- 10 Marks
Question
Abansro Corporation is a publicly traded company in the manufacturing industry. The company is yet to appoint an auditor to replace its previous auditor. A member of the board of Abansro Corporation, who is also a friend of the owners of an audit firm, referred the audit firm to Abansro Corporation. The board approved the appointment of the audit firm without considering the potential audit risks associated with the referral.
The audit firm conducted the audit for the year 2022, and the audit opinion issued was unqualified. However, in the course of 2023, it was discovered that there were material misstatements in the financial statements that were not detected by the audit firm. These misstatements resulted in a significant loss for the company and its shareholders.
As a result, Abansro Corporation faced legal action from its shareholders for the losses incurred due to the misstatements. The audit firm was also held liable for negligence and breach of professional duty.
Required:
i) Describe THREE (3) audit risks for a board member referring his friend who is the owner of an audit firm to be appointed by Abansro Corporation. (6 marks)
ii) What measures should have been undertaken by the Auditors to mitigate the issues associated with this engagement? (4 marks)
Answer
i) Audit risks associated with the referral:
- Conflict of interest: The referral of the audit firm by a board member who is a friend of the firm’s owner may impair the audit firm’s independence, leading to a lack of objectivity in the audit.
- Undue influence: The friendship between the board member and the audit firm’s owner may result in pressure on the audit firm to overlook or understate material misstatements, increasing the risk of audit failure.
- Lack of professional skepticism: The personal relationship may lead the audit firm to adopt a less rigorous audit approach, reducing their level of professional skepticism and leading to the omission of material errors in the financial statements.
(3 points @ 2 marks each = 6 marks)
ii) Measures to mitigate audit risks:
- Disclose the relationship: The audit firm should have disclosed the personal relationship between the board member and the owner of the firm to the shareholders and board of Abansro Corporation to ensure transparency.
- Exclude the firm owner from the engagement: The firm owner should have been excluded from the engagement team to mitigate any potential conflict of interest.
- Engagement quality control review: An independent engagement quality control reviewer should have been assigned to review the audit procedures and final report.
- Assign qualified staff: Experienced and competent audit staff should have been assigned to the engagement to ensure thoroughness and quality in the audit process.
(4 points @ 1 mark each = 4 marks)
- Tags: Audit Risk, Auditor Independence, Negligence, Professional Duty
- Level: Level 2
- Topic: Audit and Assurance Risk Environment
- Series: MAR 2024
- Uploader: Theophilus