Mgt 321 Assignment

7/17/2019 Mgt 321 Assignment

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MGT 321 Assignment

Ishan Sharma (999877085)

Sinan Abdulsattar (100001590)

!ni"ersit# $% T$r$nt$

&r$%' Man%red Shneider



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PART I

T$' Ta#l$r Si%t

*r$m' +ea ,alm

-ate' .$"ember 15/ 201

e' Audit Aetane and Audit &lan

1. Preliminary engagement memo

1.1 Background Information

.u"$ esearh In is a ,anadian ubli $man# (TS4'.I) in the business $% manu%aturing and

r$"iding harmaeutial r$duts and tehn$l$gies &red$minant r$duts s$ld b# .u"$ inlude but are

n$t limited t$' Pennsaid, Pliaglis, Oxoferin and WF10 .u"$ manu%atures r$duts that are s$ld

$rldide The ,$man# as in$r$rated $n August 22/ 1983 under the las $% the &r$"ine $% ntari$

as ,lar6 &harmaeutial ab$rat$ries td The *inanial Statements are reared in a$rdane t$ thealiable re$rting standards as $utlined in the ,anadian Institute $% ,hartered A$untants andb$$6

Sine .u"$ esearh In is a ublil# listed entit#/ %inanial statements must be re$rted using the

Internati$nal *inanial e$rting Standards (I*S) rnst : ;$ung has reentl# indiated that the# ill

be resigning %r$m the audit %$r 201 The deisi$n as made b# .I/ based $n e<ensi"e audit %ees/ as

the b$ard is h$ing t$ redue $"erhead $sts g$ing int$ the %uture

1.2 Objectives

The $b=eti"e $% the audit>lanning mem$ is t$ r$"ide an e%%eti"e and e%%iient %rame$r6 %$r the audit

r$ess/ hih ill then ser"e as an ade?uate t$$l that ill be used t$ er%$rm the audit Als$/ the mem$ill determine audit ris6 and disuss h$ t$ eliminate it as muh as $ssible ne this is $mleted/

lear $mmuniati$n ill be made t$ ensure that b$th arties/ audit$r and lient/ are $n e?ual terms and

understand the e<etati$ns and needs $% the audit$r The audit>lanning mem$randum is reared in

$rder t$ assess $tential ris6s in"$l"ed ith audit $r6/ al$ng ith 6e# issues/ hih are dis$"ered b#

the audit$rs $r br$ught t$ their attenti$n -uring the reliminar# lanning r$ess stage/ an understanding

$% h$ eah deartment %unti$ns as ell as the internal $ntr$l s#stems is $btained

The r$le and res$nsibilit# $% the audit$r is $utlined in the ,anadian Auditing Standards ,AS 200 states

that the $b=eti"es $% an indeendent audit$r is @t$ $btain reas$nable assurane that the %inanial

statements as a h$le are %ree %r$m material misstatement (,&A ,anada/ 201)/ enabling the audit$r t$

e<ress an $ini$n and re$rt $n the %inanial statements and understand hat is re?uired $% the ,AS

1. Acce!ting t"e #ngagement$



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1..1 %nderstanding t"e client

The %irst ste t$ the engagement is t$ understand the business/ the business en"ir$nment and the industr#

itsel% This ill be the %irst time that MGT & audits .u"$ esearh In beause the lient has stated

that the re"i$us auditing %irm is @t$$ e<ensi"e and that the lient is tr#ing t$ @redue $"erheads

.u"$ esearh In seems t$ be unable t$ a%%$rd the audit %ees $% the $ther %irm/ hereas/ the# ere able

t$ a%%$rd it in the ast The audit$rs $% the engagement need t$ e<erise r$%essi$nal s6etiism and ha"e

a ?uesti$ning mind hen $nduting the audit/ sh$uld the# h$$se t$ aet it The# sh$uld n$t assume

that the in%$rmati$n that is resented is %ree %r$m material misstatements and sh$uld be ar# $% $tential

%raudulent ati"ities The %irst ati$n sh$uld be that MGT & as6s %$r ermissi$n t$ $ntat the

redeess$r %irm/ rnst and ;$ung/ due t$ $n%identialit# issues and en?uire ith them MGT & sh$uld

$btain ;Bs $r6ing aers As stated in the ules $% &r$%essi$nal ,$ndut > &, 3021/ @A %irm shall

n$t aet an engagementC ith$ut %irst $mmuniating ith the (redeess$r) %irm and en?uiring

hether there are an# irumstanes C hih might in%luene the deisi$n hether $r n$t t$ aet the

engagement(,&A ntari$/ 201) and 3023/ @A (redeess$r) %irm shall in%$rm the $ssible suess$r i%

suseted %raud $r illegal ati"it# b# the lient ma# ha"e been a %at$r in the lientBs deisi$n t$ a$int a

suess$r(,&A ntari$/ 201) *inall#/ e must als$ %$ll$ ,AS 210/ hih highlights the $nditi$ns

be%$re aetane $% an engagement It mainl# sei%ies that the lient must ha"e %inanial statements

hih ha"e been reared b# the ar$riate %inanial re$rting %rame$r6/ hih is I*S in this ase

1..2 Ot"er &onsiderations

MGT & sh$uld a# seial attenti$n t$ related art# transati$ns/ r$er $ns$lidati$n %$r subsidiaries

and legal $nsiderati$ns %$r $erati$ns $utside ,anada The $b=eti"e $% the audit$rs at MGT & is t$

als$ state 6e# users $% the %inanial statements These users are the man# ne shareh$lders $% .I/ the

,A %$r ta< ur$ses/ and redit$rs

1.' &om!etence

The ne<t ste $% the r$ess is t$ assess MGT &Bs $metene De must ensure that e ha"e the

$metene and the res$ures needed t$ $mlete the audit As stated in &, 2031/ @A member shall

sustain r$%essi$nal $metene b# 6eeing in%$rmed $%/ and $ml#ing ith/ de"el$ments in

r$%essi$nal standards(,&A ntari$/ 201) MGT & must ha"e en$ugh 6n$ledge $% the lient/

en"ir$nment and industr# t$ $mlete the audit su%%iientl# MGT & must ensure that e e"aluate $ur$metene g$ing int$ the engagement/ and the $metene $% an# $tential $m$nent audit$rs sh$uld

e re?uire $ne Dith a r$%essi$nal sta%% $% 37/ e must ensure that the $nes seleted %$r this assignment

$ssess the re?uired $metene MGT & is a small siEed a$unting %irm h$se lients range %r$m

ri"ate $r$rati$ns t$ entrereneursF e need t$ ensure that e ha"e the re?uired $metene/ s6ills/ and

6n$ledge t$ audit a large ubli $man#/ suh as .u"$ esearh In



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1.( Inde!endence

In the ne<t $m$nent/ MGT & must ensure its indeendene As re?uired in the ,anadian Standards

$% ualit# ,$ntr$l/ @The %irm shall establish $liies and r$edures designed t$ r$"ide it ith

reas$nable assurane that the %irm/ its ers$nnel and/ here aliable/ $thers sub=et t$ indeendene

re?uirements (inluding net$r6 %irm ers$nnel) maintain indeendene here re?uired b# rele"ant

ethial re?uirements (,&A ntari$/ 201)

MGT & must ensure that e %$ll$ hat is $utlined in the ,anadian Standards $% ualit# ,$ntr$l

(,S,) and &, In the &,/ it is stated that the %irm @shall be and remain indeendent suh that the

member/ %irm and members $% the %irm shall be and remain %ree $% an# in%luene/ interest $r relati$nshi

hih/ in reset $% the engagement/ imairs the r$%essi$nal =udgment $r $b=eti"it# $% the member/ %irm

$r a member $% the %irm $r hih/ in the "ie $% a reas$nable $bser"er/ $uld imair the r$%essi$nal

=udgment $r $b=eti"it# $% the member/ %irm $r a member $% the %irm (,&A ntari$/ 201) A%ter

identi%#ing $ssible threats t$ indeendene/ MGT & sh$uld then determine hat sa%eguards an assist

us in reduing a $ssible threat t$ indeendene *urtherm$re/ it is strange that .u"$ esearh In

deided t$ sith their audit$rs "er# late int$ the #ear (.$"ember 15/ 201) ith a -eember 31 #ear>

end &$ssible reas$n $uld be that .u"$ esearh In belie"es that MGT & ill harge a l$er audit

%ee/ but ultimatel# MGT & ill r$"ide n$ %ee ?u$te until su%%iient and ar$riate in%$rmati$n is

r$"ided This is $nsistent ith &, 21 and 215 &, 21 states/ @A member $r %irm shall n$t ?u$te a

%ee %$r an# r$%essi$nal engagement unless ade?uate in%$rmati$n has been $btained ab$ut the

engagement (,&A ntari$/ 201) *urther/ &, 215 states that @(A) %irm engaged in the ratie $%

ubli a$unting $r in a related business $r ratie shall n$t $%%er $r engage t$ er%$rm a r$%essi$nal

ser"ie %$r a %ee a#able $nl# here there is a sei%ied determinati$n $r result $% the ser"ie/ $r %$r a %ee

the am$unt $% hih is t$ be %i<ed/ hether as a erentage $r $therise/ b# re%erene t$ the

determinati$n $r result $% the ser"ie (,&A ntari$/ 201) ne this is $mleted and the status $% the

engagement is aeted/ MGT & must r$"ide a ritten engagement letter The engagement letter

$utlines the $b=eti"es and s$e $% the audit It als$ inludes the res$nsibilities $% the audit$r and the

management/ as ell as the ar$riate %inanial re$rting %rame$r6 that ill be used The letter sh$uld

inlude the nature/ the timing $% the $r6 and e<tent $% the $r6 that ill be $mleted The ne<t ste $%

this r$ess is t$ $utline the res$nsibilities $% the audit$rs and management The res$nsibilities $% the

audit$r are as $utlined in ,AS 200 and re"i$usl# stated in this re$rtThe res$nsibilities $%

management inlude rearing the %inanial statements in a$rdane t$ the ar$riate GAA&/ as ell as

maintaining ar$riate internal $ntr$ls t$ redue ris6 as muh as $ssible The %inal ste is t$ test %$r

$tential %raud MGT & an d$ this b# $ntating re"i$us audit$rs and using the $r6ing aers t$

$btain e"idene T$ ensure that e ha"e $btained su%%iient and ar$riate audit e"idene/ MGT &



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an re"ie re"i$us ases $r legal letters regarding %raud in $rder t$ $n%irm $tential laims $r an

$ntat e<ternal seialists that an assist in "aluati$ns $r related art# transati$ns

1.) Ot"er considerations$

&A* )++ , *!ecial &onsiderations

MGT must ta6e the $m$nent audit$rs int$ a$unt as this $uld be a gr$u audit .I is a ,anadian

$man# but it has $%%ies and subsidiaries ar$und the $rld/ $ne $% hih is in ur$e MGT sh$uld

ha"e the $metene and the res$ures t$ $mlete the audit in its l$al area $% T$r$nt$/ but ma# n$t ha"e

the aabilities t$ audit its $ther subsidiaries that are l$ated $utside ,anada/ there%$re a $m$nent

audit$r ma# be re?uired The gr$u engagement artner ill be res$nsible %$r the direti$n/ suer"isi$n/

and er%$rmane $% the engagement team and the adherene ith r$%essi$nal standards The gr$u

engagement artner is res$nsible %$r setting materialit#/ s$e/ timing $% the audit/ as ell as e"aluating

$m$nent audit$rsB $metene and re"ieing their $r6ing aers

1.- ateriality

A ruial art $% the audit is the assessment $% materialit# A$rding t$ ,AS 320/ misstatements and

$missi$ns are $nsidered t$ be material i% the# indi"iduall# $r =$intl# an reas$nabl# in%luene the

deisi$ns $% a user This is im$rtant beause it determines the e<tent $% the audit testing. There e<ists an

in"erse relati$nshi beteen materialit# and audit ris6 There%$re/ the higher the materialit#/ the m$re

testing is neessar# t$ $llet su%%iient and ar$riate audit e"idene/ in $rder t$ minimiEe audit ris6

The %irst ste is t$ determine h$ e<atl# $nstitute the users $% the %inanial statements .u"$ esearh

In is a ubli $man#/ and this means that the shareh$lders are the users and are m$st a%%eted b# the

%inanial statements ther users an be the lients and ust$mers h$ deend $n the antid$tes and

mediine hih .u"$ r$dues The# $uld de%initel# ant t$ 6n$ the %inanial $siti$n $% .u"$ and

ant the assurane that .u"$ is a g$ing $nern and ill n$t g$ ban6rut Materialit# is based u$n

r$%essi$nal =udgment $% the audit$r and this usuall# in"$l"es ?uantitati"e as ell as ?ualitati"e anal#sis

$% data uantitati"e anal#sis means that a sei%i standard is set based $n %inanial statement "alues $%

in$me ta< e<ense/ l$ng>term %inanial liabilities $r gr$ss r$%it The standard/ hih is set/ is mainl#

based u$n sei%i riteria $% ?ualitati"e anal#sis

The %irst $ne deals ith unusual $r large hanges in assets/ liabilities $r shareh$lders e?uit# The main

a$unting de%initi$n is that Assets H iabilities Shareh$lders ?uit# MGT & must ensure that the

inreases $r dereases are $nsistent and auratel# re%leted in the %inanial statements This is im$rtant

beause it greatl# a%%ets the materialit# T$ illustrate/ assume that there is a signi%iant inrease in

liabilities/ suh as a l$ng>term n$te a#able/ hile there is a small inrease in assets This ill ause the

a$unts t$ imbalane and reate a $tential ris6 $% a material misstatement



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The se$nd riteria deals ith sei%i a$unts hih are 6e# t$ the shareh$lders $% the business ne $%

the m$st im$rtant measures $% a business is .et In$me The shareh$lders are "er# interested in the .et

In$me beause it a%%ets their di"idends as ell as the earnings er share An$ther im$rtant %at$r is the

li?uidit# and s$l"en# $% .u"$ esearh In/ as $tential in"est$rs are an<i$us t$ see i% .u"$ esearh

In is able t$ a# their liabilities As a mediine researh $man#/ there is a great deal $% m$ne# that is

in"ested in researh t$ %ind ures In the mar6et/ these ures an s$metimes be suess%ul $r s$metimes

%ail MGT & must be "er# auti$us and must maintain r$%essi$nal s6etiism in $rder t$ be able t$

r$"ide a r$%essi$nal $ini$n $n the %inanial statements As seen in <hibit 1/ there as a 35387J

derease in the debt t$ e?uit# rati$ $mared t$ last #ear This indiates that .u"$ is m$re %inaniall#

stable beause the# are $nsistent in a#ing $%% their debts/ hih has a $siti"e imat $n the image $%

the business t$ the users

The third riteria deals ith related art# transati$ns .u"$ esearh In $ns 3 subsidiaries/ all $%hih are in the health>related industr# As stated in the r$"ided %inanial statements/ there are n$ related

art# transati$ns e<et %$r 6e# management $mensati$n There%$re/ the ris6 $% %raudulent related

art# transati$ns is l$/ and this l$ers the am$unt $% testing neessar# and ma6es it easier t$ determine

materialit#

*raudulent ati"ities are the %$urth riteria As stated ab$"e/ MGT & an $ntat seialists t$ assist in

l$ating %raudulent ati"ities It is n$t g$$d that .u"$ re$rted a .et $ss this #ear !tiliEing r$%essi$nal

s6etiism/ it an be seen that management at .u"$ might be temted t$ hange earning %igures/ $"erstate

assets $r e"en understate liabilities ,$nsiderable am$unt $% testing sh$uld be d$ne t$ ensure r$%essi$nal

$metene $% $r6

2.+ Risk

The $b=eti"e $% an audit$r is t$ $btain a high degree $% assurane in the %inanial statements/ as ell as t$

gather su%%iient and ar$riate e"idene t$ redue audit ris6 as muh as $ssible A n$te t$ menti$n is

that it is n$t $ssible t$ r$due 0J ris6 and 100J assurane beause abs$lute assurane is $stl# and

time $nsuming/ as ell as in%initel# imr$bable t$ ahie"e There%$re/ audit$rs are $bliged t$ er%$rm

reas$nable assurane is6 is di"ided int$ three main ateg$ries' inherent ris6/ $ntr$l ris6 and deteti$n

ris6

.u"$ ill be regarded as a high>ris6 audit due t$ its in"$l"ement in the r$duti$n $% di"erse r$duts

and tehn$l$gies Als$/ the# ha"e se"eral am$rtiEati$n e<enses/ researh e<enses/ and imairment

issues *inall#/ the# re$gniEe re"enue %r$m di%%erent l$ati$ns and ha"e di%%erent streams suh as

r$#alties/ hih are related t$ their sales $% &ennsaid sales ith $riE$n/ hih $mliates this audit



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There%$re/ e ha"e high $ntr$l ris6 and high inherent ris6/ hih ma6es this a high>ris6 audit +el$ are

the di%%erent ris6s that are ass$iated ith .I

2.1 In"erent Risk

This 6ind $% ris6 is de%ined as the ris6 $% material misstatements $urring %r$m reas$ns $ther than the

%ailure $% $ntr$ls .u"$ esearh In is a ubli $man# and its %inanial statements reared b#

management ha"e users that inlude shareh$lders/ $tential in"est$rs as ell as anal#sts *r$m a neutral

stand$int/ this might $tentiall# reate a bias %r$m management t$ards stating higher earnings and

re$rting m$re suess%ul results in $rder t$ imress the users $% the %inanial statement This reates

inherent ris6 beause the ris6 $% a misstatement haening in the %irst lae is higher *urtherm$re/ this is

the %irst time auditing .u"$ %$r MGT & and this %urther inreases inherent ris6 beause the# d$ n$t

ha"e a re"i$us e<eriene in auditing this lient Als$/ $nsidering the $mle<it# $% the business

industr#/ it an be seen that $mle< transati$ns in"$l"ing harmaeutial drugs ma# be inherentl# ris6#

An additi$n t$ this/ .u"$ esearh In als$ has 3 di%%erent subsidiaries/ hih are l$ated in di%%erent

$untries This has an e%%et $n inherent ris6 beause it ill re?uire MGT & t$ reah $ut t$ $ther

audit$rs $% the di%%erent subsidiaries t$ gain su%%iient and ar$riate e"idene %$r this audit In this

industr#/ usuall#/ there are man# litigati$n issues/ hih arise %r$m atents/ researh/ et This usuall#

leads t$ $ntingent liabilities/ hih are hard t$ measure and an ha"e %ault# assumti$ns As a

harmaeutial $man#/ .u"$ has t$ %$ll$ strit g$"ernment las/ hih man# $% the times an lead t$

litigati$n i% the# are n$t %$ll$ed This an s$metimes be tri6# beause liensing %ees and $llab$rati$n

agreements $mliate re"enue transati$ns and e<enses .u"$ esearh enters agreements %$r r$dutde"el$ment/ liensing/ sul# and distributi$ns $% its $mmerial r$duts These 6inds $% agreements

an lead t$ $mliati$ns due t$ di%%erent a#s $% re"enue re$gniti$nF .u"$ esearh re$rted re"enue

%r$m di%%erent ateg$ries &r$dut sales/ $#alties/ esearh and $ther $ntrat re"enue/ iensing %ees

In this ase re"enues an be $ntingent beause the agreements made ha"e ertain $nditi$ns/ s$ hen all

$nditi$ns are met re"enue is re$gniEed

Inherent ris6 is high due t$ .u"$Bs business di"ersi%iati$n The# are ar$"ed t$ sell &ennsaid in man#

$untries/ &liaglis in m$st estern $untries and T ath in the ur$ean mar6et *urtherm$re/ .u"$

esearh In has t$ main business units/ hih are @Tehn$l$g# and T$ial &r$dut S$luti$ns and

@Immun$l$g# Gr$u This als$ inreases inherent ris6 due t$ the raid de"el$ment in tehn$l$g# that

might s$metimes lea"e $manies ith $bs$lete tehn$l$g#/ researh and de"el$ment as ell as

imairments due t$ trademar6s and atents



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The management $% .u"$ esearh is $rried ab$ut their high reliane $n e<ternal %unding This is due

the the %at that the# are n$t able t$ %und themsel"es ith the re"enue the# urrentl# generate This

inreases ris6 due t$ the need t$ re$rt health# %igures t$ generate m$re %unding and l$ans in $rder t$

$ntinue $erati$ns

This $man# $erates internati$nall#/ and this %$res it t$ deal ith redit ris6 due t$ its gl$bal lient

base and %$reign transati$ns These dealings inrease issues %$r a$unts reei"ables $% the business

There is l$ ris6 %r$m this industr# beause .u"$ esearh sells its r$duts t$ $r$rati$ns/ n$t t$

regular ust$mers An issue $% redit ris6 an arise here is i% the $r$rati$ns bu# %r$m .u"$ using redit

and n$t ash $r ash e?ui"alents There an be higher inherent ris6 due t$ estimates %$r the a$unt

reei"able suh as aging $% reei"ables This an ause disreanies beteen a$unts reei"able and

bad debt $r un$lletible bad debt e<ense

2.2 &ontrol Risk This ris6 arises hen a $man#Bs internal $ntr$ls are n$t str$ng en$ugh t$ re"ent material

misstatements b# eml$#ees .u"$ esearh is a ublil# traded $man#F there%$re it must $ml# ith

the aliable %inanial re$rting %rame$r6/ hih in this ase $uld be I*S Sine this is a %irst time

audit %$r MGT & t$ .u"$ esearh/ the audit$rs must $btain a th$r$ugh understanding $% the 6e#

$ntr$ls used b# their lient This is d$ne b# administering tests/ hih assess the reliabilit# and

e%%iien# $% urrent internal $ntr$ls The assessment $% the e%%iien# $% the $man#Bs $erati$ns and

reliabilit# $% the %inanial statements an be d$ne thr$ugh an interim audit ne that is $mleted/

audit$rs must he6 the reliabilit# $% the internal $ntr$ls using a test $% $ntr$ls As a ubli $man#/ .u"$ is $bligated t$ ha"e their internal $ntr$ls assessed e"er# three #ears/ and the last interim internal

$ntr$l test as er%$rmed in t$ber Testing the e%%eti"eness $% design/ imlementati$n and

maintenane $% internal $ntr$ls b# management t$ address identi%ied ris6s is a 6e# r$edure In additi$n

t$ this/ MGT & ill test the sa%eguards $% ust$mer in%$rmati$n and transati$ns in $rder t$ ensure that

su%%iient $ntr$ls are in lae t$ r$tet assets and internal data .u"$ esearh has established internal

$ntr$ls sine it as %$unded in 1983 This imlies that the# sh$uld ha"e better er%$rming internal

$ntr$ls due t$ m$re e<eriene and time/ and this sh$uld %urther l$er $ntr$l ris6 $e"er/ due t$ the

ad"anement in tehn$l$g#/ eseiall# in the %ield $% mediine/ .u"$ esearh might ha"e an $utdated

s#stem/ hih needs t$ be reneed/ thus inreasing $ntr$l ris6 *urtherm$re/ .u"$ esearh als$ has

subsidiaries ar$und the $rld/ and man# l$ati$ns $rldide a"ing man# l$ati$ns and $%%ies a%%ets

$ntr$l ris6 due t$ the br$adness $% $erati$ns and the ass$iated greater ris6 $% err$rs There ma# be an

issue ith a$unts reei"able due t$ .u"$ esearhBs $rldide in"$l"ement The# need t$ assess the

$lletabilit# $% a$unts %r$m all ar$und the $rld *urtherm$re/ .u"$ esearh might $nsider hedge



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a$unting and deri"ati"es in $rder t$ $mbat %$reign urren# ris6 +# h$$sing n$t t$ hedge/ this

inreases urren# "$latilit# ris6 and redues %uture bene%its %r$m hedging

2. /etection risk

This 6ind $% ris6 haens hen there is %ailure in re$gniEing a material misstatement Inherent and

,$ntr$l ris6 ann$t be altered b# the audit$r/ but deteti$n ris6 an As stated earlier/ it is n$t %easible $r

$ssible t$ attain 0J ris6 beause $% the %at that the audit ill be $stlier and m$re time $nsuming t$

the lient -ue t$ this %at/ audit$rs need t$ selet samle siEes t$ redue the am$unt $% testing t$ a

manageable le"el/ hile still maintaining a high degree $% assurane This is d$ne b# reduing samling

and n$n>samling ris6 t$ a l$ le"el b# utiliEing r$%essi$nal =udgment and seleting ade?uate samles

*at$rs suh as inaurate assumti$ns and e"idene inrease deteti$n ris6/ hih is de%ined as the ris6

$% n$t being able t$ detet a material misstatement in the %inanial statements

-eteti$n ris6 an be l$ered thr$ugh a substanti"e auditing ar$ah/ here the audit$r attemts t$ %indmaterial misstatements The substanti"e testing usuall# stems %r$m main asserti$nsF $mleteness/

e<istene/ "aluati$n/ all$ati$n/ e<istene and resentati$n The $b=eti"e is t$ l$er deteti$n ris6 t$ a

le"el as l$ as $ssible/ due t$ the high inherent and $ntr$l ris6 *urtherm$re/ MGT & sh$uld attemt

t$ derease the samling ris6 b# i6ing a $marable and e%%eti"e samle

2.' Business risks

2.'.1 0iuidity risk

.u"$ researh %aes a min$r li?uidit# ris6 due t$ the industr# the# are in As a medial researh $man#/

s$me arts $% .u"$Bs sales are aid b# redit There%$re/ there is a min$r issue $% the $ssibilit# $% n$tretrie"ing the %ull am$unt the# are $ed Als$/ as a medial researh and harmaeutial $man#/ .u"$

has high researh e<enses/ hih are usuall# aid b# redit$rs The issue here is that .u"$ has t$ a#

ba6 hat the# $e The# ha"e made a timeline regarding hen t$ a# the am$unts and %$r 2015/ the#

must a# K377/000 K51/000 $% this am$unt are interest a#ments that are set at 155J As suh/ .u"$ is

under a tight $nstraint t$ a# these am$unts gi"en the %at that must a# the interest a#ments e"en i%

the# a# earl# due t$ the @rea#ment enalt# harge

2.'.2 raud risk

.u"$ researh is under a tight $nstraint due t$ their researh di"isi$n The# must sh$ that the# are

suess%ul %inding ne ures using their researh %und/ hih is ba6ed b# redit$rs .u"$ has an

inenti"e t$ sh$ that the researh %unds are used e%%iientl# and are generating results There%$re the#

ha"e an inenti"e t$ sh$ @themsel"es in the best $ssible light

2.( Audit A!!roac"

In $rder t$ address the ris6s $% material misstatements/ the audit$rs at MGT & must %$ll$ the



10

%rame$r6 set $ut b# their audit ar$ah The# must %irst address the high>le"el $ntr$l ris6 and inherent

ris6 hih urrentl# e<ists b# using a substanti"e ar$ah t$ l$er deteti$n ris6 t$ an aetable le"el

.u"$ esearh has high inherent ris6 and high $ntr$l ris6/ hih ill re?uire the usage $% an e<tensi"e

substanti"e ar$ah t$ l$er deteti$n ris6 In additi$n t$ the substanti"e testing/ MGT & sh$uld runa test $% $ntr$ls in $rder t$ derease deteti$n ris6 in the ase here the substanti"e testing %ails t$

redue the ris6 t$ an aetable le"el I% b$th tests are d$ne/ this ill be$me a $mbined ar$ah/

h$e"er/ a $mbined ar$ah sh$uld $nl# be d$ne hen the audit$rs at MGT & ann$t rel# $n the

internal $ntr$ls These t$ tests are ritial t$ the suess $% this audit beause the urrent internal

$ntr$ls need t$ be regularl# assessed t$ maintain aura# and e%%iien#

-ue t$ the ea6 $ntr$l en"ir$nment/ MGT & ill ha"e t$ $ndut m$re substanti"e testing in $rder t$

$btain su%%iient and ar$riate e"idene %$r this audit <tra attenti$n sh$uld be laed $n the %$ll$ing

a$unts'

2.(.1 Accounts receivable

A$unts reei"able is sub=et t$ ris6 due t$ .u"$ esearhBs internati$nal business The a$unts

reei"able is a%%eted b# the di%%erent ris6s $% $erating in eah sei%i $untr# This reates ris6 beause

.u"$ esearh is e<$sed t$ redit l$sses/ hih arises %r$m sales t$ ust$mers in %$reign $untries -ue

t$ the internati$nal business en"ir$nment/ in$me ill usuall# be re$rded %r$m a$unts reei"able and

n$t straight ash It ma# be di%%iult %$r internati$nal $lletabilit# and inreases inherent ris6 *$r $ntr$l

ris6/ MGT & sh$uld ensure there are r$er $ntr$ls t$ ensure aurate re$rding $% a$unts

reei"able I% there arenBt su%%iient internal $ntr$ls %$r this segment/ a $mbined ar$ah/ $%

substanti"e testing and test $% $ntr$ls sh$uld be laed

2.(.2 Inventory

In"ent$r# m$re than d$ubled this #ear %r$m 990 t$ 1929 +ut at the same time/ there as a rite d$n/

hih suggests the# are n$t able t$ sell all $% their r$duts Inherent ris6 ill be high i% there is in"ent$r#

imairment Substanti"e testing sh$uld be administered in $rder t$ negate this issue *urtherm$re/

in"ent$r# an be e<ternall# "alued %r$m a third art# in $rder e"aluate in"ent$r# better Audit$rs are n$t

e<erts %$r $unting hemials and it is "er# $stl# and timel# t$ ha"e an audit$r er%$rm these ser"ies/

there%$re ha"ing a team $% e<ternal e<erts e"aluate in"ent$r# an hel the audit$rs $btain m$re su%%iient

and ar$riate e"idene It is als$ im$rtant t$ menti$n that ar$ah .u"$ esearh In re$gniEes the

in"ent$r# l$er $% $st and net realiEable "alue MGT sh$uld als$ test the sa%eguards set in m$ti$n %$r

in"ent$r#

2.(. Revenue

.u"$ esearh has t$ main business units and has re"enue $ming %r$m di%%erent streams There is



11

high inherent ris6 due t$ the di%%erent business agreements/ hih must be $mlied ith in $rder t$ be

re$gniEed as re"enue ,$ntingent re"enues are n$t straight%$rard due t$ the re?uirements that must be

met t$ be re$gniEed/ and this reates e<tra $r6 in $rder t$ determine h$ t$ di"ide re"enue streams

This inreases the hane $% misstatements due t$ the $mle<it# $% transati$ns/ and thus m$re

substanti"e testing sh$uld be administered In additi$n t$ this/ the gl$bal mar6et adds ris6 mainl# %r$m

the %$reign urren# e<hanges The main urrenies/ hih .u"$ esearh $r6s ith/ is the ,anadian

-$llar/ !S d$llar and the ur$/ al$ng ith s$me $ther urrenies It d$es n$t aear that .u"$ hedges

against the ris6/ s$ the# are n$t r$teting themsel"es %r$m urren# %lutuati$ns and this reates ris6

.u"$ esearh is susetible t$ urren# ris6 and this %urther esalates inherent ris6 *r$m an$ther

erseti"e/ $ntr$l ris6 an als$ be a%%eted i% there is n$ segregati$n $% duties There%$re there must be

e%%iient $ntr$ls set in lae/ suh that eml$#ees ann$t re$gniEe $ntingent re"enues i% the# are trul#

n$t re$gniEed #et A test $% $ntr$ls sh$uld be d$ne in $rder t$ ensure this

2.(.' &as" and cas" euivalents

This a$unt must be r$erl# he6ed %$r its e<istene and $nershi The r$edures needed t$ he6

%$r their e<istene $uld be inseti$n as ell as e<ternal $n%irmati$n &$siti"e e<ternal $n%irmati$n

an be d$ne thr$ugh $mmuniati$n ith the ban6/ in $rder t$ ma6e sure that .u"$ has K8/275/000 in

ash and ash e?ui"alents Additi$nall#/ there sh$uld be an inseti$n $% ast transati$ns in $rder t$

ensure the $nershi/ and $mleteness $% the ash e?ui"alents

2.(.( Account !ayable and accrued liabilities

.u"$ esearh In is under tight ressure t$ a# ba6 hat it $es The# ha"e $ntratual $bligati$ns/

urhase $mmitments and $ther $bligati$ns t$ a# the t$tal t$ K120 milli$n The# are under ressure

beause the $bligati$ns must be aid in less than a #ear hile K0 milli$n $% $ntratual $bligati$ns are

due %r$m 201 t$ 2018 *urtherm$re/ the n$tes e<lain that .u"$ esearh d$es n$t generate en$ugh

m$ne# in $rder t$ %und their $n $erati$ns/ and there%$re the# deend largel# $n e<ternal %unding This

reates issues beause it might n$t be able t$ a# $bligati$ns that are due this #ear/ resulting in late

a#ment harges and enalties There is high inherent ris6 due t$ the ris6 $% an intenti$nal misstatement

in $rder t$ sh$ the $man# @in the best $ssible light This might be d$ne in $rder t$ imress redit$rs

and shareh$lders and this leads t$ %raudulent ati"it# ,$ntr$l ris6 is high here as ell/ as there are ea6

internal $ntr$ls t$ st$ this %r$m haening A $ssible s$luti$n is t$ ha"e the ,* and treasurer rehe6 eah $therBs $r6/ rather than ha"e the auth$rit# gi"en t$ $nl# $ne $% these indi"iduals A $mbined

ar$ah here there ill be substanti"e testing as ell as a test $% $ntr$ls is re$mmended

2.(.) Researc" and develo!ment #3!ense

There is high inherent ris6 %$r this t#e $% e<ense due t$ the $mle<it# $% aitaliEing $r e<ensing

researh and de"el$ment *urtherm$re/ researh and de"el$ment is ritial %$r the e<istene $% this



12

$man# beause it deends $n the suess $% reating brea6thr$ughs I% ertain riteria are met/ these

e<enses an be aitaliEed as assets/ s$ are needs t$ be ta6en/ as this imlies a high inherent ris6

Substanti"e tests sh$uld be administered t$ ensure that the aitaliEati$n $r e<ensing $% researh and

de"el$ment is $rretl# d$ne

2.(.- Intangible assets - The "alues that .u"$ esearh alulates %$r intangible assets re?uire

signi%iant estimates and assumti$ns/ b$th $% hih inrease inherent ris6 Management states that these

estimates an imat .u"$Bs %uture results/ meaning the# are ritial %$r the $man# There%$re/ it is the

audit$rBs dut# t$ ensure the aura# $% the estimates and assumti$ns Audit$rs $% MGT & sh$uld use

a substanti"e testing ar$ah in $rder t$ ensure the aura# $% the a$unt *urtherm$re/ a test $%

$ntr$ls sh$uld be d$ne as ell/ due t$ the im$rtane $% this a$unt The strength $% the internal

$ntr$ls related t$ this a$unt must be su%%iient and ade?uate

#3"ibit 1

ati$ anal#sis

ati$ ,urrent ;ear &ast ;ear &erent ,hange eas$ning

,urrent ati$ 887 3008 12891J inrease This is due t$ the

huge inrease in

ash ,urrent

liabilities

$marati"el#

sta#ed similar

The# als$ ha"e a

ne sh$rt term

in"estment

-ebt ati$ 0155 0358 19952J derease iabilities

$marati"el#

sta#ed the same/

the derease in

erentage is due

t$ the huge

inrease in assets

The# als$ aid

m$st $% their



13

urrent

$bligati$ns

-ebt t$ ?uit#

ati$

01702 07725 35387J derease The# aid $%%

m$st $% their

urrent $bligati$ns

%r$m liabilties and

are als$ a#ing $%%

the huge de%iit

hih the# ha"e

,ash t$ T$tal

assets rati$

0755 05837 292J inrease ,ash inreased

%r$m K12/21 t$

K8/275 (in

th$usands $%

d$llars)

3 &O4&0%*IO4

#3"ibit 2

.1 ee 5uotation$

L$b -esriti$n Time re?uired *ee ate T$tal

Audit &lanning 2 ee6s K500ee6 K9000

*ield$r6 (inluding e<ert $ini$n) 2 ee6s K1000ee6 K28000

,$miling data and audit re$rt 2 ee6 K5000ee6 K10/000

6'-7+++

In $rder t$ su$rt .IBs $"erhead reduti$n $b=eti"e/ e ha"e made seial $nser"ati"e arrangements

%$r $ur audit %ees De belie"e that the ab$"e %ee ?u$tati$n K7/000 is a $nser"ati"e am$unt %$r this audit

Sh$uld .I sta# a lient ith us %$r the %$rth$ming #ears/ the audit %ee ill derease as e an

e"entuall# rel# $n $ur $r6 A n$te t$ menti$n is that additi$nal $sts ma# arise thr$ugh$ut the r$ess

due t$ a need %$r an e<ternal e<ert as ell as the res$ures re?uired %$r the $m$nent audit$rs



14

.2 &lient Acce!tance

The %inal deisi$n t$ aet this lient is h$sen b# $ur audit artner $e"er/ in $ur r$%essi$nal

=udgement/ e belie"e that the audit engagement sh$uld be aeted .I is a high> ris6 lients and

re?uires additi$nal $r6/ but/ this gi"es $ur %irm an $$rtunit# t$ e<and $ur $rt%$li$ t$ $manies that

are n$t ri"ate $r run b# entrereneurs A lient suh as this/ in m# $ini$n/ is ritial t$ the l$ng term

suess and e<ansi$n $% MGT &

PART II

PART A

T$' Audit &artner

*r$m' +ea ,alm

e' MinArrels

There are man# imliati$ns $% @m$thballing $n the &r$ert#/ &lant and ?uiment a$unt In the ase

$% MinArrels ,$r/ all use $% the &&: $n a artiular =$b site is susended hen the =$b site is

@m$thballed This reates an unertaint# $% the estimated usage $% the lant and mahiner# %r$m eri$d

t$ eri$d This unertaint# is n$t atured b# the meth$d $% dereiati$n used b# MinArrels ,$r

*urther/ maintenane ser"ies $ntinue t$ be er%$rmed $n the @m$thballed &&:/ hih raises

additi$nal maintenane e<ense related t$ the asset/ e"en hile the asset is n$t generating an# ash %l$s

These imliati$ns reate an issue related t$ the @mathing $net/ hih/ as de%ined under AS&

1000/ is a $net hih @in"$l"es the simultane$us $r $mbined re$gniti$n $% re"enues and e<enses

C %r$m the same transati$ns $r $ther e"ents (,&A ,anada/ 201) The mathing $net imlies that

the e<enses inurred %$r dereiati$n $% an asset sh$uld be mathed ith the ash %l$s that are

generated thr$ugh the use $% the asset in the same eri$d The ratie $% this $net is s6eed ith the

m$thballing $% $erati$ns at mining =$b sites Als$/ there are imliati$ns ass$iated ith the e<istene $%

the assets hih are m$thballed The &&: are m$thballed/ but the# are still listed $n the %inanial

statements/ hih means the# must still e<ist/ be $mlete and the $man# must ha"e $nershi $%

them This reates m$re res$nsibilities %$r us/ as the audit team/ t$ th$r$ughl# assess/ b$th h#siall#

and ith the use substanti"e testingF the e<istene/ $mleteness/ $nershi/ "aluati$n and resentati$n

$% the items in the &&: a$unt *urtherm$re/ there are imliati$ns $% m$thballing $n the "alue $% the

mining &&: $ned b# MinArrels As n$ted/ e$n$mi $nditi$ns determine the deisi$ns $% the %irm t$

m$thball ertain mining $erati$ns Dhen e$n$mi $nditi$ns are ad"erse/ this ma# $se $tential

imairment issues $n the "alue $% &&: Ad"erse e$n$mi $nditi$ns ma# imair the "alue $% these

assets/ reating the ris6 $% $tential misstatements in the a$unt/ i% these imairments are n$t a$unted

%$r ade?uatel#



15

The %at that the %inanial statement audit $% MinArrels is a ne $ne %$r the %irm als$ $ses greater

res$nsibilities us as the audit team T$ $n%irm the $ening balanes $% the a$unts/ e must $ntat

the redeess$r audit %irm De must $mmuniate ith the redeess$r that e ill re?uire their $r6ing

aers $% the audit $n MinArrels/ al$ng ith their %ull $mliane ith $ur audit team De must als$

assess hether the redeess$r %irm an be relied u$n b# $ur audit team/ and $nl# r$eed i% the

redeess$r aears t$ be reliable I% there is n$ redeess$r audit %irm/ e must e<erise greater auti$n

and m$re th$r$ugh testing $% the asserti$ns b# MinArrels in the &&: a$unt

-ereiati$n/ as de%ined in AS& 301/ begins @hen Nthe assetO is a"ailable %$r useF ie hen it is in the

l$ati$n and $nditi$n neessar# %$r it t$ be aable $% $erating in the manner intended b# management

(TP/ 201) Als$/ dereiati$n @d$es n$t st$ hen the asset be$mes idle $r is retired %r$m ati"e use

(TP/ 201) Thus/ hen the assets are m$thballed/ the dereiati$n d$es n$t st$ e"en th$ugh the use $%

the assets has st$ed Als$/ as stated b# AS& 301/ the am$rtiEati$n meth$d %$r &&: eml$#ed b# the

%irm sh$uld re$gniEe am$rtiEati$n @in a rati$nal and s#stemati manner ar$riate t$C its use b# the

enterrise (,&A ,anada/ 201) In the ase $% MinArrels/ the %irm uses the meth$d $% straight>line

dereiati$n Ingrained in the alulati$n $% straight>line dereiati$n is the assumti$n that the asset ill

be used e?uall# $"er the $urse $% its use%ul li%etime $e"er/ in the ase $% MinArrels/ m$thballed

&&: is shut d$n/ ith $nl# essential sa%et# and maintenane $erati$ns le%t running -uring the eri$d

$% m$thballing/ the assets at the =$b site are n$t used and d$ n$t generate an# ash %l$s $r in$me

Thr$ugh this $bser"ati$n/ it an be seen that the straight>line meth$d $% dereiati$n used %$r assets suh

as lant and mahiner# ma# n$t neessaril# be the m$st aurate estimate $% dereiati$n/ as the usage $%

the assets is sub=et t$ the "$latilit# $% e$n$mi $nditi$ns AS& 301 states that the meth$d $%

dereiati$n $% an asset sh$uld be re"ieed $n a regular basis/ ith a list $% signi%iant e"ents hih ma#

trigger the need t$ re"ie the dereiati$n meth$d $% ertain assets ele"ant t$ the ase $% MinArrels

$uld be e"ents hih result in @a hange in the manner in hih the asset is used (,&A ,anada/ 201)

and @rem$"al $% the asset %r$m ser"ie %$r an e<tended eri$d $% time (,&A ,anada/ 201) !sing an

inaurate and unreas$nable estimate $% dereiati$n ma# result in material misstatements in b$th the

in$me statement (related t$ e<enses) and the balane sheet (related t$ the &&: a$unt) In #ears in

hih an asset is n$t being used/ a $tentiall# unreas$nable estimate $% the dereiati$n $% the asset ma#

ause net in$me t$ be l$er/ all$ing MinArrels t$ e%%eti"el# a# less in$me ta<es A m$re aurate

measurement $% dereiati$n $n m$thballed assets ma# be the use $% a "ariable harge meth$d/ hih

re%lets the ser"ie $% an asset $n the basis $% its usage (thr$ugh the am$unt $% mahine h$urs/ et) De/

as the audit team/ must er%$rm sei%i audit r$edures t$ assess that the estimates $% dereiati$n used

b# MinArrels are aurate and reresent m$st reas$nabl# the use $% the assets in the eri$ds in hih

dereiati$n e<ense is inurred



16

There are man# ris6s related t$ the &&: a$unt in general T$ assess the aura# $% the a$unt $%

&&:/ e ill need t$ %irst determine hether the inluded assets $n%$rm t$ the riteria in GAA& As

de%ined in AS& 301/ assets inluded in &&: must meet the %$ll$ing riteria'

(i) are held %$r use in the r$duti$n $r sul# $% g$$ds and ser"ies/ %$r rental t$ $thers/ %$radministrati"e ur$ses $r %$r the de"el$ment/ $nstruti$n/ maintenane $r reair $% $ther

r$ert#/ lant and e?uimentF

(ii) ha"e been a?uired/ $nstruted $r de"el$ed ith the intenti$n $% being used $n a

$ntinuing basisF and

(iii) are n$t intended %$r sale in the $rdinar# $urse $% business (,&A ,anada/ 201)

In determining the aura# $% the &&: a$unt/ e must assess the e<istene/ $mleteness/

$nershi/ "aluati$n and resentati$n $% the assets in the a$unt

The %irst ris6 is the ris6 that the assets siml# d$ n$t e<ist T$ $"er$me this ris6/ e ill ha"e t$ inset

the assets $n the balane sheet This ill re?uire a tri t$ the "ari$us mining $erati$ns and a h#sial

$bser"ati$n $% all the r$ert#/ lant and e?uiment $n the balane sheet As this ma# re?uire signi%iant

%inanial $sts/ e ma# utiliEe $ther %irms in the =urisditi$ns $% the "ari$us mining $erati$ns t$ at as

$ur agents/ and he6 the assets $n $ur behal% Als$/ t$ determine e<istene/ e ill ha"e t$ r$be

d$uments t$ determine hether these assets ere re$rded in the $rret eri$ds rele"ant t$ their

a?uisiti$n and dis$sal

The se$nd ris6 is the ris6 that all the &&: transati$ns are n$t re$rded $n the balane sheet T$

$"er$me this ris6/ e ill ha"e t$ er%$rm audit r$edures t$ determine $mleteness De ill anal#Ee

the ledgers and re$nile the general ledger t$ the subsidiar# ledgers De must als$ anal#Ee an# general

maintenane $r reairs $n the assets/ and e"aluate hether these ere $rretl# re$rded in the ledger $%

the eri$d Als$/ e ill determine hether reairs/ maintenane $r betterments are $rretl# e<ensed $r

aitaliEed in the re$rting eri$d

The third ris6 is the ris6 that MinArrels d$es n$t $n/ ie $ssess all the rights and $bligati$ns/ $% the

assets in the &&: a$unt De ill er%$rm sei%i audit r$edures t$ determine $nershi $% the

assets De ill e<amine the titles t$ determine hih assets are $ned b# MinArrels/ and $mare these

against the n$n>leased assets in the balane sheet Als$/ e ill anal#Ee lease agreements t$ determine

hih assets are leased/ %urther $maring $ur %indings t$ the resentati$n $n the balane sheet *$r

leased assets/ e ill e"aluate hether the leases are resented auratel# as either $erating $r aital



17

leases De ill $mare re$rds $% a#ment/ insurane and r$ert# ta<es t$ the &&: re$rds t$

determine hether the assets are in %at $ned b# MinArrels

The %$urth ris6 is the ris6 that &&: assets are n$t r$erl# "alued (in a$rdane ith GAA&) in the

re$rds $% the $man# As e<lained re"i$usl#/ e ill test t$ see hether aurate and reas$nable

estimates $% dereiati$n ha"e been alied/ and hether these estimates are in a$rdane ith GAA&

De ill als$ anal#Ee re$rds t$ determine hether all dereiati$n has been r$erl# re$rded in the

ledger Als$/ e ill anal#Ee all dis$sals and a?uisiti$ns $% assets and determine i% these ha"e been

auratel# re%leted in the a$unt $% &&: In the mining industr#/ in hih there is a large am$unt $%

natural res$ures/ $tential imairment issues ma# arise under ad"erse e$n$mi $nditi$ns As stated in

AS& 303/ @a l$ng>li"ed asset shall be tested %$r re$"erabilit# hene"er e"ents $r hanges in

irumstanes indiate that its arr#ing am$unt ma# n$t be re$"erable (,&A ,anada/ 201) An e"ent

hih auses @a signi%iant derease in its mar6et rie (,&A ,anada/ 201) $r @a signi%iant ad"erse

hange inC the business limate that $uld a%%et its "alue (,&A ,anada/ 201) $uld eliit a test $%

imairment %$r the l$ng>li"ed asset in ?uesti$n In the ase $% MinArrels/ ad"erse e$n$mi $nditi$ns

ma# be an e"ent hih $uld ause imairment $% assets hih ha"e been m$thballed This is due t$ the

%at that the deisi$n $% m$thballing $mmuniates that the $erati$ns are n$t "iable/ $ssibl# due t$ the

redued demand $% the mineral in ?uesti$n Thus/ e ill need t$ er%$rm audit r$edure t$ ensure that

management has r$erl# re$rded this $tential imairment in the %inanial statements T$ assess the

"alue $% the natural res$ures/ e ma# need t$ utiliEe the e<ertise $% a seialist/ as assessing the "alue

$% natural res$ures is a seial matter and an $nl# be auratel# measured b# a seialist

The %inal ris6 is the ris6 that the a$unt $% &&: has n$t been r$erl# resented/ and re?uired

disl$sures are n$t gi"en T$ $"er$me this ris6/ e ill read %inanial re$rts and a$man#ing n$tes/

and assess hether e"er#thing has been resented in a$rdane ith GAA& *$ll$ing these audit

r$edures/ e an %ailitate the deteti$n $% an# material misstatements in the &&: a$unt/ and the

deteti$n ris6 an be minimiEed

PART B

T$' Audit &artner

*r$m' +ea ,alme' T& ,$r

There are man# internal $ntr$l issues related ith the $erati$ns $% T& ,$r *irstl#/ I $uld li6e t$

$int $ut the issue related t$ the eml$#ment $% tem$rar# sta%% It is desribed that the managers $% T&/

h$ are als$ the $ntr$llers/ hire tem$rar# sta%% %$r t$ sh$rt eri$ds during the #ear In these eri$ds/

the# r$"ide $n>the>=$b training The r$"isi$n $% $n>the>=$b training an reate man# $mliati$ns in



18

$erati$ns .e eml$#ees ma# $mmit mista6es earl# $n in the tem$rar# eml$#ment/ hih ma# g$

unn$tied b# management Assuming ne tem$rar# sta%% is hired during eah $% the t$ eri$ds $% the

#ear/ this an $tentiall# ause a high rate $% mista6es b# ne sta%%/ as there is ne tem$rar# sta%% eah

time the sta%% is hired Thus/ an issue $% internal $ntr$l ma# be the la6 $% ?uali%iati$ns and training $%

the tem$rar# eml$#ees t$ er%$rm the =$bs and ser"ies re?uired b# T& ,$r Als$/ the e<istene $%

tem$rar# sta%% ma# iml# that the tem$rar# sta%% ill n$t be $nerned ith the l$ng term ell>being $%

the business/ and ma# arta6e in the%t/ r$"ided the $nse?uenes $% arehensi$n are e<eeded b# the

utilit# $% esaing arehensi$n

The %irst ea6ness in internal $ntr$l an be $inted $ut hen the ust$mer ser"ie ler6 (,S,) reei"es

the $rder/ $n%irms the $rder and %a<es the sales in"$ie t$ the ust$mer The dut# $% reei"ing the $rder

sh$uld be segregated %r$m the dut# $% rearing the sales in"$ie t$ ahie"e better internal $ntr$l The

reas$n %$r this an be dem$nstrated b# an e<amle Assume that the ,S, reei"es an $rder %$r 100 units

$% the r$dut In the r$ess $% he6ing in"ent$r# and rie thr$ugh the $nline database/ the ,S, n$tes

that the in"ent$r# is in st$6 and the rie is K100 er unit $e"er/ the ,S, has a ers$nal m$ti"ati$n

t$ $mmit %raud and ma6e m$ne# $n the side The ,S, alls the ust$mer/ and e<lains that the

in"ent$r# is in st$6/ and that the rie er unit is K110 Thr$ugh this n$n>segregati$n $% duties/ the ,S,

an %raudulentl# harge m$re m$ne# er unit $% the r$dut/ hide this additi$nal @harge %r$m

management and ut the m$ne# in his $n $6et n the $ther hand/ the ,S, $uld harge less m$ne#

er unit $% r$dut (t$ d$ s$me$ne a %a"$ur) and $"er his tra6s easil#/ as ade?uate $ntr$ls are la6ing

$nerning the sa%eguarding $% assets T$ $"er$me this ea6ness in internal $ntr$l/ the duties $% (a)

reei"ing and $n%irming the $rder ith the ust$mer/ and (b) rearing and %a<ing the sales in"$ie/

sh$uld be segregated As a result $% this segregati$n $% duties/ the t$ searate eml$#ees ill n$t ha"e

$$rtunities t$ de%raud the ust$mer/ unless the# $lluded in the rime/ hih $uld be a rare

$urrene T$ $"er$me the ris6 $% $lluded %raud ith the t$ eml$#ees/ the rearer $% the sales

in"$ie $uld %urther be re?uired t$ get auth$riEati$n %r$m a manager be%$re the issuane $% eah sales

in"$ie

The se$nd ea6ness in internal $ntr$l is the la6 $% sa%eguarding $ntr$ls $% the in"ent$r# *r$m the

in%$rmati$n r$"ided in the te<t/ it an be assumed that there is n$ l$gging s#stem t$ determine h$enters $r e<its the areh$use Als$/ it seems that indi"idual seurit# de"ies are absent %r$m the r$duts

Thus/ the ,S, $uld ha"e eas# aess t$ the in"ent$r#/ and $uld $tentiall# engage in the%t $r %raud

The diret the%t $% in"ent$r# b# the ,S, is %airl# eas# t$ en"isi$n $e"er/ the ,S, $uld als$ engage

in the the%t $% in"ent$r# indiretl#/ hih $uld ha"e the ad"antage $% being m$re disreet This

$$rtunit# an be best illustrated using an e<amle Assume that the ,S, gets an $rder %r$m a %riend/



19

and the# ha"e re"i$usl# lanned $ut a a# t$ steal in"ent$r# %r$m T& ,$r The ust$mer $rders 100

units $% the r$dut/ and the ,S, r$eeds t$ reate the sales in"$ie and %a< it t$ the ust$mer .e<t/ the

,S, al6s $"er t$ the areh$use and selets 150 units $% the r$dut The ,S, then ta6es the 150 units

$"er t$ the shiing deartment The shiing deartment then ta6es the h$le bath $% 150 units and

l$ads it $nt$ the trans$rtati$n "ehile These 150 units arri"e at the ust$merBs address/ and the ,S,/ $n

his $n time/ tra"els t$ the ust$merBs address and ta6es the e<tra 50 units %$r himsel% Thr$ugh this

e<amle/ e an see h$ the ,S, has the $$rtunit# t$ steal g$$ds disreetl# %r$m the areh$use A

res$luti$n t$ this internal $ntr$l ea6ness is t$ intr$due $r imr$"e seurit# measures (h#sial

$ntr$ls) in the areh$use/ here eah unit $% in"ent$r# is a$unted %$r in real>time as it is he6ed $ut

%r$m the areh$use An$ther res$luti$n $uld be t$ hire a searate eml$#ee %$r the areh$use/ t$ h$m

the ,S, $uld r$"ide the sales $rder This eml$#ee $uld then ta6e the sales $rder and selet the

$rret number $% units t$ r$"ide t$ the shiing deartment $e"er/ this res$luti$n $uld $nl# be

e%%eti"e i% the res$luti$n related t$ the %irst ea6ness in internal $ntr$l is imlemented

The third ea6ness in internal $ntr$l is related t$ the shiing deartment The shiing deartment

relies $n the sales in"$ie/ initialed b# the ,S,/ t$ r$eed ith the shiment $% the $rder Thr$ugh this

reliane/ the ,S, ma# ha"e an $$rtunit# t$ engage in the%t $% in"ent$r# *$r e<amle/ the ,S, ma#

r$due a %a6e sales in"$ie/ hih he $uld then initial and r$"ide t$ the shiing deartment The

shiing deartment $uld shi the $rres$nding in"ent$r#/ hih $uld then arri"e at a %a6e address

and be $lleted b# the ,S, This ea6ness in internal $ntr$l an be res$l"ed b#/ as menti$ned earlier/

segregating the duties $% the $rder reei"er and the eml$#ee h$ deals ith the sales in"$ie *urther/

the sales in"$ie sh$uld be signed b# a manager t$ re"ent an# $$rtunities %$r %raud $r the%t Als$/ the

manager sh$uld $bser"e a h#sial $unt $% the in"ent$r# al$ngside the sales in"$ie/ t$ see that the#

math

The %$urth ea6ness in internal $ntr$l is inside the shiing deartment *r$m the in%$rmati$n r$"ided/

it an be assumed that there is n$ in"ent$r# $unt d$ne in the shiing deartment Instead/ the

eml$#ees in the shiing deartment siml# $llet the bath $% in"ent$r# ith the sales in"$ie and

l$ad the h$le bath $nt$ the trans$rtati$n "ehile The la6 $% a $unting s#stem in the shiing

deartment ma# reate $$rtunities %$r eml$#ees t$ thie"e in"ent$r# beteen the areh$use and theshiing deartment/ and be%$re shiing the bath A%ter the the%t/ it $uld be eas# %$r a shiing

eml$#ee t$ esae arehensi$n/ as he $uld siml# blame the missing in"ent$r# as @l$st during

trans$rtati$n A res$luti$n t$ this ea6ness in internal $ntr$l $uld be t$ ha"e t$ $unts $% the

in"ent$r# in the shiing deartment ne $unt $uld be d$ne b# the ler6 h$ reei"es the bath ith

the related sales in"$ie and reares the bath %$r shiing This $unt $uld ensure that the am$unt $%



20

the in"ent$r# being sent $ut ith a sales in"$ie $rres$nds ith the ?uantit# listed $n the sales in"$ie

The se$nd $unt $uld be d$ne a%ter the in"ent$r# has been l$aded $n t$ the tru6/ t$ ensure that the

$rret am$unt $% in"ent$r# is being shied $ut and n$ in"ent$r# as l$st during the r$ess $%

rearing the shiment $e"er/ it sh$uld be n$ted that these in"ent$r# $unts $uld be ?uite time

$nsuming/ as $nse?uentl#/ $st the %irm a substantial am$unt $% m$ne#

The %i%th ea6ness in internal $ntr$l is the %at that the ,S, is ers$nall# res$nsible t$ $ntat the

ust$mer in the ase $% an in$rret address This res$nsibilit#/ gi"en t$ the ,S,/ in the la6 $% an# $%

the $ther res$luti$ns menti$ned ab$"e/ r$"ides the ,S, ith $en $$rtunities t$ esae arehensi$n

$% an# the%t This $$rtunit# %$r the%t an be illustrated using an e<amle Assume that the ,S,

ur$sel# shis the g$$ds t$ the r$ng address/ and later $llets this in"ent$r# and 6ees it Dhen it is

dis$"ered that the g$$ds ere sent t$ the r$ng address/ the $man# then shis an$ther $rder t$ the

udated $rret address Thr$ugh this meth$d/ the ,S, an thie"e in"ent$r# %r$m the $man# The

meth$d hih an be imlemented t$ res$l"e this ea6ness is that the eml$#ee h$ is in harge $%

sending the sales in"$ie t$ the ust$mer/ r$"ided he is searate %r$m the ,S,/ sh$uld $ntat the

ust$mer a%ter %a<ing the sales in"$ie and $n%irm i% the address $n the in"$ie is $rret

The si<th and %inal ea6ness in internal $ntr$l $nerns the res$nsibilit# $% the ,S, t$ $ntat

ust$mers ith $"erdue a$unts ers$nall# Thr$ugh this res$nsibilit#/ the ,S, has the $$rtunit# t$

@$llet the a$unts reei"able/ and instead $% re$rding it in the b$$6s/ ut it in his $n $6et and

rite $%% the a$unt as bad debts e<ense at the end $% the #ear A res$luti$n t$ $"er$me this ea6ness

$uld be t$ %$ll$ u ith all a$unts reei"ables hih are t$ be ritten $%% as bad debts e<ense This$uld r$mt the a$unts reei"ables h$ ha"e alread# aid t$ rel# t$ the %$ll$>u/ stating that the#

ha"e alread# aid/ r$"iding a $# $% the a#ment reeit

These ea6nesses in internal $ntr$l ill signi%iantl# imat the audit lan and ar$ah $% T& ,$r

The audit team shall $mmuniate these ea6nesses in internal $ntr$l t$ management/ s$ that

management ma# imr$"e their internal $ntr$ls The la6 $% ade?uate internal $ntr$l raises the $ntr$l

ris6 $% the entit#/ and thus/ uts the res$nsibilit# $n the audit team t$ er%$rm m$re substanti"e

r$edures t$ ensure $n%idene Sine the internal $ntr$ls $% the $rganiEati$n aear n$t t$ be reliable/

it is m$re e%%eti"e t$ g$ the r$ute $% substanti"e testing and $mit reliane $n $ntr$ls alt$gether These

substanti"e r$edures inlude tests $% indi"idual transati$ns and the a$man#ing re$rds and $ther

substanti"e anal#tial r$edures The m$re it is determined that the entit#Bs $ntr$ls are n$t e%%eti"e/ the

higher am$unt $% substanti"e testing that is neessar# t$ minimiEe audit ris6

PART &

T$' Audit &artner



21

*r$m' +ea ,alm

e' +edr$6 uarries In

The audit $% the in"ent$r# a$unt $% +edr$6 uarries ill re?uire er%$rming audit r$edures hih

enasulate se"eral riteria The riteria hih ill need t$ be assessed hen auditing in"ent$r# are

e<istene/ $mleteness/ $nershi/ "aluati$n/ and resentati$n

The %irst ris6 ass$iated ith auditing the in"ent$r# is the ris6 that the in"ent$r# d$es n$t e<ist T$

$"er$me this ris6/ e ill er%$rm ertain audit r$edures De ill $"ersee the in"ent$r# $unt and

ers$nall# er%$rm in"ent$r# he6s as ell/ t$ ensure that the in"ent$r#/ hih in the ase $% +edr$6/ is

r$6/ d$es in %at e<ist De ill "isit the ?uarr# t$ determine hether the bedr$6 is resent at the

?uarries De ma# need t$ see6 the hel $% a seialist t$ assess the e<istene $% the in"ent$r# at the

?uarr# The $nsiderati$ns and re?uirements $% see6ing the hel $% an e<ternal e<ert ill be disussed

later $n in the mem$randum

The se$nd ris6 is that the in"ent$r# a$unt d$es n$t $ntain all the a"ailable in"ent$r# at the end $% the

#ear T$ $"er$me this ris6/ e ill er%$rm ertain r$edures t$ $mare the asserted am$unt $%

in"ent$r# t$ industr# a"erages/ trends/ et *urther/ e ill assess the in"ent$r# turn$"er rati$/ as ell as

$ther a$unts t$ ensure the $mleteness $% the in"ent$r# a$unt at the re$rting date Als$/ e ill

er%$rm substanti"e tests t$ $mare the urhase and sales $% in"ent$r# be%$re and a%ter the ut>$%% date/

t$ ensure that an# transati$ns ha"e n$t been imr$erl# re$rded in the in$rret re$rting eri$d

The third ris6 is the ris6 that +edr$6 uarries d$es n$t $n/ ie ha"e all the rights and $bligati$ns/ $%

the in"ent$r# listed $n their balane sheet In the ase $% +edr$6 uarries/ the in"ent$r# is siml# the

bedr$6 hih is rem$"ed %r$m the gr$und Thus/ it is reas$nable t$ assume that +edr$6 uarries d$es

in %at ha"e all the rights and $bligati$ns/ and there%$re $nershi/ $% the in"ent$r# in the ?uarr# De ill

er%$rm substanti"e tests t$ assess +edr$6 uarriesB $nershi $% the natural res$ure r$ert#

The %$urth ris6 is the ris6 that the in"ent$r# is "alued imr$erl#/ and n$t in a$rdane ith GAA& In

the ase $% +edr$6 uarries/ this ris6 seems t$ be the highest $$6ing at the inherentl# ris6# nature $%

the business/ it an be seen that a seialistBs assistane $uld be needed in "aluing the in"ent$r# T$

$"er$me this ris6/ e ill l$$6 at the in"ent$r# turn$"er rati$ t$ determine hether in"ent$r# is %l$ing

r$erl# thr$ugh the business De ill als$ $mare the asserted in"ent$r# t$ the asserti$ns $% re"i$us

#ears De ill determine hether an# in"ent$r# is imaired/ and thus/ sh$uld be ritten d$n t$ l$er $%

$st $r net realiEable "alue $e"er/ t$ determine the "alue $% the in"ent$r#/ an e<ternal seialist ill

m$st r$babl# be needed The issues/ re$mmendati$ns and $nsiderati$ns ass$iated ith an e<ternal

seialist ill be e<anded $n later in the mem$randum



22

The %i%th ris6 is the ris6 that in"ent$r# and related a$unts are n$t r$erl# resented $n the %inanial

statements/ and ade?uate disl$sures are n$t r$"ided in the n$tes T$ $"er$me this ris6/ e ill

are%ull# e<amine the %inanial statements/ in?uire $% management ab$ut an# transati$ns related t$

in"ent$r#/ and e"aluate the a$man#ing n$tes t$ determine i% ade?uate disl$sures are r$"ided

T$ establish the e<istene and "aluati$n $% the in"ent$r# at +edr$6 uarries/ e ill need t$ use the

$r6 $% an e<ternal seialist In seti$n 20 $% the ,anadian Auditing Standards (,AS) seti$n/ guidane

is gi"en hen using the $r6 $% an audit$rBs e<ert As ,AS 20 states/ @I% e<ertise in a %ield $ther than

a$unting $r auditing is neessar# t$ $btain su%%iient ar$riate audit e"idene (,&A ,anada/ 201)/

e need t$ determine i% the use $% an audit$rBs e<ert is neessar# In see6ing the use $% an audit$rBs

e<ert/ e ill need t$ determine hether the e<ert is $metent/ aable and $b=eti"e t$ assist the

audit$r in the gathering $% audit e"idene I% the e<ert is urrentl# suess%ull# $r6ing in the %ield %$r

hih the audit e"idene is re?uired/ this $uld deem the e<ert $metent t$ d$ $r6 %$r the audit

re$rt I% the e<ert is unrelated t$ the lient and la6s an# %inanial interest in the lient/ this $uld r$"e

the e<ertBs $b=eti"it# .e<t/ e ill ha"e t$ gain an understanding $% the e<ertBs %ield $% understanding

as it relates t$ the audit De ill determine the @nature/ s$e and $b=eti"es $% the $r6 $% the e<ert %$r

N$urO ur$ses (,&A ,anada/ 201) *$r $ur ur$se/ the seialist is t$ determine hether the in"ent$r#

e<ists in t$talit# and is "alued $rretl# as asserted in the %inanial statements A%ter $btaining an

understanding $% the e<ertBs $r6/ e ill $ntratuall# bind int$ an agreement ith the e<ert This

agreement ill en$mass a ide range $% matters as the# relate t$ the audit These matters are @the

nature/ s$e and $b=eti"es (,&A ,anada/ 201) $% the $r6 $% the seialist/ the @r$les and

res$nsibilities (,&A ,anada/ 201) $% the audit artner and the seialist/ the @nature/ timing and e<tent

$% $mmuniati$n (,&A ,anada/ 201) beteen the audit$r and the seialist/ the %$rm $% the re$rt t$

be r$"ided b# the seialist/ and the re?uirement that the seialist is t$ 6ee $n%identialit# $%

in%$rmati$n *$ll$ing the agreement and the $r6 $% the seialist/ e ill e"aluate the $r6 in

determining hether the $r6 is ade?uate %$r the ur$ses $% the audit De ill need t$ assess hether

the $r6 is rele"ant/ reas$nable and $nsistent ith $ther e"idene %$und during the audit I% the e<ert

deides t$ use an# data t$ base his measurements $n/ e ill assess the @rele"ane/ $mleteness and

aura# (,&A ,anada/ 201) $% the s$ure data De must als$ assess the ris6 $% material misstatements

in the %inanial statements/ $nsidering the signi%iane $% the a$unt ith hih e are dealing ith

The balane $% in"ent$r# and the $rres$nding $st $% g$$ds s$ld a$unt la#s a signi%iant r$le in the

"alue $% the assets/ as ell as the earnings aait# and aabilit# $% a business This %at is rele"ant t$

+edr$6 uarries as the intended user $% the audit re$rt is the ban6



23

The ban6 re?uires the audited %inanial statements t$ assess hether +edr$6 uarries is eligible %$r a

large l$an and m$rtgage In 6n$ledge $% this %at/ management ma# ha"e a bias t$ards misstating their

in"ent$r# a$unt t$ $btain the l$an De assume that management is h$nest and reliable/ h$e"er/ e

must maintain r$%essi$nal s6etiism at all times T$ illustrate a $ssible bias/ assume that the ban6 ill

r$"ide the l$an $n the terms that there has t$ be an asset t$ debt rati$ $% 2 T$ meet this $b=eti"e/

management ma# ha"e a bias t$ $"erstate the "alue $% in"ent$r# Thr$ugh this ar$ah/ management

ma# aggressi"el# $siti$n themsel"es t$ $btain the l$an

The nature $% the business is inherentl# ris6# This inherent ris6 ma6es it ine"itable that the audit$r ill

n$t be able t$ measure the "alue $% the in"ent$r# T$ auratel# measure the "alue $% in"ent$r# and

$mare it against the asserted am$unt/ e ill re?uire the $r6 $% a seialist An e<ert in the industr#

an er%$rm sei%i r$edures t$ "alue the in"ent$r# at its true am$unt The audit$r ma# then use that

"aluati$n and $mare it against the %inanial statementsB a$unt $% in"ent$r# +e%$re rel#ing $n the

"aluati$n $% the seialist/ e ill als$ need t$ determine hether the seialist used an abundane $%

atuarial assumti$ns $r hether the "aluati$n is based m$re hea"il# $n $nrete in%$rmati$n I% the

"aluati$n $% the seialist is bel$ the "alue $% the asserted in"ent$r#/ the in"ent$r# a$unt ill be

sub=et t$ imairment/ and ill be br$ught d$n t$ the l$er $% $st and net realiEable "alue The

seialist ill als$ be use%ul in determining the e<istene $% the in"ent$r# a$unt The nature $% the

@in"ent$r# is suh that it is n$t easil# measurable/ either b# eight $r an# $ther measure Thus/ the

inherent ris6 is ?uite high/ and the seialist ma# be use%ul in determining the t$tal e<istene $% the

bedr$6 This e<istene ma# be assessed b# the seialist in a number $% a#s/ ranging %r$m the atual

eighing $% all in"ent$r#/ a "er# detailed h#sial $unt/ et Dhen deiding t$ rel# $n the $r6 $% the

seialist/ e ill need t$ be aare $% an# ris6s hih ma# arise %r$m t$$ man# atuarial assumti$ns

An abundane $% atuarial assumti$ns ma# ause the "aluati$n $% the seialist t$ be unreliable/ hih

$uld imat the ar$riateness $% the audit e"idene

In additi$n t$ the ris6s en"isi$ned ab$"e/ there is als$ ris6 related t$ the $ening balane $% in"ent$r# As

this is an initial audit %$r +edr$6 uarries/ it is $ssible that in"ent$r# has been misstated in ast

re$rting eri$ds/ hih ma# ha"e in%luened a materiall# misstated $ening balane in the urrent

re$rting eri$d T$ $"er$me this ris6/ e ill need t$ anal#Ee and $mare ast re$rting eri$ds t$ theurrent re$rting eri$d/ sei%iall# $maring the asserti$ns $% the in"ent$r# a$unt t$ the "aluati$ns

r$"ided b# the seialist

e%erenes



24

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and Guidance Collection. etrie"ed Aril 2/ 2015/ %r$m


,&A ,anada/ (201) AS& 1000 R *inanial Statement ,$nets CPA Canada Standards and

Guidance Collection. etrie"ed Aril 2/ 2015/ %r$m


,&A ,anada/ (201) ,AS 20 R !sing the D$r6 $% an Audit$rBs <ert CPA Canada Standards

and Guidance Collection. etrie"ed Aril 2/ 2015/ %r$m


,&A ,anada/ (201) ,AS 200 R "erall b=eti"es $% the Indeendent Audit$r CPA Canada

Standards and Guidance Collection. etrie"ed Aril 2/ 2015/ %r$m


,&A ntari$ (201) !S * &*SSI.A ,.-!,T ,AT-

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