T5_HW1_Risk and materiality_Q
1)
a. Audit risk is a risk that auditor expresses inappropriate opinion when financial
statements are materially misstated.
b. Inherent risk is a risk derived from nature of business, its environment, industry
c. Control risk is a risk of misstatement due to failure of internal control
d. Detection risk is a risk that audit procedures will not be able to detect a
misstatement
2) For audit, the riskiest parts of the business are estimated. For this, auditors conduct risk
assessment and find out which areas may cause trouble - they are considered material
for the audit. Among the factors are, for example, different peculiarities of industry,
history of company (e.g. if it pays debts on time), inner control mechanisms (may be
outdated in certain sectors)
T5_HW2_Risk and materiality_Q
For this calculation, we can use benchmarks of materiality levels:
- ~5% of profit before tax - 136 000*5%= 6800
- ~1% of total assets - 500000*1%=5000
- ~0,5% of revenue - 2540000*0.5%=12700
Benchmark of revenue is too overstated, the industry is not capital-intensive -> I choose 5% of
PBT as benchmark (maybe even take value at 6-7%)
T4_HW3_Audit engagement_Q
FA should make research about the company they want to audit - “client screening”. Consider
geographical aspect. Check for possible ethical threats which can interfere with the audit,
should this tender be won. Additional factors like image and reputation of this company in
public.