CASE STUDY
Aims of this assignment:
This assignment is designed to facilitate your learning of the key skills and knowledge needed when facing a financial report audit of a company, and how to analyse, research and pinpoint facets of the company that require auditing attention.
Case Background
This case analysis relates to the continuous case study, titled Cloud 9, which is featured in Moroney, Campbell & Hamilton (2017), Auditing: a practical approach, 3e, John Wiley & Sons, Australia (textbook). The details of the case study covers key aspects of a financial report audit.
Ron McLellan established his business, McLellan's Shoes, in 1980. Since then he has run his business as a sole trader. Ron keeps records and his wife helps him prepare basic accounting records. As McLellan's Shoes has no outside owners, Ron has never seen the need to have his accounts audited. When Chip Masters from Cloud 9 Inc. expressed an interest in buying McLellan's Shoes in 1995, Ron was asked to provide audited financial reports.
Questions:
Please answer ALL Questions after fully reading the Cloud 9 case study.
1. Cloud 9 is a new client to your firm. Discuss factors that will influence your:
- Client acceptance decision
- Audit planning
- Preliminary risk assessment
- Preliminary materiality calculation
2. Identify FOUR inherent risks that are involved in Cloud 9 and its industry, name the account and audit assertions that would potentially be misstated and give an assessment of "high", "medium" or low in relation to the likelihood and materiality of the risk occurring and justify your assessment. Answer in the following tabular format:
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Inherent risk description
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Accounts affected
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Assertions affected
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Risk assessment (likelihood and materiality)
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1
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2
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3
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4
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3. Review the transcript of meeting with Carla Johnson, the Financial Controller of Cloud 9 (Appendix, Moroney 3e, pp.444-445), identify THREE internal controls that Cloud 9 has in place to stop errors occurring as well as the accounts and assertions covered by those controls and explain how you (as auditors of Cloud 9) will test these controls.
Answer in the following tabular format:
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Internal control description
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Accounts affected
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Assertions affected
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Proposed tests of controls
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1
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2
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3
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Attachment:- Assignment and Appendix.rar