Considering Mr. Brown is auditing the financial statements of Roadrunner for the first time, the PVC Audit management team has decided to plan a peer review on the audit work.

Mrs. Smith works as an audit manager at PVC Accountants B.V. as well, but at a different location. She has been assigned as the peer reviewer. The interim audit has been finalized by Mr. Brown and he needs to provide the audit file to Mrs. Smith for review. Mrs. Smith will focus on the phases of engagement continuance and audit planning.

Question 1:

Risk assessment procedures are part of ‘Understanding the client’ and an important phase in the audit planning. Mr. Brown has performed this risk assessment and he has identified the following categories in the table below.

Aspect	Relevant aspects for the audit
Competitive position and industry	Every season new models are introduced into the market. E-bikes are getting more and more popular and the traditional bikes might be outdated.
Organizational structure
Critical business processes
Methods of measuring performance
Internal Control

Additional information

In the above table you have identified Roadrunner specific aspects which further support the risk assessment procedures. These aspects might indicate that an inherent risk is present.

The inherent risks identified can be further related to ‘what can go wrong’ on an assertion level.

Question 2:

1. Describe in your own words what an inherent risk actually is.

2. Describe for each aspect, an inherent risk which may have an impact on the risk of material misstatement either on financial statement level or assertion level. Include for each inherent risk an internal control measure which may mitigate the risk of material misstatement.

Relevant aspect for the audit	Inherent risk	Internal control measure
Every season new models are introduced into the market. E-bikes are getting more and more popular and the traditional bikes might be outdated.
Copy from above
Copy from above
Copy from above
Copy from above

Additional information:

In the process of risk assessment Mr. Brown has concluded that there are no significant risks present at Roadrunner which need to be taken into account in the audit of financial statements. More specifically, Mr. Brown concluded to have found no fraud risks.

Question 3:

1. Describe 2 procedures the auditor should follow to consider the risk of material misstatement from fraud. For each procedure describe how Mr. Brown should perform this procedure for Roadrunner.
2. In your opinion and based on your risk assessment, do you agree with the conclusion of Mr. Brown regarding the significant risks? Explain your answer.

Question 4:

1. Watch the following video on fraud schemes as explained by Blair Cook . Explain in your own words the main message in this video. Also explain 3 fraud schemes which Blair explains.

Additional information:

Imagine the following situation. The controller Peter Verkade at Roadrunner is waiting for a promotion for a long time. As you know Mrs. Countant has been hired as his supervisor. As you can imagine, Peter Verkade feels neglected by management and is not happy with this new situation.

b. Based on your knowledge of the Roadrunner case, assess the 3 elements in the fraud triangle which may trigger fraudulent behavior in this specific case.

Additional information:

During the interim audit Mr. Brown has identified several transactions that have not been recorded timely or were adjusted at weird times at night. The adjustments mainly involve inventory adjustments.

c. Put yourself in the position of Mr. Brown. As the auditor, in which way should you respond to this risk? (remember the responses to fraud risk, 3 categories)

Additional information:

Mrs. Smith has reviewed the audit plan and the strategy behind it. She noticed that there is a significant systems portion in the audit plan, but also a portion of substantive procedures.

Question 5:

1. Indicate the objective of each of the following audit procedures:

Audit procedure	Audit Objective(s) + which financial statement item
Vouch a sample of sales transactions to the shipping documents
Trace purchase orders to the purchasing transactions
Identify and review the loan agreements for longterm liabilities
Witness a stock count performed by the warehouse staff and finance team
Review the reconciliation of shipping conditions (such as Free on Board) and revenue at month-end

Mrs. Smith is almost done with the peer review. The last check she performs is the completeness of the audit file.

2. Define 3 elements which should be included in an audit file resulting from the planning phase and identify how they contribute to the overall audit result.

Answer rating: 100% (QA)

Question 1 Inherent risk is the risk that a financial statement item may be materially misstated due to errors or fraud Aspect Inherent Risk Internal Control Measure Every season new models are introd... View the full answer