Background: After a bitter disagreement with their External Auditor, Kelptos (a Charity providing work for the Victorian government) fired their External Auditor and is looking for a new External Audit firm.
The CEO of Kleptos (W.E. Chatham) has asked Dewy Cheatem, and Howe to bid on doing the Kleptos Audit. However, as a precondition of taking the contract, you must agree to not complain about the funding receipts from the Victorian government being journalized on receipt as revenue (even though the contracted work has not yet been done).
Your early assessment of Kelptos indicates that it has a high-risk business environment (0.83), poor to none existent internal controls (0.95), and the detection of problems during any reasonable level of audit is very poor (0.75).
Mr Chad Cheatem has asked for a memo on whether or not to accept the Kleptos engagement. In that Memo make and support a decision on the acceptance/(rejection) of the job—as part of the support:
a) List and discuss what you need to consider before accepting the Kleptos Audit engagement.
b) Show the audit risk model and use it to estimate and evaluate the audit risk of the Kleptos Audit engagement.
c) If your firm’s Audit Risk tolerance is 0.15, would you accept the audit? Explain.
d) Discuss what changes Kelptos should implement to make their Charity more auditable.