Auditing 3014

Q1 Case study Analysis

1. Identify and explain the Business Risk to the auditor

2. Identify the Key Account at Risk

3. Identify the prime Assertion

4. Write a practical substantive test that links to the assertion and the key account at risk.

A business risk approach allows the auditor to

* Identify threats faced by the organization

* Recognises that most business risks will eventually have an effect on the financial statements

* Increase the chances of identifying risk of material misstatements in the financial reports

Business risk categories:

1. Financial risk: funds availability, constraints on credit. Complex financing arrangements

2. Operational risk: changes in supply chain, lack of competent personnel, changes in IT environment, changes in key management

3. Compliance risk: environmental breaches, exposures to litigation, contingent liability.

Income Statement Assertions

Occurrence- whether recorded t/a included in the f/s’s actually occurred during the acct period –i.e. did the rev and exp actually take place?*concerned with possibility of including t/a’s that shouldn’t have been recorded = violation of overstatements eg/sales revenue

Completeness- whether all t/a’s that should be included in the f/s’s are included –i.e. all rev and exp*concerned with possibility of omitting t/a that should have been recorded = violation of understatements

Accuracy- whether t/a’s (rev an exp) have been recorded at the correct amounts–eg/using wrong price or calculation error eg/complex discount term; foreign exchange calculations

Classification- whether t/a’s (rev and exp) are recorded in the appro accounts eg/ recording admin salaries in COGS eg/all items but in particular exp’s as high risk incorrectly capitalized

Cutoff- whether t/a’s are recorded in the proper acct period

Balance Sheet Assertions

Existence- whether A/L/E’s actually exist on the balance sheet date–are they real?*concerned with the inclusion of amounts that...