Master Mines and External Confirmation in Audit
Group Written Assignment
Question 1 First of all, the inherent risk is existed as the Master Mines Limited specializes in sulphur exploitation in a multi-location (five different locations), different locations may have different internal control systems. It is hard to observe inventory taking carried out in more than one location. It may be impracticable for the auditor to visit all locations and the control for inventory movement will be more difficult. It requires more audit attention due to the nature of the entity’s business. We also have to consider whether they have used off-balance sheet in order to require a funding from bank borrowing. Although it is supported by the latest audited financial statements, however auditor may express the opinion based on the off-balance sheet which the company provided.
One of the other factors is the changes in key personnel including departure of key executives (changes of CEO), we have to examine is the reason of resignation of CEO, is that the original CEO is forced to be resigned because he or she does not follow the instruction made by the board of directors, e.g. approving some missing figures in the financial statements. If yes, the financial statement will contain a material misstatement and auditor should be careful in assessing it.
The expectation of the new CEO of doubling the revenue in the coming year while the company has cut 20% of the company’s personnel seems unachievable, there is a risk that the new CEO, Mr. Yeung may intend to manipulate the accounting figures to achieve the objective under such pressure which constitute an inherent risk that may result in material misstatement of the overall financial statement.
As Mr. Yeung seems to overlook the importance of a good internal control system, there is a risk that there are deficiencies in the internal control system which are not addressed by the management, hence, constitute an inherent risk that may
Question 1 First of all, the inherent risk is existed as the Master Mines Limited specializes in sulphur exploitation in a multi-location (five different locations), different locations may have different internal control systems. It is hard to observe inventory taking carried out in more than one location. It may be impracticable for the auditor to visit all locations and the control for inventory movement will be more difficult. It requires more audit attention due to the nature of the entity’s business. We also have to consider whether they have used off-balance sheet in order to require a funding from bank borrowing. Although it is supported by the latest audited financial statements, however auditor may express the opinion based on the off-balance sheet which the company provided.
One of the other factors is the changes in key personnel including departure of key executives (changes of CEO), we have to examine is the reason of resignation of CEO, is that the original CEO is forced to be resigned because he or she does not follow the instruction made by the board of directors, e.g. approving some missing figures in the financial statements. If yes, the financial statement will contain a material misstatement and auditor should be careful in assessing it.
The expectation of the new CEO of doubling the revenue in the coming year while the company has cut 20% of the company’s personnel seems unachievable, there is a risk that the new CEO, Mr. Yeung may intend to manipulate the accounting figures to achieve the objective under such pressure which constitute an inherent risk that may result in material misstatement of the overall financial statement.
As Mr. Yeung seems to overlook the importance of a good internal control system, there is a risk that there are deficiencies in the internal control system which are not addressed by the management, hence, constitute an inherent risk that may