ACCT3000 Auditing Assignment - Free Samples to Students
Answer:
Introduction and Scope
The main purpose of this memorandum lies in the assessment of the organizational factors that can increase the audit risk in Forest Limited. From the provided scenario about Forest Limited, it can be observed that there are three accounts that are subjected to increase the audit risk and the following discussion provides details about them along with the reasons:
Risk Assessment
The three accounts that are subjected to increase the audit risk are Accounts Payable account, Accounts Receivable account and Inventory account.
According to the given scenario o
f Forest Limited, the accounts payable account is subjected to increase the audit risk and there are some specific reasons. The implementation of upgraded accounts payable system has led to the update issue with the creditors balance due to the split into $AUD and $US. In addition, the accountants are required to re-enter the creditor balances manually. This whole situation shows the weakness in the internal control of Forest Limited to establish an efficient mechanism for accounts payable. In addition, this weakness also create scope for accounting fraud related to creditors as accountants may manipulate with the values of creditors while manually entering them for their personal benefits (William Jr et al. 2016). Thus, the control risk is high in the presence of the accounting fraud.
After that, the accounts receivable account can be considered as a factor that can increase the audit risk of the company. As per the provided scenario, the debtors are invoiced in US dollar and the money is received after one month when the shipment is received. Forest Limited receives debtor amount at the reduced value in $US due to the effect of decreased value in currency. Moreover, Forest Limited has to incur more loss as they have to make the payment to plantations companies in $US before timber cutting. This whole aspect indicates towards the foreign exchange risk at the time of doing international business. Forest Limited does not have any control on this risk and thus it increases the inherent risk of audit. (Chandler 2014). The assertion of ‘occurrence’ is at the risk of material misstatements.
Lastly, the inventory account of Forest Limited is subjected to increase the audit risk of the company. It can be observed that there is a decrease in the source of timber from 70% to 50% due to the protests from the environmental groups. This scenario is not in the hands of the company and thus, it increases the inherent risk of auditing related to the inventory. This aspect has slowed the production along with affecting the suppliers of the company. There will be major pressure on the managers to value the inventory. In this case, the assertion named ‘completeness’ of inventory is at risk of material missstements (Chandler 2014).
In addition, the specific incident that has made the state government nervous about selling the timber resources to Forest Limited can question the going concern status of the company and it can increase the audit risk in Forest Limited. The going concern assumption states that the companies will be able in continuing their business operation for unforeseeable future. However, in case the state government stops supplying the resources of timber to Forest Limited, it would not be possible for the company to carry on their business operation in future. Thus, this aspect increases the audit risk of the company. In addition, the fall in value of Japanese Yen against US dollars shows the bad condition of Japanese economy. As Forests Limited exports woodchips in Japan, fall in the value of Yen can stop exporting woodchips from Forest Limited and this aspect can question the going concern condition of the company.
Audit Approach
There are three elements of audit risk model; they are Inherent Risk, Control Risk and Detection Risk. However, in the provided case of Forest Limited, control risk is the affected element for all the three accounts. The presence of control risk indicates towards the presence of weakness in the internal control that is not in the hand of the auditors as the management of the companies is responsible for this (Messier et al. 2015).
In this context, it needs to be mentioned that the whole audit plan will be affected with the presence of these three accounts as the auditors need to plan the audit operation based on the nature of the risks. As all the three risks are control risk in nature, the auditors are required to conduct an evaluation of the internal control of Forest Limited. The result of this internal control evaluation will help the auditors in deciding the extent of control risk. In case the control risk is high, the auditors are required to take appropriate actions to bring reduce them at the acceptable level (Knechel et al. 2016).
In this process, the auditor of Forest Limited is required to undertake certain actions to mitigate the risks related to these three accents and they are shown below:
It can be seen that both the inherent risk and control risks are there in the operation of Forest Limited. For this reason, it is suggested for the auditor to take into consideration the transactions and accounts balances test in the primary basis that will be helpful in the reduction of these kinds of audit risks (Chan et al. 2018). As a part of this, it is needed for the auditors to conduct substantive audit tests on various transactions of Forest Limited related to sales, creditors, purchase and others as per the standard of ASA 505. At the same time, the auditors are required to approach to the management of Forest Limited related to the going concern issue so that strategies can be developed to reduce this risk according to the standard of ASA 570. It is the responsibility of the auditors to carry out different tests in order to ensure that there is not any accounting fraud in the internal control of the company according to the standard of ASA 240 (Griffiths 2016). In order to verify and test the inventory of the company, the auditor is required to follow the standard of ASA 501.
References
Chan, David Y., and Miklos A. Vasarhelyi. "Innovation and practice of continuous auditing." In Continuous Auditing: Theory and Application, pp. 271-283. Emerald Publishing Limited, 2018.
Chandler, R. "Auditing and assurance." London School of Economics. London (2014).
Griffiths, Phil. Risk-based auditing. Routledge, 2016.
Knechel, W. Robert, and Steven E. Salterio. Auditing: Assurance and risk. Taylor & Francis, 2016.
Leung, Philomena, Paul Coram, Barry J. Cooper, and Peter Richardson. Modern Auditing and Assurance Services 6e. Wiley, 2014.
Messier, William F., Steven M. Glover, and Douglas F. Prawitt. Auditing & Assurance Services: A Systematic Approach. Qing hua da xue chu ban she, 2015.
William Jr, Messier, Steven Glover, and Douglas Prawitt. Auditing and assurance services: A systematic approach. McGraw-Hill Education, 2016.
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