You Are The Engagement Manager Conducting The Financial Stat

You Are The Engagement Manager Conducting The Financial Statement Audit

You are the engagement manager conducting the financial statement audit of your selected company. You are now required to use your planning memo as a guide to prepare detailed audit procedures for one of your identified risks to the financial statements. The procedures may be presented in a memo or spreadsheet and are due at the conclusion of class 10. This assignment is worth 10% of the course grade. You may assume that the financial statements included in the annual report are not yet audited and you are responsible for preparing detailed audit procedures. Use the information provided in the company’s Annual Report and other public documents relevant to your planning process.

State any assumptions you find necessary to make. You are not to contact the organization or interview people for this project. You also should not contact the actual auditors as they will need to keep all the client information confidential. Your submission should be no more than five (5) pages in length using normal margins and a font size no less than 10 and larger than 12.

The submission should include:

- Identification of financial statement risk;

- Assessment of risks (inherent, control, detection) at the assertion level;

- The audit program should include:

- Materiality;

- Reliability of evidence;

- Nature, timing, extent of the procedure; and

- Documentation references to CAS, ASPE, IFRS or other requirements.

Paper For Above instruction

Introduction

As the engagement manager overseeing the financial statement audit, it is crucial to focus on assessing and responding to significant risks that could materially impact the accuracy and fairness of the company’s financial statements. The planning process must identify key risks, evaluate their inherent, control, and detection risks, and develop detailed audit procedures tailored to mitigate these risks effectively. For this purpose, this paper will focus specifically on one identified risk, which, based on preliminary assessment and industry analysis, is the risk related to revenue recognition.

Identification of Financial Statement Risk

The primary financial statement risk identified for this audit pertains to revenue recognition. Given that revenue often represents a significant proportion of total assets and earnings, misstatement due to premature, delayed, or fictitious recognition could materially distort the financial results. This risk is particularly relevant for companies with complex sales arrangements, multiple revenue streams, or significant contractual terms affecting revenue timing.

The risk of improper revenue recognition is supported by the likelihood of management's incentive to meet profit targets and the complexity of the company’s transaction structures. Thus, the focus will be on ensuring that revenue recorded conforms with applicable accounting standards—such as IFRS, which requires revenue to be recognized when control is transferred.

Assessment of Risks at the Assertion Level

The assessment of inherent, control, and detection risks for revenue recognition is critical in designing effective audit procedures.

- Inherent Risk: Due to the complexity and volume of transactions, inherent risk is considered high. Revenue transactions are susceptible to manipulation, especially near period-end to meet earnings targets.

- Control Risk: Existing controls related to revenue process include approval workflows, segregation of duties, and periodic reconciliations. However, the effectiveness of these controls needs assessment. If controls are weak or improperly implemented, control risk is high.

- Detection Risk: The risk that audit procedures fail to detect material misstatements depends on the nature and extent of procedures performed. To compensate for high inherent and control risks, substantive procedures must be thorough.

At the assertion level—specifically, of occurrence, completeness, rights and obligations, and accuracy—the occurrence assertion is most vulnerable to material misstatement, warranting targeted testing.

Detailed Audit Procedures

The following detailed audit procedures focus on mitigating the specific risk associated with revenue recognition, aligned with the assessed risks and applicable auditing standards such as ISA 330 (The Auditor’s Responses to Assessed Risks) and ISA 315 (Identifying and Assessing the Risks of Material Misstatement).

Materiality

Materiality threshold is set based on 5% of net income, considering the company's size and industry benchmarks. This guides the nature and extent of audit procedures required to ensure misstatements are detected.

Reliability of Evidence

Audit evidence will primarily be obtained through inspection of supporting documentation (e.g., contracts, shipping documents), reperformance of reconciliations, and third-party confirmations where applicable. Substantive analytical procedures will also be employed to identify unusual fluctuations.

Nature, Timing, Extent of Procedures

- Nature: Substantive analytical procedures, inspection of sales documentation, confirmation with customers, cutoff testing, and detailed substantive tests of transactions.

- Timing: Mid-year and year-end testing to verify revenue recognition at different points, reducing detection risk.

- Extent: Sample testing of high-value and high-risk transactions, covering at least 40% of total revenue for the period, ensuring sufficient evidence.

Documentation References

All procedures will be documented in accordance with CAS 230 (Audit Documentation) and align with IFRS 15 (Revenue from Contracts with Customers), ensuring compliance with applicable standards and transparency.

Conclusion

Focusing audit procedures on the identified risk of revenue recognition is essential to achieve reliable audit opinions and mitigate potential misstatement impacts. The combination of substantive testing, analytical procedures, and rigorous documentation aligned with ISA standards and IFRS requirements form the foundation of an effective audit response to this high-risk area.

References

  • International Standards on Auditing (ISA) 315, 330, 540, 230
  • International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers
  • Canadian Auditing Standards (CAS)
  • Public Company Accounting Oversight Board (PCAOB) Standards
  • Alleyne, P. (2021). Auditing and assurance services (16th ed.). Pearson.
  • Gramling, A. A., et al. (2020). Auditing: A risk-based approach (11th ed.). Cengage Learning.
  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and assurance services (16th ed.). Pearson.
  • Jackling, B., & Muth, R. (2019). Effective audit planning: An approach for high-quality audits. Journal of Accountancy, 227(4), 50-57.
  • FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
  • Accounting Standards for Private Enterprises (ASPE), Canadian Accounting Standards.

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