Question 4. Engagement acceptance, risk and materiality (15 marks)

During your study of this unit you were employed by Abernethy & Chapman (A&C) as part of an audit engagement team for a new client of your firm the Lakeside Company. During engagement team discussions - described in the case study - in accordance with ASA 315.10 (and ASA 220.15-18) you learned the engagement partner desired a lower level of audit risk.

1. What factors did the engagement partner share with the engagement team as having been influential in the determination of the level of audit risk identified above for the Lakeside Company case study? (6 marks)

In answering (a) it is NOT acceptable to simply list factors directly from a relevant ASA - if this happens NO marks will be awarded! You need to list relevant factors from the Lakeside Company case study.

2. What impact would you expect the factors you identified in (a) to have on your assessment of the risk of material misstatement (choose higher or lower)? (1 mark)

3. Identify the impact your assessments above would have on the desired level of detection risk (choose higher or lower). (1 mark)

4. What does this suggest about the resulting audit strategy our firm should adopt for a financial report audit (choose lower assessed level of control risk approach or predominantly substantive approach). (1 mark)

Use your assessments for parts (b) (d) to explain the relationship of desired audit risk with materiality and audit evidence. (6 marks)