Auditing, Assurance and Risk Assessment

Case Study (Part 2) – ACCT 3000 Semester 2, 2020
You are an Audit Senior on the AUDIO Health Limited (AUDIO) audit engagement for
the financial year ending 30 June 2019. AUDIO specialises in the design and manufacture
of implantable hearing aids and invests more than twice the industry average in research
and development. While undertaking audit planning procedures you become aware of the
AUDIO has been developing its latest hearing implant, the X5, for a number of years.
AUDIO has invested heavily in research and development of the X5 and has capitalised a
significant amount in relation to the development phase of the product. Market studies and
prototypes of the X5 have proved successful for bringing it to the market. In July 2018,
AUDIO acquired two technologically advanced machines specifically designed for
manufacturing the X5, at a cost of $15 million each. Production and sales of the X5 hearing
implant commenced in October 2018, and demand for the product has been extremely high
since its launch. AUDIO has sold large volumes of the product and further manufactured a
large stockpile of the X5 in anticipation of on-going high demand, and a substantial number
have already been implanted in patients.
There has recently been a sharp increase in incidences of the implant shutting down postsurgery, resulting in a number of patients commencing legal action against AUDIO for
damages and prompting the company to initiate a recall. Initial investigations reveal that
the defect is attributable to a design flaw. It is likely that the product in its current form
cannot be sold. Management of AUDIO is confident that it will be possible to re-engineer
the two machines acquired for the manufacturing of the X5 to enable production of its four
other product lines and potentially for other products currently under development.
You have raised concerns with AUDIO’s audit committee on improving the competence
and objectivity of the internal audit department. Currently, the internal audit department is
made up of three recent graduates with no prior experience who periodically report the
Audio’s Chief Executive Officer Dr. Dave Bautista.
Prepare a memorandum to the audit manager, outlining your risk assessment relating to
AUDIO Limited. When making your risk assessment:
(a) Identify three (3) key account balances from the information provided that are
subjected to an increase in audit risk. Briefly explain what factors increase the audit
risk associated with the three (3) accounts identified. In your explanation, please
mention the key assertion(s) at risk of material misstatement.
(b) Identify how the audit plan will be affected and recommend specific audit
procedures to address the risks associated with each account identified.
(Please Note – Maximum Word Limit: 950 Words)

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