The Financial Controller (FC) of Management Consolidated Systems Ltd (MCS)

AUDIT PLANNING AND RISK ASSESSMENTS (10
Marks)

1.
The
Financial Controller (FC) of Management Consolidated Systems Ltd (MCS), a
public company, has approached your audit firm to provide audit services. The
FC has given permission to you and the previous audit firm, Anderson &
Price, to communicate. In your discussion with RandelMudge, the partner of
Anderson & Price who supervised the MCS audit, you learnt the following:

a)
Mudge
has no reason to question the integrity of MCS management.
b)
Mudge
understands that the reason for the change in auditors was to obtain a lower
audit fee. Anderson & Price charged $80,000 for the prior-year audit, of
which $50,000 has not yet been paid by MCS.
c)
Mudge
indicated that he had no disagreement with MCS management concerning accounting
principles or auditing procedures. He did note that management had not informed
the audit team of several cancelled customer sales contracts for which revenue
has been recorded. The auditors learnt of the cancellations from their audit
procedures,and management agreed to reduce revenue only when questioned about
the matter.
d)
Mudge
stated that MCS management was very conscious of a perceived need to increase
earnings per share each year. To do this, they would provide a minimum amount
for doubtful debts and warranty expenses. Where alternative accounting
principles existed, MCS management always selected the principle that resulted
in the highest current net income.
e)
Mudge
said that, because of significant losses in the last two years, he had seriously
considered modifying the audit report last year to indicate substantial doubt about
MCS’s ability to continue as a going concern. He discussed this matter with
management, who was adamant that the company would continue as a going concern.
Mudge agreed not to modify the report for last year, but he told management
that a modified audit report might be necessary in the future.

Required:
Explain (with reasons) how each of the above
items will impacton material misstatement in financial reporting for the
company and on your decision whether to accept MCS as an audit client.

Present
your answers as follows:

Impact on
material misstatement in financial reporting

Impact on your
acceptance of MCS as audit client

Impact on material misstatement in Financial reporting

You need to
write relate to inherent risk, Control risk, detection risk under IAS 200 13(n)
From New Zealandstandard

Impact on your acceptance of MCS
as audit client
You need to
write relate to client evaluation, identify special circumstance and unusual
risk, evaluate independence, ethical and legal consideration, determine ability
to use due care, assess competence to perform audit

No introduction and reference needed!
Word: 400