Answer :
When developing the audit strategy for High-Tec Limited, auditors should consider matters such as understanding the industry and the company's operations, assessing the client's business risks.
(a) When developing the audit strategy for High-Tec Limited, there are several matters that need to be considered. These include:
1. Understanding the industry and the company's operations: It is important to gain a comprehensive understanding of the e-commerce industry, including the specific risks and challenges faced by companies operating in this sector. Additionally, a thorough understanding of High-Tec Limited's operations, such as the design and development of software and the sales distribution channels, is crucial to assess the relevant risks.
2. Assessing the client's business risks: It is essential to identify and understand the key business risks faced by High-Tec Limited. These risks could include technological advancements, competition, cybersecurity threats, and changes in the regulatory environment. This assessment helps in determining the areas that require more audit attention.
(b) In planning the audit of High-Tec Limited, several audit risks need to be considered. These include:
1. Inherent risk: Inherent risk refers to the susceptibility of the financial statements to material misstatement before considering the effectiveness of internal controls. For High-Tec Limited, inherent risks could include the complexity of revenue recognition for franchise agreements, valuation of deferred income, and the risk of misstatement in relation to the overseas manufacture of security features.
2. Control risk: Control risk refers to the risk that the client's internal controls will not detect or prevent material misstatements. As High-Tec Limited does not have an internal audit department and has limited board oversight, the control environment may be weak. This increases the control risk and the need for substantive testing.
3. Detection risk: Detection risk refers to the risk that the auditor's procedures will fail to detect material misstatements in the financial statements. The auditor must design audit procedures to reduce detection risk to an acceptably low level. In the case of High-Tec Limited, the auditor needs to design appropriate procedures to address the specific risks associated with revenue recognition, deferred income, and the overseas manufacture of security features.
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