Pinnacle Manufacturing Case

6. Although you are basically satisfied with the analysis thus far, you are concerned about the

7. List some of the risk areas that can be identified through the auditing process.

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

#3. Inherent Risk Factors; audit planning decisions. Businesses that face extreme competition are susceptible to many inherent risk factors – the measurement of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control. Complex valuation issues and related party transactions are two such factors that would affect audit planning decisions. Valuation issues may lead the audit team to request more evidence, if they choose to accept the audit at all. Risks such as inventory turnover leading to potential misstatements of inventory, costs of goods sold, or obsolescence of inventory may influence the audit firm’s decision to hire outside specialists to assist in the audit. Another inherent risk factor, client business risk (competitive

3.4 Summarise the types of risks that may be involved in assessment in own area of responsibility

Sofitec Computers (“Sofitec” or the “Company”) has engaged our firm to perform an audit of their financial statements for the year ending December 31, 2008. Our audit approach requires that we perform a risk based audit in which the amount of substantive testing (“work”) we perform is contingent on how effective the Company’s internal controls are, the risk of the environment the company is operating in, and the amount of risk the firm is willing to accept for issuing an improper audit opinion (i.e., Audit Risk Formula: Audit Risk = Control Risk x Inherent Risk x Detection Risk).

When performing risk assessment procedures and related activities to obtain an understanding of the client and its environment, the auditor shall obtain an understanding of the following:

17) The risk that the auditor will NOT detect a material misstatement that exists in an assertion is

Review Exhibits 1 and 2; audit memos G-3, and G-4i and audit schedules G-5, G-6 and G-7. Based on your review, answer each of the following questions:

There are four things that an auditor needs to assess prior to performing an audit:

“Keystone Computers & Networks, Inc. (KCN) is a company that sells and installs computer workstations and networking software to business customers. The CPA firm of Adams, Barnes & Co. has audited the financial statements of KCN for the past three years. The case illustrates selective audit planning working papers that were prepared by the staff of Adams, Barnes & Co. for this year’s audit.” I will be listing the order in which I would perform this audit and I will decide if I should select the client and focus on the key audit objectives while applying the audit risk model.

The purpose of this memo is to address the topics of inherent risk, control risk, and detection risk. We will do this by addressing an accounting policy stated in the company’s 10-K report. We will discuss risks associated with the accounting policy, recognize company controls, and test those controls. Substantive analytics and tests of details will follow. Lastly, we will discuss fraud and extended procedures to detect fraud. To end, we will conclude by outlining the main points and emphasizing our audit plan.

During the planning phase of the audit, you met with Pinnacle’s management team and performed other planning activities. You encounter the following situations that you believe may be relevant to the audit:

List the fraud risk factors that the CPA firm might encounter if they accept this audit engagement. Be sure to include a discussion of all items that will probably require special attention during the audit. For each of these fraud risk factors, indicate how the auditor should follow up on each potential problem if the engagement is accepted. Use the following format:

The audit risk is generally evaluated based on accounting firm policy and professional judgment. Our firm requires us to assess low audit risk, which is to be 0.05, for the audit client that generally has stable financial condition and achieve steady financial performance. Tiffany is profitable company and has strong financial position: the net income in 2012 and 2011 are $416M and $439M respectively, Net assets in 2012 and 2011 are $2,611M and $2,349M respectively. In addition, the market share of the company in jewelry industry ranks No.1 in US and No. 2 in the world. They could keep their position continuously due to brand power and valuable employees. Therefore, we determined our overall audit risk to be 0.05.