1. Identify and analyse the risk factor (a) Which account and assertions might be
misstated? (b)
Audit strategies or procedures to address
the risk of material misstatement (c)
1 Miller is both the Chairman of the Board of
Directors and CEO of Magic Natural. The
transparency of the governance of the
company will be lost. Miller can do what she
wants because there is no one to check the
transparency of her actions (Schultz Jr &
Bierstaker, 2010).
Presentation and Disclosure assertions as
well as transparency will be affected.
Providing the extent of supervision that
is appropriate for the circumstance.
2 DCK audited the primary bank with which she
did business
This belongs to the risk of involving related
party transactions
Testing how related-party transactions
are identified and coded in the
company's enterprise resource planning
(ERP) system
Interviewing accounting personnel
responsible for reporting related-party
transactions in the company's financial
statements
3 One of Miller’s grandnephews (her sister’s
grandson) work for DCK as a senior associate
auditor (Zhang & Shailer, 2021)
The audit firm will become a related party
of the company because Miller, the CEO
and a senior associate who is her grandson
are relations
Eliminating any support or involvement
of the relevant senior associate to the
audit of Magic Natural
2. 4 Engagement offers an excellent opportunity to
break into a new industry
Presentation and Disclosure assertions Conducting an environmental
assessment to identify the risks
Miller is a qualified cosmetic chemist Accuracy assertions Performing analytical procedures
Conducting a discussion among
engagement team members regarding
the risks of material misstatement
In 2004, the production of hand-made soaps
was dropped by Magic Natural in a move to
concentrate on hair and skin care products.
Creating incentives or pressures for
management of the company to manipulate
certain accounts or disclosures to achieve
certain performance targets or conceal a
failure to achieve those targets
Audit of internal control procedures of
the company
Started setting up retail stores to market its
products in addition to wholesale distributions
Creating incentives or pressures for
management of the company to manipulate
certain accounts or disclosures to achieve
certain performance targets or conceal a
failure to achieve those targets
Audit of internal control procedures of
the company
The industry has multiple regulations to
ensure the product is safe to use
Assertions related to presentation and
disclosure
Get an understanding on the relevant
industry, regulatory, and other external
factors including the applicable financial
reporting framework
3. The company has stringent quality control
process and also invests heavily in its R&D to
formulate new products
Assertions related to presentation and
disclosure
Get an understanding on the relevant
industry, regulatory, and other external
factors including the applicable financial
reporting framework
The company has a patent for its Smooth
Recovery anti-aging serum
Management can think that another party
has infringed on his patent and he makes a
declaration of the infringement / Rights and
Obligations Assertion
Conduct an IP audit
Make sure that the company amortizes
IP accurately
The company is suing another Australian
manufacturer what they believe is an
infringement against their patent
Patent assertion / Rights and Obligations
Assertion
Review the adequacy of, 'clean room'
procedures used in the development of
such a patent
Magic Natural stores began to carry Cypress
products almost 50% of its total stock
Depending on a single supplier will pose a
risk for the supply chain of the company
For significant risks, the auditor should
perform substantive procedures,
including tests of details, that are
specifically responsive to the assessed
risks.
Magic Natural is allowed a 90 days credit
terms from Cypress, but Cypress encourages
quick payment by offering large cash
discounts
Working capital issues Select a sample of receivables and
confirm the trade terms to original credit
agreements
Calculate the working capital position
(Liquidity) of the company
4. To meet the payment terms, Magic Natural
holds bank credit lines with two Auckland
banks. Interest on this debt is based on the
floating prime rate of the respective banks and
has averaged just 6%-7% during recent years.
Working capital issues Calculate the working capital position
(Liquidity) of the company
Retailing stores face intense competition To establish manufacturing facilities in
other high-income countries
To serve foreign markets
Do a competitor analysis
Lockdown periods in 2020 also negatively
effects sales level
Occurrence, Completeness
Updating the company’s accounting systems.
Magic Natural was simply outgrowing the
control features of its current systems and,
Miller asserted, King & Associates had not
provided the needed input for upgrading them.
She hopes that DCK would provide a better
service including recommending and
improving the current systems. Second, Miller
believed that King & Associates was charging
an excessive fee for its annual audit. She stated
that she was no longer willing to pay that
much money for, what she termed were,
Issues with the previous auditor The successor auditor should plan and
perform the reaudit in accordance with
generally accepted auditing standards.
5. inferior services. Miller’s final problem with
King & Associates is around the audit opinion
for the company’s financial statements for the
year ending March 31, 2020. The auditor
issued a qualified opinion due to a material
disagreement on the value of PPE in the audit
report1 . MN adopts the revaluation model for
PPE. King & Associates was not satisfied that
the company would be able to generate
sufficient future cashflows to justify the
carrying amount of the seventh store.
The store was opened in November of 2018,
which was constructed adjacent to a shopping
centre that had proven to be unsuccessful. At
the time of issuing the last audit report, the
shopping centre had leased less than 50% of
its available space. The seventh store had,
consequently, never been able to generate the
customer traffic necessary to come close to a
break-even point. The continuing failure of the
shopping centre made King & Associates
questioned the fate of the Magic Natural store.
Completeness The successor auditor should plan and
perform the reaudit in accordance with
generally accepted auditing standards.
6. Only Miller is involved actively in the day-to-
day operations of the business
Transparency Kickoff meeting
End of planning (discussion of
objectives and sharing of audit work
program)
Throughout fieldwork (vetting
observations)
Reporting (writing observations and
action plans)
Every manager and assistant manager will
each receive a bonus based on the income
earned by their store during the previous year
Occurrence and rights and obligations Performing substantive procedures
(IAASB, 2019) (IAASB, 2019)
7. References
IAASB. (2019). INTERNATIONAL STANDARD ON AUDITING 315. IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL.
IAASB. (2019). International Standards on Auditing 330.
Schultz Jr, J., & Bierstaker, J. (2010). Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a
strategic-systems-audit approach. Accounting, Organizations and Society.
Zhang, P., & Shailer, G. (2021). Changes in audit effort and changes in auditors' disclosures of risks of material misstatement. The British
Accounting Review.