ABC Company is a wholesaler of desk lamps. The company has two locations one in Toronto

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Question:

ABC Company is a wholesaler of desk lamps. The company has two locations — one in Toronto and another that just recently opened in Vancouver. You, CPA, have just been assigned as the Senior Auditor of the financial statement audit engagement for ABC Company's fiscal March 31, 2021 year-end audit.

The March 31, 2020 financial statement audit was led by a previous Senior Auditor that is no longer with your audit firm. As part your preparation for the upcoming audit engagement, you start to review the prior year file and have gathered the following background information of what had occurred during the prior year audit for the March 31, 2020 year-end:

Notes from Prior Year Audit - March 31, 2020:

The time-budget for the March 31, 2020 financial statement audit was cut substantially from the prior year. As a result, in an effort to save time, the Senior Auditor only discussed the fraud risks with the audit team members during the planning/risk assessment phase of the audit. No additional work was performed to assess the potential risk of material misstatement due to fraud.

The Senior Auditor had extensive experience working on the ABC Company file by working on the audit for the past 5 years. Therefore, the Senior Auditor had developed a strong friendship with the Controller of ABC Company from working together over the years. The Senior Auditor had advised the audit team during the preliminary planning meeting the following: "I have known the Controller of ABC for many years now and he is one of my closest friends that I golf with regularly. He is really busy these days with planning for his upcoming wedding so I think it is best we reduce our testing this year to lighten his load in answering our questions and providing us with our documentation requests. Plus, I trust him entirely with the financial reporting of ABC and I know he wouldn't make any errors! He is very smart!".

The audit approach for the audit was purely substantive and as a result, the audit team did not perform any additional procedures during the risk assessment phase to understand the controls that were relevant to the audit or evaluate their design effectiveness and implementation. In addition, the audit team passed (i.e did not carry out any work) on performing any procedures to understand the new controls within the new accounting system that was implemented during the year. The Senior Auditor had noted the following memo as justification for this approach: "Having known the Controller of ABC for several years, I have no doubts about the design and implementation of controls at ABC Company. The Controller has extensive experience and is very knowledgeable. Also, by not performing any work to assess the design and implementation of controls, we can save approximately 60 hours on the audit".

REQUIRED:

a) Define "professional skepticism." Explain why professional skepticism is important when considering fraud risk and exercising professional judgement.

b) Explain the professional skepticism Qualities/Traits that were impacted during the March 31, 2020 audit, which resulted in the Senior Auditor deciding to reduce testing.

c) What are the 3 components to the Fraud Triangle?

d) Describe the auditor's responsibilities regarding the risk of Fraud during the risk assessment phase of the audit.

e) Explain whether the Senior Auditor's approach to assess risk of material misstatement due to Fraud for the March 31, 2020 audit was sufficient or not. In addition, Explain 3 additional procedures that the Senior Auditor could have performed to appropriately assess the risk of material misstatement due to fraud.