Question 1)
MANAGEMENT REPRESENTATION AND MANAGEMENT REPORT
Two vital communication between the auditors and the management or Board of Directors of the client entity are commonly referred as “Letter of representation” and the “the Management Report (or Letter of Weaknesses). Both communications are referred to in ISA 210 Terms of engagements. The letter of representation is, additionally, the subject of ISA 580 Management Representations and the management report is referred to in ISA 260 Communication of Audit Matters with those charged with Governance.
Required:
a. Letter of Representation:
i. Describe the purpose of the letter of representation and the extent to which it constitutes sufficient suitable audit evidence
ii. Explain three matters you might find in a letter of representation (other than the acknowledgement by management of its responsibility for the financial statements).
iii. Describe the effect, on the audit, if management refuses to make one or more of the representations requested.
b. Management report:
i. Explain the procedures associated with the communication of control weaknesses to management relating to:
• Timing of the communication
• Method of communication
• Level of management to which communication should be made.
ii. Describe the extent of the auditors’ responsibility for detecting and reporting fraud.
Question 2) MATERIALITY AND AUDIT RISK
(a) ISA 320 Audit Materiality gives guidance on assessing materiality.
Required:
i. Describe, with illustrations, the concept of materiality
ii. Explain how materiality affects the audit work performed by auditors.
(b) Risk management involves the classification of risks. Internal auditors sometimes classify risks as follows:
i. high impact, high likelihood- like the risk that contaminated foodstuffs will enter the production process in a biscuit manufacturing business, or, that other entrants into the market will reduce the existing business’ market share or profit margins;
ii. high impact, low likelihood- such as the risk of the non-availability of a basic element of production such as sugar, for a biscuit manufacturing business, or, that there will be important damage to property or injury to employees as a result of an earthquake affecting the factory.
iii. Low impact, low likelihood- like the risk that slight damage to property will be caused by some calamities.
iv. Low impact but high likelihood- like the risk that drivers may be involved in vehicle accidents which will leave the business temporarily without the vehicle, or, that production employees may be ill and unable to work temporarily. Companies may transfer, reduce, or accept risks, or adopt some combination of these approaches to risk.
Required:
Describe how the work of internal auditors on the classification of risk, as explained above, could be used by external auditors.