Objective: Identify Risks In Planning The Audit By Examining

Objective Identify Risks In Planning The Audit By Examining Client S

Identify risks in planning the audit by examining client source documents: 10-K, Board Minutes, Letter to Shareholders, Organizational Chart, and IT Systems. Apollo Shoes, Inc is a global distributor specializing in technologically superior athletic podiatric products. Apollo is a new client to the firm. Our objective at this phase in planning the audit is to become familiar with the client and identify risks associated with the audit, so we can plan the audit accordingly. Information obtained and documented in the planning phase should help guide risk assessments for the current year audit.

Review the following client source documents: -K_v2-1.pdf, 2020_Apollo_Organization_Chart-2.pdf, 2020_Apollo_Shoes_Minutes-1.pdf, CEO Letter Shareholders 2020-1.pdf, New IT System Details-1.pdf. Access the workpaper spreadsheet with audit program and workpapers: Apollo_Planning_Part_1_Audit_Mini_Case.xls. Review the email from your Audit Manager and respond accordingly. Identify significant audit items on workpaper A-3. Sign-off on A-0 Audit Program upon completion of audit procedures.

Review all posted materials related to the case, including instructions, audit program, and workpapers. Identify significant audit items, summarize them on A-3, consider and document evidence necessary to gather, audit procedures to apply, and their anticipated effect on the financial statements.

For each team member’s contribution, identify with your initials. Answer all questions on the email tab and sign-off. Sign-off as completed on A-0 as preparer and reviewer with your initials.

Paper For Above instruction

The planning phase of an audit is critical to ensure a comprehensive understanding of the client’s business environment, internal controls, and potential risks that could impact the financial statements. For Apollo Shoes, Inc., a new client, this phase involves examining various source documents and records to identify significant risks that need to be addressed during the audit process.

Understanding the Client through Source Documents

Examining the client’s 10-K and CEO letter to shareholders provides insight into the company’s financial health, strategic focus, and potential areas of concern. The 10-K filing provides a comprehensive overview of the company’s financial performance, risk factors, and management’s discussion and analysis (MD&A), which helps auditors identify areas where misstatements or fraud might occur. The CEO’s letter often emphasizes company achievements, strategic initiatives, or challenges, highlighting potential areas of risk that require more focused audit procedures.

The Board minutes serve as valuable evidence of oversight activities and internal governance. These minutes reveal discussions related to internal controls, significant transactions, or issues raised by the board, which could signify risks such as management override or inadequate internal controls. The organizational chart assists in understanding the company’s structure, reporting lines, and segregation of duties, which are essential for assessing control risks. The chart can reveal potential areas where internal controls might be weak or misaligned, especially relevant given Apollo’s expansion into new markets or systems.

The new IT system details are particularly pertinent given the increasing reliance on technology for financial reporting. An understanding of the hardware, software, and processes involved highlights areas susceptible to IT risks such as data breaches, unauthorized access, or system failures. These risks could materially impact financial reporting if not properly managed.

Identifying Significant Audit Items

Based on the review, significant audit items may include: the recognition and measurement of revenue, valuation of inventory, and disclosures related to new IT systems. Revenue recognition risks are heightened given Apollo’s global distribution network, requiring careful testing of sales processes and cut-off procedures. Inventory valuation is critical because of the potential for obsolescence, theft, or misstatement, especially with new product lines. The implementation of a new IT system introduces risks related to data integrity, system controls, and cybersecurity, which could lead to material misstatements if not properly addressed.

Furthermore, internal control weaknesses highlighted in the board minutes or organizational structure may increase substantive testing requirements. Risks associated with management override, especially in areas with significant estimates or judgments, should be thoroughly assessed, as there is a higher likelihood of manipulation or error in those areas.

Auditor’s Procedures and Evidence Gathering

Auditors should plan to gather evidence through substantive tests and control testing aligned with identified risks. For revenue, procedures include vouching a sample of transactions to supporting documentation, testing cut-off, and analyzing trends for unusual fluctuations. For inventory, physical counts and valuation reviews are necessary to confirm existence and valuation assertions. Regarding the new IT system, auditors need to evaluate user access controls, test data integrity, and review cybersecurity measures to assess the effectiveness of controls in preventing unauthorized access and data manipulation.

Assessment of internal controls is essential, especially around areas identified as risky, to determine the nature and extent of substantive testing. If weaknesses are identified, additional procedures such as detailed testing of journal entries and review of estimates are warranted to mitigate the risk of material misstatement.

Impact on Financial Statements and Planning

The identified risks and procedures will influence the scope and focus of the audit plan. For instance, high revenue recognition risk may lead to increased substantive testing, while control deficiencies around IT systems may require reliance on detective controls or additional testing of system-generated data. Recognizing these risks early enables auditors to allocate resources efficiently, enhance audit quality, and provide valuable insights to management regarding internal control improvements.

Conclusion

In summary, the preliminary review of Apollo Shoes’ source documents and internal information highlights key risk areas like revenue recognition, inventory valuation, and IT system integrity. Systematic procedures focused on these areas will help the audit team obtain sufficient and appropriate evidence, thereby supporting the overall integrity and accuracy of the financial statements. Effective documentation and communication of these risks and planned procedures are vital for a successful audit engagement.

References

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