Suggested Solutions Workshop 5 4. 5.4 The auditor needs to have knowledge of the client's business to enable them to obtain an understanding of the events, transactions and practices that in their judgment might have a significant effect on the financial report. Understanding the business and using this knowledge appropriately assists the auditor in assessing risks and identifying problems; planning and performing the audit effectively and efficiently; evaluating audit evidence; and providing better service to the client. The audit judgments facilitated by knowledge of the client's business include: · identifying accounting or auditing matters that need special attention . assessing the conditions under which accounting data are prepared · evaluating the reasonableness of management's estimates and other representations · making judgments about management's selection and application of accounting principles. 5. 5.5 As per ASA 315.11 (ISA 315.11), the auditor's understanding of the entity and its environment consists of an understanding of: · industry, regulatory and other external factors, including the applicable financial reporting framework . the nature of the entity . the entity's selection and application of accounting policies . the entity's objectives and strategies, and those related business risks that may result in risks of material misstatement . the measurement and review of the entity's financial performance. 5.12 Analytical procedures at the planning stage of the audit assist in understanding the business and identifying areas of potential risk. Analytical procedures may reveal aspects of the business about which the auditor was unaware, and assist in determining the nature, timing and extent of other audit procedures. They also give the auditor some knowledge of the business and a base against which to compare subsequent evaluations of the reasonableness of the financial report. 5.23 (Medium) (a) You will need to check on the internal auditor's assessment of the total loss and check whether it is isolated to this branch. The materiality of the losses will need to be considered (However, if the internal auditor's assessment is reasonable and it is isolated to this branch, it appears likely that the amount is not material.) You will also need to consider whether the stock disappearance was the result of a weakness in internal control. If so, you will need to reconsider your prior evaluations of internal control and whether you need to change to a substantive approach to the audit.
2. (b) As the competition caused selling prices to fall prior to balance date, this may cause the net realisable value of the stock on hand at year-end to be less than cost. As a result, testing will need to concentrate on selling prices at and after balance date to verify the accuracy, valuation and allocation of inventory. The impact of reduced selling prices on cash flow and going concern will also need to be considered. 3. (c) There is a need to determine the reliance that can be placed on the work of the internal auditor. As the internal auditor was only appointed in the second half of the year, this reliance