logo

ADG Partners Assessment of Audit Risk Client

   

Added on  2020-05-08

6 Pages808 Words67 Views
ADG PartnersAssessment of Audit RiskClient: WOW Electrical LimitedFrom the Desk of Mark Walker To: Mr. Kate JonesIn continuation to the Memo of 17th May instant received from you, I amforwarding you my assessment of audit risk which we can encounter in the case of ourclient M/s WOW Electrical Limited. In the following pages I have given a broader viewof the difficulties and the precautions which we need to adopt while taking up the audit.Since you have entrusted the task to my team, as its leader I assure you of a fair andimpartial assessment and I shall take leads from your experience of the last year’s auditwhich was conducted by you.1.Assessing Acceptable Audit Risk(A)Reliance by External UsersAny external user, such as the lender, supplier and a regulator will try to gaugetherisks contained in the financial statements if these are materially incorrect or haveany material misstatements. I need to focus on these two components and insert cautionwhile identifying therisks associated with material misstatements. WOW needs to becautious with its bank which has put the condition of a minimum 15% profit ratio afterthe $100m loan. Taking note of last year’s misstatements by the management, I will be morecautious with the management’s reports, so that external users have no reason ofmistrust. The management also needs to take note of the fact that its supplies are highlyreliant on imports. Any changes in the administrative structure will have long termeffects on its supply chain and this may disturb the relations with the external parties.(B)Likelihood of Financial FailureInherent riskis often caused by an error or omission in financial statements. In thecase of WOW I find these happening because of management’s failure ofcontrol. Theother factor occurs because of complexity created in transactions by the management. InWOW’s case, a financial failure can also occur if the management demonstrates a highdegree of judgment when making financial estimates. I also want to issue a note of caution to the management on the following – 1

ADG PartnersAssessment of Audit RiskClient: WOW Electrical LimitedFrom the Desk of Mark Walker To: Mr. Kate Jones(a)Its improper and highly risky system of using numbered purchase orders.Even if the management continues with the practice of using them, it shouldimmediately put in place a system of checking and following theirauthenticity and implementation. I am going to discuss this issue in detail inmy notes on “Completeness Assertion of Purchase” given below.(b)The company is heavily reliant on bank debt and the management has totread cautiously with regard to its profitability. It cannot afford laxity incontrols.(c)Fast and unchecked expansion of the retail network will not only createbottlenecks in the administrative system, it will also choke the entirefinancial system if not handled with strict and adequate control measures.The above factors will also contribute to the chances of a financial failure, if themanagement does not follow the advice of this audit team. I shall be elaborating onthese factors in my notes on “Completeness Assertion of Purchase” given below.(C)Integrity of ManagementClient’s questionable integrity is the most disturbing factor for anauditor and thisislikely to force the auditor in lowering the level of the acceptable audit risk. In the caseof WOW I can mention the following two as important indicators of the management’sintegrity: (a)Its frequent disagreement with prior auditors.(b)Inadvertent change of the key financial and HRpersonnel.In my opinion, the management should not have changed the CFO at this criticaljuncture as the new incumbent will take time to understand the organisation’s workingand may not be able to provide adequate information to the external audit team.Moreover, this change will also create difficulties for the Internal Audit team of thecompany as they will not be able to adjust to changes at such a crucial juncture.2.Completeness Assertion of Purchase(A)Assessing Inherent Risks2

ADG PartnersAssessment of Audit RiskClient: WOW Electrical LimitedFrom the Desk of Mark Walker To: Mr. Kate Jones(a)Industry Factors(b)Nature of Client’s Business(c)Integrity of Management(d)Motivation to Staff(e)Results of Previous Audits(B)Assessing Control Risk(a)Pre-numbered Purchase Orders(b)Maintaining Sequence(c)Reconciling General Ledger(d)Inadequate HR Functioning(e)Review of Staff3

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
AUDIT RISK, ANALYSIS AND CONTROL IN ORGANIZATION
|14
|3344
|28

Auditing: Preliminary Risk Assessment and Analytical Procedures in Elmo Software Limited
|13
|2708
|70

Audit Risk, Independence and Case Studies of Enron, WorldCom and Lehman Brothers
|13
|3893
|222

THE AUDITING AND ETHICS
|15
|2884
|22

ACCT20075 Auditing and Ethics
|18
|3032
|74

Important Elements of Auditing Standards in Australia
|12
|2506
|368