Professional skepticism is a topic of great importance to the audit profession, audit regulators, audit standard setters, and others who work in the audit arena for the benefit of the public interest. The term “professional skepticism” is widely used but may mean different things to different organizations and individuals.
The concepts underlying professional skepticism are relatively straightforward, there is a lack of common understanding or practical guidance on what professional skepticism is and how it can be demonstrated and documented.
Design a hypothetical case study based on a real-world company that demonstrates the application of “professional skepticism” in the context of financial statement audit.
Next, include in your case study an evaluation of the issues faced by the hypothetical company, followed by an audit plan to address these identified risks with reference to any applicable International Standards on Auditing (ISA). Note that risk assessment, control testing, and substantive procedures must be included in your proposed plan.
You must present your work in FOUR (4) sections as follows:
1) Background of the company (15%)
You, as one of the audit managers of KPNG International Cooperative, has been assigned to lead the audit of a public listed retailer based in Malaysia since 1990. The Company is principally engaged in the operations of a chain of departmental stores and supermarkets selling a broad range of goods ranging from clothing, food, household goods, other merchandise and shopping center operations. With the ever-changing market dynamics, the company ventured into online retailing last year to offer a different shopping experience to the local consumers.
In the preliminary stage of the audit, some of these issues have been reported to you by Allen (you’re subordinate) in the following structure:
1.1) A brief background of your assurance client’s company
1.2) Issues related to the internal risk assessment and management
1.3) Issues related to the internal control system for sales cycle
You are required to elaborate on these issues by adopting the approach of narrative writing from the perspective of Allen. Do not include the analysis of these issues in this section.
2) Evaluation of the issues (25%)
Evaluate the implications/impacts of the issues in your section 1 on your client company’s operation and financial reports. You must support your evaluation with empirical evidence reported in the journal articles preferably from the publisher of Elsevier, Emerald or Taylor & Francis; or professional journals such as articles issued by the CPA, or the American Accounting Association. Supporting your argument with unpublished journal articles are strictly prohibited. Further, do not include the recommendation for improvements in this section.
3) Audit plan (50%)
You are required to formulate an audit plan in response to the identified risk regarding the assurance engagement. According to the policy of KPNG, you must present your plan in the following structure:
3.1) Risk assessment
Illustration of the risk assessment procedures of the external auditor in the context of the issues in your section 1. You must demonstrate how these issues affect your :
· Assessed risk of material misstatement,
· Audit risk model
Further, briefly discuss about the auditor’s statutory rights and duties in connection with professional scepticism.
3.2) Test of control
Demonstrate how the assessed control risk affects your control-testing procedures. Further, clearly specify the objective and the rationale of such procedures.
3.3) Substantive procedures
Illustration of the substantive procedures of external auditors by highlighting how these issues in your section 1 affect the assertions on the account balances and transactions. Elaborate on the auditor’s response to these risks by specifying the type of audit procedures, the extent of sampling (if relevant), and the rationale of selecting such procedures in terms of sufficiency and appropriateness of the evidence (ISA 500).
4) Appendix (10%)
a. Summary of the audit plan in the prescribed format as follows:
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