PA503 FUNDAMENTALS OF AUDITING
Materiality and Audit Risk
CLO2 | LD2/P3
Instruction: Please answer ALL questions.
| Part 1
NEW CLIENT ACCEPTANCE DECISION
After completing and discussing this case, you should be able to:
1. Understand the types of information relevant to evaluating a prospective audit client
2. List some of the steps an auditor should take in deciding whether to accept a prospective client
3. Identify and evaluate factors important in the decision to accept or reject a prospective ...view middle of the document...
The company’s annual financial statements have been
audited each of the past 10 years in order to comply with debt agreements and
to receive favourable profit rates on the company's existing line of credit.
Since the company's 31 December financial year-end has already passed, time
PA503 FUNDAMENTALS OF AUDITING
is of the essence for the company to contract with a new auditor to get the
audit under way.
The firm partner is interested with the idea of having a client in the
textile industry, especially one with the favourable market position and
growth potential of Unggul Holdings Berhad. Although there are several
textile company in the industry, your accounting firm has never had a client
in the textile industry. Most of current audit clients are in the hospitality
services industry. Thus, the partner feels the engagement presents an
excellent opportunity for the accounting firm to enter a new market. On the
other hand, knowing the risks involved, the partner, wants to make sure the
client acceptance decision is carefully considered.
UNGGUL HOLDINGS BERHAD BACKGROUND
Unggul Holdings Berhad is as medium –sized textile company. Although the
shares are not publicly traded, the company is planning an IPO in the next 5
years in hopes that they will be able to trade the shares on Main Market
Bursa Malaysia. Your team has been assigned to gather information in order to
make a recommendation on whether your firm should accept Unggul Holdings
Berhad as a client.
The company wants to hire your firm to issue an opinion on their December 31,
2015, financial statements. At the same time, the CEO has expressed interest
in obtaining help in getting their recently installed information technology
(IT) system in better shape. They also want your firm's advice and guidance
on getting everything in order for the upcoming IPO. During the initial
meeting with company's management, the following information was obtained
about the industry and the company.
The Malaysian Textile Industry Trend and Development
The domestic retail textile market continues to excite. That there is still
considerable optimism surrounding the industry has been evidenced by
continued investments in shopping malls and retail outlets. Regularly, there
arises a consistent stream of events or media announcements that tout of
developments in the sector. New malls to be built or are opening, existing
malls upgraded or will have extensions added to them, prime retail lots
getting scarcer while their rental rates soar, more labels and brands making
their entry; all these developments, committed to way before the launch of
the recently launched Economic Transformation Programme (ETP), can only mean
that the retail sector is still a very vibrant sector.
However this vibrancy and promise are not without attendant challenges.
Competition for resources needed to fuel the sector has pushed costs up, and