M/s RGS & Co., Chartered Accountants, have been appointed as the statutory auditors of Nova Engineering Ltd., a company engaged in manufacturing…

M/s RGS & Co., Chartered Accountants, have been appointed as the statutory auditors of Nova Engineering Ltd., a company engaged in manufacturing specialised industrial machinery. During the first planning meeting, the engagement partner informed the audit team that the audit would be conducted in accordance with Standards on Auditing applicable to audits of financial statements relating to historical financial information. While discussing the audit approach, the engagement partner first finalised the overall audit strategy considering the size of operations, complexity of transactions and available resources. Thereafter, the audit team was instructed to develop a detailed audit plan addressing matters identified in the strategy. The partner emphasised that before designing audit procedures, the team must obtain adequate knowledge of the client's business model, revenue cycle and procurement process, as without such understanding a proper audit plan cannot be developed. During the risk assessment process, the audit team identified that the company had recently implemented a new revenue recognition system, which could potentially affect several items in the financial statements simultaneously. The team also noticed that inventory valuation and revenue transactions carried specific risks of misstatement because of complex pricing arrangements with customers. The engagement partner explained that the first risk relates to financial statements as a whole, whereas the second relates to specific assertions for particular classes of transactions and account balances. Accordingly, the team decided to assess the risks at both levels so that appropriate further audit procedures could be designed.