The three elements of audit risk relating to Chestnut plc business

This is a paper that focuses on the three elements of audit risk relating to Chestnut plc business. The paper also provides a case scenario of the business to focus on the assignment.

The three elements of audit risk relating to Chestnut plc business

Assessment task details and instructions:

You are to answer all four questions.

Question One (25 Marks)
Before accepting a new client, an audit practice must consider the audit risk with respect to that potential client. You are a partner in an audit practice and have been approached by Chestnut plc to become their new auditors.

You have ascertained the following information about Chestnut plc and are considering whether or not to accept the position as auditor.
The company is based in a number of cities in the UK, writing software and employs staff from all over the world. It is ten years old and has only shown a profit in four of those ten years.  It operates mainly within Europe and sells to all countries in the European Union, dealing in all relevant currencies.

The company is looking to expand and expects that expansion to be into America and Asia, rather than the UK.

One reason for a change of auditor is that Chestnut plc are hoping to become listed on the London Stock Exchange within five years, but the directors are also concerned about the audit work undertaken by the current auditors and are considering both not paying the current year’s fees and even also taking legal action against the current audit practice.
You occasionally play golf with one of the directors of Chestnut plc and usually have afternoon tea with him after the game is completed.


a)      Describe the three elements of audit risk                   (12 marks)
b)     Discuss both the business risks facing Chestnut plc and also any ethical issues that the practice should consider in deciding whether or not to accept the company’s audit  (13 marks)
(Total 25 marks)

Question Two (25 Marks)

ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, requires the auditor to understand the entity, its environment and its controls.

A)    Firstly, identify and explain the key business areas that the auditor needs to understand in order to be able to plan the audit.
(12.5 marks)
Secondly, discuss the nature of and the reasons for audit planning. Also, explain why there is the need for flexibility in the planning and subsequent execution of an audit.

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