Reference no: EM132576886

You are the auditor of M Ltd.. As part of your procedures to understand the entity you ask the CEO, a few questions.

• You are particularly interested in what he has to say about inventory. He admits that this year has been especially difficult, not only due to the lockdown situation but also due to some naïve management decisions made before that period. Despite the business being able to access the wage subsidy he is concerned about whether the company will survive.
• The CEO stated that the purchasing department procured a new range of rings that were overpriced by the supplier and he is unsure if the business will be able to sell them in the current environment. He also admits that the inventory stock take was not well supervised and that they used inexperienced people to count and value the inventory. He ended the conversation in a hushed tone and suggested that you should treat inventory as a low risk item.

Question:

Question 1: Briefly explain the implication of business risk for auditors.

Question 2: What impact do inherent risk and control risk have on the auditors's work?

Question 3: What should the planned detection risk be set at in the audit of M Ltd? What impact will that have on the auditor's work and sample size?

Question 4: Provide three examples of the impact of detection risk on audit effort discussed in the preceding question.

Question 5: When planning the audit strategy for the audit of M Ltd, would you use test of controls or a more substantive approach? Explain your decision.

Question 6: Identify the category of internal control weakness and issue of concern that seems most evident in this scenario.