Auditing and Assurance: Identifying Inherent and Control Risks

AUDITING AND ASSURANCE

TABLE OF CONTENTS
QUESTION......................................................................................................................................1
ANSWERS......................................................................................................................................1
A) Identifying elements of inherent risk and control risk............................................................1
B) Audit program being utilised for auditing the marketable securities account for the current
year...............................................................................................................................................2
C ) Factors that influence the auditor's opinion analysing the strengths of internal control over
financial reporting. ......................................................................................................................3
CONCLUSION................................................................................................................................3

QUESTION
The question is related to the understanding of situation related to the inherent control risks, audit
planning and evidence gathering. In the present case Ms Abbas has been appointed as CEO for
directly dealing with all the internal audit department. Ms Abbas has restructured the investment
portfolio of business. As an independent auditor of Tobias ltd various risks associated with
company and respective audit implications are to be identified.
ANSWERS
A) Identifying elements of inherent risk and control risk
Audit risks refers to risk when an inappropriate opinion is expressed on financial
statement of company. It is divided into inherent risk and control risks. Inherent risks of material
misstatements in financial statements that arises because of errors and omission due to factors
other than control failures. Inherent risks are considered where degree of judgements are high,
estimations are involved or when transactions of company are complex.
Control risks relate to material misstatement that arises due to failure or absence of
operations of relevant control systems of the entity. Internal controls are required for preventing
and detecting the frauds and errors instances. This risks is high where internal controls are not
adequate for preventing and detecting fraud and error in financial statements.
In the present case inherent risks can be associated with the transactions. As company is
having high investments transactions of securities that involves high estimations risks. While
planning the audit, auditor has to consider the investment portfolios, the amounts invested by the
company. It has to analyse the level of speculations made by CEO in the investments. The long
term investments are to be analysed by the company as risky shares can lead the company to
suffer losses.
Auditor has to inspect the portfolio of investments identifying the securities, mortgages
and instruments that are not active and are nor deriving any profits for company. Broker charges
are part of controls risks, auditor has to inspect the invoices that are issued by the broker for the
investment and also ensure that it does not include the personal investment consultancy shares of
Ms Abbas. All the fees paid by the company is to checked that they are related to the
investments of company only. Investment documents of company related to investments are
required to be audited. Increase in net income of the company may involve elements of inherent
and control risks.
1