Audit Planning & Risk Assessment Case

GAAS requirements guide the process that must be followed by a professional accountant in accepting a financial statement audit engagement and the steps necessary to plan the work to be performed. Using the foundational knowledge you have acquired through your readings, RIFs, and team activities, you will apply that knowledge to a Canadian public company of your choosing.

Role: The purpose of this assignment is to demonstrate your understanding of preliminary audit planning and risk assessment steps and to apply those steps to an audit client that you and your team have recently been assigned. The enabling competencies of communication, teamwork, problem solving and decision-making are targeted skills this case seeks to further develop. The technical audit knowledge addressed in this case are: developing a risk-based audit plan and approach that responds to client’s needs and context; appraising materiality levels; and assessing risk of material misstatement overall and at the account level (including use of analytical procedures)

Requirements:

This a three-part assignment as follows:

• Research a Canadian public company that you and your team have agreed to work on (search via the link provided in BB to http://www.sedar.com/homepage_en.htm , if you search by company be sure to carefully select the date that includes the annual report filing as the default is the most recent 6 month period). Avoid insurance companies, mutual funds and bank.
  • Read and Analyze the information reported in the Annual Report (both the MD&A and the audited financial statements, including the notes)
  • Capture a copy of the report to append to your final submission (download a pdf version and attach to the final team submission). If accessing a company website, be sure to include the url in your final paper submitted
  • Obtain a recent news release or news item that provides current information about the company, its products/ services or its management team. Append a copy of this information to your team’s final submission
    
    • Prepare a written response for the following requirements
    1. As a step in completing your client’s business risk profile, identify THREE business risks and justify your reasoning for highlighting these business risks. (see Appendix 6 A, p. 235 – 239 for useful headings to frame your analysis). Conclude on your assessment of client business risk. (7  marks)

     

    1. How would you assess audit risk (provide conclusion) for this client? Provide three reasons to support for your assessment (7 marks)

     

    1. Using the most recent year end financial statements presented in the client’s annual report:

    Identify FOUR balance sheet accounts and related income statement accounts (or income statement account and related balance sheet

    • Provide support for your assessment based on company annual report information provided and the news release/ news item published.
    • Provide support for your assessment based on numerical calculation or ratio.
    • For each account, separately identify whether they are at risk of overstatement or understatement (i.e. what is management’s bias?)
    • For each account identified describe the audit objective (aka financial statement assertion) you believe could pose a risk of material misstatement.

     (14 marks)

     

    You might find the following headings useful to help frame your analysis:

    Accounts (pairings of related accts)

    Relevant case fact

    Numerical analysis or ratio analysis

    Risk of overstatement or understatement (specifically state for each account)

    Audit objective at risk for each of the accounts

     

     

    1. Using the company information you have researched and analyzed:
    • Explain and justify how you would calculate planning materiality for this company. Calculate an appropriate $ amount for the planning materiality (4 marks)
    • Indicate what factors you would consider in establishing planning materiality (1 marks)

    (Total: 33 Marks)

    • Prepare a team presentation that summarizes your analysis and findings to communicate with the lead audit partner (address the following requirements)

    Company overview and business risk profileaccount) that you believe may pose significant risk of material misstatement.

  • 1. Audit risk assessment and planned materiality
    2. Accounts at risk of material misstatement (audit focus)

     

    
     

    Case Process:

    • Submit individual draft to BB on Monday, Oct 26 by 11 pm (10%)
      • Individual submissions are marked on a completion basis (parts 1 & 2 must be drafted to receive full points; incomplete submissions will receive either 50% or 0% of available grade)
      • These individual elements will form the basis for the final polished group work presented, so fulfillment of responsibility to team members will be evaluated in the Team Peer Evaluation completed at end of term

     

    • Submit final group document on Monday, Nov 2 by 4 pm (10%)
      • group submissions are graded in accordance with the rubric attached

    be sure to maintain confidentiality amongst your team (i.e. do not share your ideas with other people outside

  • • of your team, particularly other students currently enrolled in ACCT 4225)
    • Prepare a 10 minute presentation maximum, all group members expected to participate and prerecord using https://screencast-o-matic.com/ and provide me with a link.

     

    
     

    Team Submission Rubric:

    “5 point” Score	5-4	3	2-1	0
    Research
    Primary material sourced	Public company selected meets criteria requirements (Canadian public company, not a bank/mutual fund/ insurance company) and has sufficient depth/weight and details to enable in-depth analysis. News release/ news item enables a more in-depth/ interesting risk assessment process. Researchers demonstrate creativity, resourcefulness and care in discovering primary materials.	Public company selected meets most of the criteria requirements (Canadian public company, not a bank/mutual fund/ insurance company) and/or sufficient depth/weight and details to enable in-depth analysis. News item/ release adds to analysis. Researcher demonstrates resourcefulness and care in sourcing primary materials.	Company selected for analysis does not meet criteria requirements or has published information that is incomplete/ lacking in detail. News item/ release adds little to analysis	No primary material is discovered.
    Analysis
    Analysis of primary materials	Interpretation of MD&A and audited financial statements is comprehensive and thoughtfully carried out. Appropriate “reading between the lines” of primary information (including news release/ report) exhibits understanding of business risk criteria, the elements that affect planned audit risk and the factors that should be considered in planning materiality. Audit team demo’s ability to logically work out missing details/ gaps in reported information.	Interpretation of MD&A and audited financial statements demonstrates basic understanding of risk assessment and planning process. Primary information is accepted as reported without consideration of further evidence/ or questioning missing details.	Interpretation of MD&A and audited financial statements demonstrates very limited understanding of risk assessment and planning process.	Interpretation of MD&A and audited financial statements overlooks  / misinterprets risk assessment and planning requirements.
    Written Risk Assessment & Preliminary Planning Steps
    Business Risk Assessment	Clearly Identified business risks and logically analyzed in a framework that addressed both external context (industry, regulatory environment, socio-political and economic factors) and internal elements (incl governance, strategy, business process and operation). Conclusion reached was well-supported by company evidence.	Business risks were adequately identified, and explanation was clear, but less certainty about its relevance for audit engagement planning (although some sense of impact) and/or conclusion was not clearly supported by company evidence.	Poorly understood the business risks (or confused with audit risk perspective) and struggled to explain to readers the relevance for audit engagement planning (little info conveyed about relevance)	Did not identify business risks in terms of audit engagement implications

  • Audit Risk Assessment	Clearly demonstrated understanding of primary drivers of audit exposure and assessment is supported by evidence gleaned from annual report and news information. Conclusion was plausible and well-supported.	Some elements of audit exposure not fully addressed/ supported by evidence. Or conclusion incomplete/ missing elements and “leap” difficult to follow.	Missing two of three elements of audit risk exposure and missing conclusion. Little connection between evidence and conclusion derived.	No conclusion, no analysis of audit risk factors.
    Financial Statement detailed account analysis for risk of misstatement	Analysis at account level demonstrated clear understanding of accounting requirements and the potential for risk of material misstatement given the context of the company selected for analysis. No errors in grouping of related (“partner”) accounts and <1 error in identifying appropriate audit objective and <1 error in determining mgmt bias to over or under state account.	Analysis at account level demonstrated clear understanding of accounting requirements and the potential for risk of material misstatement. The analysis was loosely connected to the context of the company selected for analysis. <1 error made in grouping of related (“partner”) accounts and <2 error in identifying appropriate audit objective and <2error in determining mgmt bias to over or under state account.	Analysis at account level contained <1 error in understanding of accounting requirements and the potential for risk of material misstatement. The analysis was not connected to the context of the company selected for analysis. >2 errors made in grouping of related (“partner”) accounts and >2 errors in identifying appropriate audit objective and >2errors in determining mgmt bias to over or under state account.	Did not complete requirements for account analysis.
    Materiality Calculation	Sound professional judgement demonstrated in selecting basis for materiality calculation, identification of relevant normalizing adjustments, and rationale for final $amount well-supported and clearly explained. Demonstrated clear understanding of audit role wrt materiality setting and the relationship between materiality and risk.	Basis for materiality calculation loosely linked to company context, incomplete identification of relevant normalizing adjustments, and rationale for final $amount simply explained as “common use” or norm. The link between audit role and establishing  materiality was incompletely addressed as was the relationship between materiality and risk.	Materiality calculation completed without explanation for base chosen and no effort to adjust for relevant normalizing adjustments. No rationale for final $amount provided and no link between materiality and audit role explained.	Did not calculate materiality
    Team Presentation & Communication
    Presentation in whole class group setting	Succinctly articulated main requirements at appropriate level for audit partner. Managed limited time wisely to share key points within 10 min limit. All group members participated and were well-prepared in delivery.	Addressed main requirements but did not tailor presentation to intended partner audience. Managed limited time wisely within 10 min limit. All group members participated and were well-prepared in delivery.	Addressed some requirements but did not tailor presentation to intended partner audience. Struggled to deliver presentation within 10 min limit or ended <7 min. Only some group members participated and were well-prepared in delivery.	Did not complete presentation.
    Context/ Background	Balanced concise use of facts and story-telling narrative in providing company context/ background to convey team’s insight and understanding in terms of audit engagement planning and risk implication	Provided facts but information was not well organization, or delivered facts without organizing into narrative or effort to convey team’s insight and understanding in terms of audit engagement planning and risk implication	Copied/ pasted facts without considering relevance/ or how they “fit” together	Did not provide context/ background
    Findings & Ideas	Presented findings and ideas or alternatives in a logical and cohesive manner; thought-provoking and creative ideas or interesting findings shared to engage reader	Findings and ideas were loosely listed (groupings or organization difficult to follow); simple ideas were less engaging for reader or few connections between ideas made	Minimal findings or ideas generated; confused descriptions or difficult to follow ideas	Did not present findings or ideas about the case
    Written submission	Written submission is polished and professional; No spelling errors, clear and concise language, easy to follow and read	Written submission lacks organizational flow in some spots but generally easy to read; there are few spelling errors, structure could be better organized to aid understanding	Written submission an unexplained list of bullet points; written communication contains spelling errors and poor use of language, structure is difficult to follow or understand	No written submission made

    
     

    Team’s Written Submission

     

    Required	Maximum Marks	Marks Awarded
    1. Client Risk profile	7
    2. Audit risk	7
    3. Accounts at risk of misstatement	14
    4. Materiality	5
    Deduction for grammar and spelling
    Total	33

     

    Team’s Presentation

    Purpose: Present your preliminary audit planning and risk assessment to your lead audit partner. Each group is expected to address the following elements in a 10 min presentation:

    Element	Mark Allocation
    1.       Company Overview (background, high-level “about” information) a.       Client Business Risk Profile b.      Business Risk Conclusion	/5
    2.       Audit Risk Assessment & Materiality Calculation	/2
    3.       Accounts at risk of misstatement (areas of audit focus)	/5
    Total	/12

     

    Comments