Section A

Question 1

A) Risks:
1) Mars electronics is a new company for the Asia supplier, there is a high detection risk of
audit because the company is not familiar with the accounting policies, ledger accounts and
balances of transactions.
2) The goods are in transit of two weeks. There will be risk that the inventory payables, cut off
inventory and purchases may not give accurate figure.at the year end only the goods
received Will be included in warehouse and inventory accounts/ balances.
3) There is a high risk that some receivables will be overvalued as the company has concern of
customer creditworthiness. As a result of bonus scheme, receivables will show over valued
or overstated figures. Because it is possible that some customers that sign up for the
contract may not exist
4) There is a high risk that property plant and equipment will be overvalued if it is not in
compliance with IAS 16 rule of plant and property or disclosures may not be made in
financial statements.
5) The company undertakes perpetual inventory system. Inventory may be overstated if the all
perpetual inventory is not timely calculated and adjusted.

B) Responses to risk
1) Auditor response: Mars electronics should ensure the supplier that its team is equipped with
adequate experience and it will get understanding of any material misstatement during the
supply of goods.
2) Response: audit team will require a detail information of Cut off inventory or goods in transit
of supply. It will sim to ensure that cut off is complete and accurate.
3) Response: Customers should be verified by the Audit team, whether they exist or it is a
fraud or employees seeking for high bonuses. It will also ensure valid amounts due to
customers.
4) Response: discussion with the manager that for the undertaking of revaluation of assets as a
whole and the revaluation should be done by the experts.
5) Response: Level of inventory adjustments will be reviewed and completeness of perpetual
inventory will be assured.

C) Example 1: Before commencing the audit work, professional judgment is required

during the external audit; it helps auditor whether the company meets with the IAS
objectives, for example in case of Mars electronics, company revalue the land and
building. Auditor needs to apply the professional judgment here in order to ensure
whether the company meets the IAS 16 revaluation of property, plant and equipment.
 Example 2: Another area to apply professional judgement during the external audit is
ensure the sufficiency and appropriateness of audit evidence. For example, in case of
Mars electronics, auditor will apply professional judgment of if any material
misstatement in the financial statements is done by the manager or employees to get
high bonus, for example making false customer contracts that does not exist.
D) Mars have a skeptical scheme of mobile phones that it is selling to the new audit team
by replacing their old phones. Audit team should not accept the mobile phones and
keep their own phones this will show their professional skepticism.

Question 2
A) Substantive procedures:
1. Trace all unpresented and unrecorded invoices of purchases before the end of current
year. For any unusual amount or unrecorded invoice, explanations will be obtained from
the managers.
2. To calculate the trade payable days for Oxygen Co, compare the payable days with
prior year and obtain any significant differences.
3. To select a sample of invoices from 25 October to 1 st November, perform the trade
payable circularization. Find out any reconciling items between the trade payable
balance and balance confirmed
4. to obtain the supplier statements and reconcile into purchase ledger balances. Also
investigate any reconciling items.
5. receivables ledger should be reviewed to identify any exclusion of postings. To
identify any differences in time such as cash transit should be agreed to post year end
cash receipts in the cash book.
In case if the receivables are not received timely, senior manager should telephone the
customers to claim the cash, for non-Reponses, team should arrange a follow-up
circulation
B) Concept of materiality in audit
Materiality is any information that if is omitted then it can influence the economic
decision of company. That kind of information is stated as material. It is considered
through out the whole audit work, audit planning and audit analytical procedures. The
audit risk is descried by the level of materiality, higher audit risk defines lower
materiality.
It is the basis of audit work to draw the conclusion of his opinion. Misstatement of
material information can be a cause of error (unintentional) or fraud (intentional fraud).
In case of Oxygen Co, purchase ledger has error because the purchases are recorded on
25 October instead of 1st November. This will provide material misstatement in the
financial statements. Receivable of company are also material because of differences in
 the number. This can be a fraudulent activity by the managers or employees to
deliberately show low receivables.
C) The concept of professional skepticism in external audit
It is the questioning mind and attitude of auditor to find the critical assessment of audit
work whether any material misstatement occurs due to error or fraud. Planning and
performing of audit are based on professional skepticism that recognize the
circumstances of whether the material misstatement occurs. ISA 200, requires auditor
to use professional skepticism that aims to enable the ability of audit evidence to
identify the risk of misstatement. There are various stages at which auditor can apply
the professional skepticism. In above case, auditor can have questioning mind and
attitude to the managers about the low receivables and differences in number. Other
areas to apply professional skepticism are:
During the assessment of engagement acceptance
During the obtaining the audit evidence
Performance procedures.

Section B
Question 4
K) deficiencies in sales system
 Handwritten sales invoices: there is risk of overvalued or undervalued number
on the hand written invoice. Amount wrongly written will affect the sales and
revenue figure.
 Inventory is not checked: at the time of order placed by the customer, inventory
available is not counted to check the deficiency or over presence of inventory.
This will increase the risk of inventory run out.
 Unfulfilled orders: as the inventory check is not made, there is risk of high
customer satisfaction due to unfulfilled orders and absence of products at that
time which would impact the company reputation. A regular review of unfulfilled
orders is not made.
 Goods dispatch forms are not matched to sales invoices.

L) System-based approaches

 Use electronic sales invoices, rather handwritten sales invoices. This will reduce the
chances of error and increase accuracy.
 Use check and balance to inventory system, just in time approach, to improve the
customer orders and avoid unfulfilled orders.
 Match the goods dispatch invoices to the sales invoices to confirm the goods and prices.
 Avoid using pre-numbered invoice, it will overstate the sales revenue and increase
chances of customer dissatisfaction due to unfulfilled orders or inventory run out.

Section c
Question 6
Role of external audit in assurance process:
The main role of external auditor is to obtain reasonable assurance for the firms to
assure that the financial statements are free of material statement and they are
prepared according to the accounting framework for each financial statement. External
audit is highly obliged to provide assurance of true and fair value of the company and its
financial results. Reasonable assurance is provided by the external audit that is the high
level of assurance but not the absolute one. To achieve the reasonable assurance,
auditor first needs audit evidence and appropriate information to reduce the risk at the
low level. In conducting the unit work, the auditor is highly concerned with the
reasonable assurance to whether a client’s financial statements are free from material
statement. But the risk will never be nil after reducing the assurance engagement risk.
So, the major role of auditor is to perform assurance and consulting activities that are
designed to evaluate and improve effectiveness of the entity’s governance, internal
control and also risk management process.