Client name: Gold Explorer Inc. Schedule :X-1 Audit area: Risk Assessment Preparer :M.X Balance sheet date: xx/xx/xx Date: 01/01/2012
Raj, The following memo addresses the risk assessment of one our clients, Gold Explorer Inc.; a major public Canadian gold mining company. The firm has been auditing this company for the past 8 years, in which very few misstatements were discovered and where management integrity was never a concern. However, in this fiscal year, the audit of Gold Explorer Inc will be more challenging because of increases in inherent risk and lower levels of acceptable audit risk, resulting from different events, mainly a merger with a major U.S. gold company and a significant writedown of ‘PPE’. In the following parts of the memo, an analysis of audit risk, inherent risk and materiality will be described in detail. Part 1:
The first factor affecting audit risk is the (1) ‘external user’s reliance on financial statements’: Since the company is a large publicly traded company and that it achieved record gold production levels, many investors use the financial statements of this company for different activities. However, the company has no debt, and therefore creditors will not be using these financial statements. Finally, because the company has changed significantly in the course the year, (merger + writedown), the financial statements issued this year will have significant importance in the valuation of the company. Therefore, this factor suggest medium to low acceptable audit risk. (2) The second factor is ‘the likelihood of financial difficulties’: The company incurred a loss of 944 million $ before taxes in the fiscal year. However, the company has great liquidity, has been profitable in the past few years, does not rely on debt financing, and is established as a key player in its industry. It is obvious...
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