Auditing

                                                                   ASSIGNMENT #1

Scenario A (4 Marks)

Oliver has been auditing Limberg Cheese for five years, initially as a junior auditor and as a senior auditor for the last two years. He has never seen an accounting adjustment recommended for Limberg Cheese. As a result, he believes inherent risk should be set at zero for the Limberg Cheese audit.

# Oliver is not justified in his opinion as he has never an accounting adjustment recommended. By just recommended the accounting adjustment, it would clearly indicated that there is some material item that need to be adjusted. So, Oliver should not consider the inherent risk at zero and by just considering zero inherent risk, on the basis of past experience, would not satisfy that nothing have been done wrong in the company.

Scenario B (4 Marks)

Johnston has just completed an exhaustive study and evaluation of the internal control system at Lang’s Foods. She believes the control risk must be zero because no material errors could possibly slip through the many error-checking procedures and review layers in place at Lang’s Foods.

# Johnston is not justified in her opinion as by considering the control risk at zero, auditor would not perform sufficient substantial procedure to conclude whether the financial statement is free from material misstatement or not. Thus there would be more chance that the auditor opinion is not justified . Hence, auditor should not completely rely on internal control.  

Scenario C (3 Marks)

Fields is a lazy auditor who does not like working in Toronto. While auditing Hogtown Manufacturing in Toronto he decided to use very detailed audit procedures to audit the year-end ledger account balances thoroughly, to the extent of setting the risk of material errors and irregularities in the accounting system at 2%. He gave no thought to inherent risk and conducted a very limited review of Hogtown Manufacturing’s internal control system.  

# Field is completely wrong in his approach because by not considering the inherent risk factors of the entity at assertion level as well as at management level and internal control system of the entity, the auditor would not able to identify the area that would need more substantial procedures or that have more risk of material misstatement. There would be more chance that auditor is not justified.