Reference no: EM133150177
Question - Samuel is the audit partner in charge of the audit of Foundation Stone Limited (FS), a client in road and bridge construction. This year is the fifth year of audit. Prior audit results were satisfactory. During this year, Samuel notices the following instances in FS.
(1) The old accounting system was replaced by a new one. The transition was smooth but occasionally some exceptions are found in the new system.
(2) The bonus element in employee compensation contracts was increased from 4% to 6% of reported net profit after tax. The draft financial statements of FS show a 10% increase in net profit.
(3) Stephen succeeded Ferdinand as the chairman of the audit committee. He is very knowledgeable in the industry and has a good reputation.
(4) To expand its business, FS plans to obtain a bank loan in the coming year by furnishing the audited financial statements of the current year.
(5) FS set up an internal control department headed by an experienced accountant. Substantial internal checking under a rigorous programme was done by the department.
Required - For each of the above events, discuss the likely impact on fraud risk and / or possible material misstatements in financial statements and the auditor's work.
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