CASE STUDY ON AUDIT PLANNING AND TESTING
This guide provides some suggestions on how to do the case study. The examples given in this guide are NOT based on this particular case study.
• There are many possible factors affecting audit planning & testing but you should focus on the facts given in the case study when answering the questions. E.g., if the case study does not mention an audit committee, there is no need to discuss the lack of an audit committee.
• Get straight to the point – i.e., answer the requirements directly. There is no need to write an introduction or a summary. You do not need to cover issues that are not directly relevant to the requirements, e.g., factors about accepting/continuing an engagement or auditor independence issues. You do not need to explain any general theory about the audit process (e.g., from audit planning to audit completion). If you find yourself copying definitions and theories from the textbook etc., then your answer is most likely not specific enough to get marks. Your answer should focus on “application” – i.e., identify inherent and control risk factors based on the facts given in the case, and explain audit tests that are suitable for the relevant assertion of the relevant account for this audit client.
• Ensure your answers correctly address the specific assertion of the account/transaction class involved. Focus your analysis on the completeness assertion of purchases, not any other assertion, nor any other account balances/transaction classes.
Assessing acceptable audit risk/inherent risk/control risk:
• Identify the circumstances that affect the acceptable audit risk/inherent risk/control risk of the specific assertion of the transaction class/account. Consider the following points when writing your answer:
How does a particular risk factor affect the likelihood of misstatement for this assertion of this particular transaction class/account balance? Does this factor result in an increase or decrease of the risk? What is the nature of the likely misstatement, e.g., error or fraud? Indicate the direction of the likely misstatement if a fact clearly suggests that an overstatement or an understatement is more likely. Briefly explain how exactly this risk factor can cause a misstatement, e.g., what kind of error or fraud is likely to occur due to this risk factor?
These points can actually be covered in one or two brief sentences for each risk factor. An example is as follows: “The merger of the audit client and another business during the year is a non-routine transaction, which is likely to cause accounting staff to make mistakes relating to the [—] assertion of the [—] account because the accounting staff are less experienced in recording non-routine transactions. This increases the inherent risk of both overstatements and understatements due to errors.”
If the risk of misstatement is due to the possibility of fraud, very briefly explain the motivation/incentives for the fraud and how these affect the specific assertion of the account in the question.
Many incentives are general risk factors (i.e., they affect many assertions and many accounts). You do not need to analyse any other assertion or any other account. However, you should clearly explain the link between the fact/incentive and purchases. E.g., if you just write “[fact] gives managers incentives to overstate profit because…”, this is a good start but think about what’s missing from this sentence – how do you link this sentence to purchases?
Auditing – Guide to the Case study, p.2
There may be several risk factors that have similar effects so you can list these risk factors together (e.g., in one sentence or one paragraph) and then explain their effect on the assertion/account just once, instead of repeating the same explanation for each individual risk factor.
Ratios
• Clearly discuss whether the ratio has improved or declined and over what period of time or in comparison to the industry average.
• Give a reasonable explanation as to why the ratio may have changed. Think like an auditor! What could be causing this ratio to have changed?
Appropriate audit procedures
• Briefly but clearly explain the audit procedures that need to be performed. Give enough details to show the reader how this is actually a suitable procedure for the assertion and account/transaction class in question, e.g., what kind of test (physical inspection of what? External confirmation with whom?), what kind of documents, and the direction of the test (e.g., tracing or vouching). It also helps to briefly explain how this audit procedure is suitable for the type of misstatement/risk you have identified, e.g., how can this procedure detect this kind of error or fraud?
• A good answer with sufficient details usually requires only two to three sentences (sometimes just one if you’re good at this).
General information
• Application of audit principles using the facts of the case is more important than giving basic definitions and general theory without application. Given that there is a word limit, there is no need to define concepts like the purpose of an audit or provide definitions of the elements of the audit risk model. It’s usually not necessary to state any general theory/definitions, but if you think it’s necessary, then incorporate definitions, main audit concepts and audit standard requirements naturally into your arguments in the context of the case study
• You do not have to specifically cite Auditing/Accounting standards unless they are directly relevant to the requirements. There is usually no need to cite any Auditing/Accounting Standards.
• Some of you may feel there’s too much to say, given the word limit. Start with the most obvious issues first, and if there’s still room, explain additional issues that are directly relevant to the requirements. Do not waste time on issues that are not directly relevant to the requirements or to the facts in the case study.
• It is important to cover as many risk factors as you can identify with brief, clear and accurate explanations, instead of explaining only one or two risk factors in a lot of detail without mentioning any of the other risk factors. However, if you just put in all kind of facts from the case without correct explanations or the ability to correctly classify the facts into inherent versus control risks, you will not receive marks for these.
• For example, to obtain full marks for the assessment of inherent risks, you need to identify 85% or more of the risk factors in the case, and provide clear/correct explanations of how the risk factors affect the risk of misstatements for the assertion/account balance/transaction class in the question.
• You can use point form when writing the case study, but ensure you use clear, concise and complete sentences. Do not just throw in key words or half sentences to make the marker guess
Auditing – Guide to the Case study, p.3
your meaning.
• Carefully read your own case study before submission. Sometimes what you have written does not accurately convey your meaning. Is your meaning clear to the reader? It is a good idea to ask someone (e.g., a friend who is NOT doing this course) to check your case study for understandability and grammar issues. Be very careful about the risk of plagiarism if you ask a classmate to check your case study. Even if your classmate copied your case study without your knowledge or consent, both of you are liable under the University’s plagiarism rules.
• Some people do not bother to “spell out the basic logic” when doing the analysis because they think “isn’t this obvious?” Please remember you need to show your knowledge and understanding to the marker. We can only mark your case study based on what you have written. If you don’t provide clear explanations with sufficient details, we cannot give you marks for knowledge that you may have but do not show in your answers.
Marking rubric
• The marking rubric is available on Blackboard in the “assessments” – “Case study” folder
