MALAWI COLLEGE OF ACCOUNTANCY

SCHOOL OF COMMERCE
AUDIT AND ASSURANCE (AA) – ASSIGNMENT Due Date 11.12.2021

Q1-

ISA 315 Identifying and assessing the risks of material misstatement through understanding
the entity and its environment says that the auditor shall identify and assess the risks of
material misstatement at the financial statement level and at the assertion level for classes of
transactions, account balances and disclosures. As part of the risk assessment, the auditor
shall determine whether any of the risks are ‘significant risks’.

Required

a) Define a ‘significant risk’ and list six factors which could indicate that a risk might be
significant. (4 marks)

Daniel Co, a limited liability company, has traditionally specialised in the manufacture and
wholesaling of lady’s shoes to retailers. The shoes are manufactured for lady’s fashion
retailers, who generally also sell luxury lady’s clothes and accessories. You have been
assigned as audit senior for the year ended 31 December 20X1 and have established the
following at a recent planning visit.

In January 20X1, the company expanded into retailing and opened a shop selling shoes to
the general public. The store was an instant success and the company rushed through the
purchase of three additional stores before the end of May 20X1. These opened in June 20X1
and have also been well received. Customers can pay by cash, debit card or credit card in
all stores.

In order to accommodate the retailing activities, Daniel recently upgraded its computerised
accounting system. The new system uses a central computer at the company’s head office
which is linked to computers at its warehouses and retail outlets. The software includes a
bespoke inventory control system.

The new retail operations are expected to account for 15% of revenue for the year to 30
December 20X1 despite only being open for part of the year. However, as a result of the
expansion, the company took out a significant loan secured against two of the stores and
funded the remainder of the expansion out of working capital and by extending its overdraft
facility.

Due to the increased volume of business and additional interest payments, the company is
now trading at its overdraft facility limit. The board are seeking to increase the overdraft
facility further.
Required

b) Identify audit risks arising at the planning stage of the Daniel Co audit and for each
risk identified explain why it is a risk. (9 marks)
c) For the risks identified above describe possible audit work that could be performed in
response to those risks. (10 marks)

On a later visit to Daniel, you discover that the retail stores have been offering a three
month return period on all shoes. Customers are entitled to a refund or can exchange
the shoes. Management at Daniel have said they will estimate the figure for the
returns relating to 20X1 sales expected between 1 January 20X2 and 31 March 20X2
(inclusive). They will then make a provision for it in the financial statements for the year
ended 31 December 20X1.
The provision is likely to be material.

There is expected to be considerable time pressure on the audit this year because
the board want to get it ‘out of the way’ by the middle of February 20X2 so they can
focus on operational issues.

Required

d) Define an auditor’s point estimate and explain how the auditors of Daniel could
formulate and use a point estimate to gain evidence over the provision for shoe
returns. (4 marks)
e) Describe THREE other possible audit procedures you could carry out in respect of the
provision. (3 marks)