To: Audit file
From: Senior Auditor
Re: Updates on DIY audit
The purpose of the note to reflect the changes on the audit of Do-It-Yourself Inc. for the year ended December 31, 2011 because of the fire occurred on December 7, 2011. Our preliminary audit plan will be re-assessed and the following sections need to be updated. Updated Risk Assessment:
* Because of the fire to the largest store, there is difficulty in measuring the insurance receivable, inventory value, building and other fixed assets. There is potential for contingent liabilities such as asset retirement obligations and potential lawsuits from the victims of the fire. Thus, increased difficulty and significant amount of judgment required in the audit engagement increases the inherent risk. * DIY has tight deadline to submit their audited financial statement to the bank in order to refinance the line of credit. However, as discussed in the procedure section, the additional amount of work to be performed increases inherent risk. * The inherent risk for the other 24 stores combine would not have any changes, while the largest store individually has high inherent risk. Overall impact of the inherent risk of the engagement depends on the magnitude of the burned down store, which could be potentially assessed to be high. * We would perform additional analysis on the size of the impacted store before forming a final conclusion of the overall inherent risk. Control Risk:
* It is discovered that DIY did not perform frequently backup and DIY does not have any disaster recovery plan in place. The lack of control in the affected store indicated that the IT controls are poor, which will increase control risk. * To ensure whether the control is effective in other stores, we would need to assess the control on data backup in the other 24 stores and judge whether it is an isolated case. If the control in all other stores are designed and operated properly, we would...
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