Auditing Case Study Assignment; Assess acceptable audit risk for the audit of BlueCircle Chemicals Ltd

Auditing Case Study Assignment
Guide and Hints
1) Assess acceptable audit risk for the audit of BlueCircle Chemicals Ltd
“Qu: Do I look at all components of the audit risk model in order to this?”
No, you only need to look at one component of the audit risk model, which is audit risk. The
audit risk model is made up of 4 components: Inherent Risk, Control Risk, Planned Detection
Risk and Audit Risk (Acceptable Audit Risk). The terms acceptable audit risk and audit risk
are interchangeable (ie they mean the same thing). Therefore when you look in the textbook
and the notes from Lecture 5, you are only looking at the one component of the audit risk
model.
There are only 3 main factors that we have talked about that affect acceptable audit risk. I
would like you to look for any of these 3 factors in the case study and talk about whether
they increase or decrease acceptable audit risk. You do not need to be talking about inherent
risk, control risk or planned detection risk in this part of the question. You will talk about
inherent risk in 2a) and control risk in 2b).
There may be several risk factors that have similar effects so you can list these risk factors
together (e.g., in one sentence or one paragraph) and then explain their effect on the
acceptable audit risk of the client just once, instead of repeating the same explanation
for each individual risk factor.
2) For the completeness assertion of the purchases account:
a) Assess inherent risk
“Qu: How do I do this?”
Using lecture 5/textbook/tutorial materials, look for any factors that you can find in the
case study that are to do with inherent risk (IR). These factors are likely to be quite generic
and may affect not only the completeness of purchases but a large number of other accounts
as well. I am asking you to look for any these generic factors that would affect inherent risk
(i.e. increase or decrease inherent risk). As a guide you should be able to come up with at
least 9 factors to get full marks.
You can then list them (if you use bullet points please use complete sentences)
eg. The following factors decrease the audit client’s inherent risk of misstatements in the
purchases account because they decrease the incentives/pressures for management to
understate purchases and therefore overstate profit:
• Factor 1 from case study and explanation
• Factor 2 from case study and explanation, etc.
Please consider factors which both decrease and increase inherent risk.
Once you have listed all your factors, please write one sentence to give your overall
assessment of inherent risk (from a choice of low, medium or high). Eg. Overall, the
inherent risk can be assessed as low.
If you have:
• lots of factors which decrease IR and none which increase IR, your assesment = low
• a few factors which decrease IR and a few which increase IR, your asssement = medium,
• lots of factors which increase IR, your assessment = high
b) Assess control risk.
Using lecture 6/textbook/tutorial materials, look for any factors that you can find in the
case study that are to do with control risk. Some factors may be quite generic and may affect
not only the completeness of purchases but a large number of other accounts as well. Other
factors will relate specifically to purchases. As a guide you should be able to come up with
at least 9 factors to get full marks.
Use the same format as part 2a (ie. you can list them using complete sentences and write one
sentence to give your overall assessment of control risk).
3) Ratios
This section of the assignment is to do with the audit of the company as a whole (ie it is
not focusing on the completeness of purchases).
You may answer parts 3a and 3b at the same time for each ratio ie. give explanation
about what has happened with ratio then give 2 follow-up audit procedures for that ratio
before moving on to talk about the next ratio.
a) You need to state whether the ratio has increased/decreased etc. in comparison to both
previous years and the industry average.
Then think why this change may have occurred (think about the accounts that make up
the ratio). What could be causing this ratio to have changed? eg. If you had been asked to
look at the ratio of sales commissions divided by sales and it had increased, would this
suggest that sales staff are being paid higher commissions? (Note, this ratio is not relevant
to the case study).
Then use the textbook/lecture notes/tutorial materials to come up with 2 audit procedures. You
are trying to work out what an auditor would do to check whether or not there is a misstatement
in each ratio. The textbook has excellent examples of audit procedures that are relevant.
Remember that an audit procedure is a written instruction that someone can look at and read and
they would know exactly what to do eg. Test the clerical accuracy of payroll transactions by
adding the payroll journal and tracing postings to the general ledger and payroll master file
(please note, this audit procedure is not one of the answers, it is just to give you an example).
Other Information
• There are many possible factors affecting audit planning & testing but you should focus on
the facts given in the case study when answering the questions. E.g., if the case study does
not mention that the company has a large amount of liabilities, there is no need to discuss
this.
• Get straight to the point – i.e., answer the requirements directly. There is no need to write
an introduction or a summary. You do not need to cover issues that are not directly relevant
to the requirements, e.g., factors about accepting/continuing an engagement or auditor
independence issues. You do not need to explain any general theory about the audit process
(e.g., from audit planning to audit completion). If you find yourself copying definitions and
theories from the textbook etc., then your answer is most likely not specific enough to get
marks. Your answer should focus on “application” – i.e., identify inherent and control risk
factors based on the facts given in the case.
• Ensure your answers correctly address the specific assertion of the account/transaction
class involved. Focus your analysis on the completeness assertion of purchases, not any
other assertion, nor any other account balances/transaction classes.
• Application of audit principles using the facts of the case is more important than giving basic
definitions and general theory without application. Given that there is a word limit, there is
no need to define concepts like the purpose of an audit or provide definitions of the elements
of the audit risk model.
• You do not have to specifically cite Auditing/Accounting standards unless they are directly
relevant to the requirements. There is usually no need to cite any Auditing/Accounting
Standards.
• It is important to cover as many risk factors as you can identify with brief, clear and
accurate explanations, instead of explaining only one or two risk factors in a lot of
detail without mentioning any of the other risk factors.
• Put your assignment into Microsoft Word or similar to check for spelling and grammatical
errors.
• Be very careful about the risk of plagiarism if you ask a classmate to check your case study.
Even if your classmate copied your case study without your knowledge or consent, both of
you are liable under the University’s plagiarism rules.
Marking rubric
• The marking rubric is available on Blackboard in the “assessments” – “Case study” folder.
Format
• There is no set format for this assignment.