confidentiality by disclosing sensitive or
confidential information to unauthorized individuals or entities.

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