AUDIT PLANNING AND RISK ASSESSMENTS

1. The Financial Controller (FC) of Management Consolidated Systems Ltd (MCS), a public company, has approached your audit firm to provide audit services. The FC has given permission to you and the previous audit firm, Anderson & Price, to communicate. In your discussion with RandelMudge, the partner of Anderson & Price who supervised the MCS audit, you learnt the following:

a) Mudge has no reason to problem the integrity of MCS management.

b) Mudge understands that the reason for the change in auditors was to obtain a lower audit fee. Anderson & Price charged $80,000 for the prior-year audit, of which $50,000 has not yet been paid by MCS.

c) Mudge indicated that he had no disagreement with MCS management concerning accounting principles or auditing procedures. He did note that management had not informed the audit team of several cancelled customer sales contracts for which revenue has been recorded. The auditors learnt of the cancellations from their audit procedures,and management agreed to reduce revenue only when problemed about the matter.

d) Mudge stated that MCS management was very conscious of a perceived need to increase earnings per share each year. To do this, they would provide a minimum amount for doubtful debts and warranty expenses. Where alternative accounting principles existed, MCS management always selected the principle that resulted in the highest current net income.

e) Mudge said that, because of significant losses in the last two years, he had seriously considered modifying the audit report last year to indicate substantial doubt about MCS’s ability to continue as a going concern. He discussed this matter with management, who was adamant that the company would continue as a going concern. Mudge agreed not to modify the report for last year, but he told management that a modified audit report might be necessary in the future.

Required:

describe (with reasons) how each of the above items will impact on material misstatement in financial reporting for the company and on your decision whether to accept MCS as an audit client

Impact on material misstatement in Financial reporting

You need to prepare relate to inherent risk, Control risk, detection risk under IAS 200 13(n) From New Zealandstandard
Impact on your acceptance of MCS as audit client

You need to prepare relate to client evaluation, identify special circumstance and unusual risk, evaluate independence, ethical and legal consideration, determine ability to use due care, assess competence to perform audit.