Ican 2023 Audit And Assurance Question 3

The following issues emanated from the pre-audit meeting of FIFO Limited: i. The operating environment has been affected by the COVID-19 pandemic. Management has tried to react to it by creating a number of policy initiatives which have been embarked upon to stem the negative impact of the pandemic on the company. As a direct consequence of the slowdown in business, there was some contraction in Q2 2020 financial performance which affected the half year results and led to a revision of the previously approved 2020 budget. The effects of the pandemic on the economy includes a shrink in Gross Domestic Product, reduced yields on investment and government securities, growth in foreign exchange rates and an upward trend in inflation. This has led the company to make loss in the year. The significant drop reflects the negative impacts of the disruption caused by COVID-19 pandemic; ii. There is the likelihood of increase in account receivable balance due to inability of customers to make sales and repay balances; iii. The company focused on ensuring that there was sufficient liquidity to meet daily operations; iv. With the loss position, the engagement team has to look at appropriate benchmarks for materiality. Profit before tax from continuing operations is often used for profit-oriented entities. When profit before tax from continuing operations is volatile, other benchmarks may be more appropriate, such as gross profit or total revenues; v. The firm’s software has formula for calculating materiality, after it has been based on the selection of an appropriate benchmark, The fundamental requirement is for the auditor to exercise professional judgement in assessing materiality; vi. Members of the engagement team should declare their independence and client’s information should be kept confidential; vii. To meet the agreed timelines, all preliminary engagement activities should be completed as scheduled and submitted to the Partner for prompt review; and viii. Preliminary analytical review is a key procedure in helping to assess risk in the planning of an audit. It helps to identify the existence of unusual transactions or events and amounts; ratios and trends that might indicate matters that have audit implications. This may assist the auditor in identifying risks of material misstatements due to fraud. Hence, it should be handled with care. At the end of the pre-audit meeting, an Audit Associate has requested for some explanations from you.