Noor Packaging: materiality, audit risks and an ethical threat

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• 5% of profit before tax = $225,000.
• 0.5% of revenue = $400,000.
• Choose the lower figure of $225,000 or a figure close to it, because profit is the key measure for the owners and the bonus depends on it.
• Performance materiality at 75% = $168,750, set lower because of the risk of aggregation of misstatements and the control risks.
• Revise the amount if the actual results differ from the draft, and a lower level may be used for related party matters because of their nature.
• Documentation of the judgement and of the clearly trivial threshold.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• New ERP system: risk of errors in transfer of data and in processing, and in the integrity of the opening balances.
• Response: test data migration, controls over the system, and extend substantive testing or use data analytics on the whole population.
• Inventory: risk of overstatement of slow moving stock and net realisable value.
• Response: attend the count, review ageing, compare post year end sales prices to cost and test the provision.
• Director's loan: related party risk, completeness of disclosure, recoverability and whether it is legal.
• Response: obtain confirmation, review the terms and the ability of the company to repay, and consider the disclosure requirements.
• Revenue: risk of fraud and cut-off error because of the bonus incentive and late sales entries last year.
• Response: cut-off testing, review of credit notes after the year end and examination of large and unusual transactions.
• Management override of controls is always a significant risk, so test journals and estimates.
• Consider going concern if there are signs of cash pressure, after the loan to the director.
• Professional scepticism should be emphasised with the team because of the incentives.
• Allocate more experienced staff to the high risk areas and consider a specialist for the system.

Marks counted: 0 of 12

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Valuation services create a self-review threat if the audit relies on a valuation prepared by the same firm.
• Tax advice may create an advocacy threat or self-review if the audit tests the tax charge.
• The fees from non-audit services at 40% of the audit fee increase the self-interest threat and dependency on the client.
• Safeguards: use different teams and partners for the non-audit work and review by a partner who is not involved.
• Consider whether the valuation work is significant to the financial statements, in which case the service may need to be declined.
• Communicate with those charged with governance about the services and the fees.
• If the threats cannot be reduced to an acceptable level, decline or withdraw from the non-audit service or the audit.

Marks counted: 0 of 7