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(a) Explain what is meant by the acceptable overall audit risk, and describe the factors that influence this risk. Provide an assessment of the acceptable audit risk for the coming audit as high, medium or low. You need to support your answer with reasons.
(10 marks)
(b) Based on the information provided on pages 2 and 3 of the case study, identify the significant risks of material misstatement in the coming audit, and classify them as inherent or control risks.
(20 marks)
(c) Based on your risk assessments in question (b) above, carry out a preliminary assessment of the risk of material misstatement, and decide whether it is high, medium or low. You need to justify your assessment.
(2 marks)
(d) Perform an overall analytical review of the financial statements of KBCL. Your review should include:
i. A horizontal and a vertical analysis of the 2018 and 2017 financial statements. Prepare this analysis using an Excel spreadsheet.
(8 marks)
ii. Calculation and analysis of relevant financial ratios for 2018 and 2017, including a comparison with industry averages. You may find the financial ratio formulae on page 8 of this case study useful.
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