ACCT1059: Auditing Question 2022

ACCT1059: Auditing 1
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Institution
Course
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Questions:
1. Significant inherent risk at the industry and entity levels that could potentially increase the risk of material
misstatement in Sheridan AV’s financial statement.
W/p ref: A1
Prepared by: ___________
Date prepared: ___________
Sheridan Audio Visual Limited
Financial year ending 31 March 2021
Inherent Risk (IR) Assessment
IR description Accounts Assertions IR assessment
(2 x 2= 4 marks) (2 x 1 = 2 marks) (2 x 1 = 2 marks) (likelihood &
materiality)
(2 x 2 = 4 marks)
1. Industry level
a) Rapid changes
in the industry,
such as
frequent
updates or
changes in
technology
which results in
obsolescence
and high
vulnerability
b) High level of
competition or
saturation in
the market
coupled with
declining
margins
a) Inventories- If there
are rapid changes in
technology or rapid
product
obsolescence
occurs, the carrying
value of finished
goods and raw
materials inventory is
different from the
value stated in the
balance sheet
b) Sales – Increase in
sales while the
industry trend is a
decrease suggests that
there may be
abnormal transactions
a) Accuracy
b) Occurrence
a) The electronics
industry is generally
characterized by rapid
changes in
technology. The buzz
created around new
technology adversely
affects demand for
products that have
been in existence.
Being in the
technology industry, it
is therefore highly
likely that a company
will have to regularly
innovate to either beat
the market to catch up
with the market.
Materiality level
should be set low.
b) There is a high level
of saturation in the
market segments that
Sheridan AV
operates. There is for
instance a wide range
of TVs available in
the market. The
likelihood of having
obsolete inventory is
high. Materiality level
for sales should be set
low.
2. Entity level
a) Sheridan AV is
being audited by
an external
auditor for the first
time
b) abnormally
quick growth
in profitability
compared to
other
companies
within the
industry
a) All accounts- As
this is the first
external audit, there
is risk that Sheridan
AV may have been
recording
transactions in
inappropriate
accounts
b) Sales- Sales is a key
component of profit
and would be the
most significant
account to tamper
with in altering
profit
a) Completenes
s,
classification
b) Occurrence
a) Sheridan AV’s
financial reports
have previously
been prepared by a
professional
accounting firm.
This year, the
company’s
employees are
preparing financial
statements for the
first time and are
already feeling the
pressure. Rosie
anticipates that they
might run into
problems and is
already prepared to

consult with Alex
Gold on matters
relating to financial
reporting. There is a
high likelihood that
transactions will be
classified wrongly.
Materiality levels
should generally be
low.
b) There is a likelihood
risk relating to
Sheridan’s quick
rapid revenue
growth. The fact that
the growth is
attributed to Emily,
the new sales
managers, coupled
with the introduction
of a bonus scheme
creates pressure for
the company to
increase sales so that
Emily and two
others can earn
bonuses. Materiality
levels for sales
should be set low
(4 + 2 + 2 + 2 = 10 marks)
2. Assessing the control risks of Sheridan AV for the following assertions and write your conclusion in the
Working Paper A2.
W/p ref: A2
Prepared by: ___________
Date prepared: ___________
Sheridan Audio Visual Limited
Financial year ending 31 March 2021
Control Risk (CR) Assessment
Accounts / Assertions CR description CR assessment
(8 x 2 = 16 marks) (likelihood & materiality)
(8 x 2 = 16 marks)
1.Sales / Occurrences This is the risk that sales that did not in
fact occur are recorded as having taken
place.
There is a high likelihood that
fictitious sales have been recorded
in order to boost profitability.
These financial statements are
being prepared as part of the
processes towards obtaining a
public listing and hence there is
pressure to have the financial
performance of the company look
good.
2.Sales/ Completeness This is the risk that some sales
transactions of sales that actually took
place were not recorded.
The likelihood that some
transaction might not have been
recorded is moderate. For credit
sales taken through the phone,
there is an elaborate order process
that involves a number of staff.
Store sales are more susceptible to
recording errors or deliberate
omissions because there is only
one staff involved and he is not
supervised
3.Sales/ Accuracy This is the risk that documents in the sales
cycle contain inaccurate amounts. It is the
risk for instance that an incorrect price is
As the sales cycle proceeds, staff
check the documents presented to
them for correctness of the