Audit Model: Risks and Recommendations for Audit Activities

RUNNING HEAD:- Audit model 1
Auditing Case Study
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Audit model 2
Table of Contents
Introduction................................................................................................................ 3
TASK 1........................................................................................................................ 3
Case Study.............................................................................................................. 3
Department of Subsidy: Evaluation of Audit Activity and Internal Control..............3
a) Risks in Internal Control in the Claim Processing Unit......................................3
b) Auditing Activities............................................................................................. 5
c) Recommendation to the Audit Partner.............................................................7
TASK 2........................................................................................................................ 8
Case Study.............................................................................................................. 8
Directors’ Responsibilities in Relation to the Books and Records of the Company.
............................................................................................................................. 8
Conclusion.................................................................................................................. 9
References............................................................................................................... 10

Audit model 3
Introduction
With the ramified business changes, every organization needs to implement the audit and
assurance frameworks to strengthen the transparency and reducing the financial audit risk. It is
analyzed that an auditor is required to audit the financial statements of a company, applying
reasonable knowledge, and duty of care, on the basis of documents, records, accounts, and
statements, and after inspection of the financial statements the auditor has to certify the annual
report. However, there are several audit risk which might could be divulged by the auditors in the
implemented audit model. These audit risks is found on the finical annual report of company.
TASK 1
Case Study
Department of Subsidy: Evaluation of Audit Activity and Internal
Control
a) Risks in Internal Control in the Claim Processing Unit
i) Inherent Risk: Inherent risks refer to the risk of material misstatements in the financial
statement that may occur due to factors other than those which arise due to inefficiency,
weakness, and lack of adequate control in the internal control system. Inherent risks are
positively related to degree of judgment in estimation, and complexity of transactions. Inherent
risk is higher where the business enters into transactions where the value depends upon market
situation and future events. Where the business operates in a comparatively stable environment,
inherent risk is lower. Auditors determine the assessed level of risk associated with an account
figure in the financial statement to plan the audit procedure of the account involved. Assessment
of inherent risk depends upon the knowledge, experience, and judgment of the auditor about the
industry in which the entity operates, types of transactions in the particular entity, and the assets
and liabilities the entity owns (Companies Act, 2019).
Inherent risk arises where complex calculations are involved. In the instant case, claims are made
in Form 345 P along with supporting documents. In agricultural business subsidies are given for
a number of inputs. The claimant might have an array of transactions during the course of the
business involving different amounts and rates. Thus the net amount of claim in Form 345P is
supported by bunch of documents like cash memo, tax invoice, for different purchases, etc. and
resultant arithmetical calculations. The forms and documents are first checked by the clerk, then

Audit model 4
it is sent to claim officer, who checks the documents for validity, and sends those approved for
payment to the claim supervisor, who after prepayment review of the claims disburse payments
(Millichamp, 2002).
In this line of internal control, the validity of the documents is checked at every point. The
amount in the claim needs to be checked to make the internal control meaningful. But here arises
the inherent risk (Taylor & Osborne, 2019). Checking the calculation and amounts in the
supporting documents and verifying the figures in reference to the claim amount is subject to risk
as long and complex arithmetical calculations are involved in it. No amount of control can fully
insulate the account from this kind of risk as mistake is natural to commit when it is complex
arithmetic. Hence there is the risk of material misstatement about the claim amount in the
financial statement. The previous accountant has reconciled the bank statement balance with the
cash balance as per cash disbursement balance record in the office. Since claim amount is only
being paid, there cannot be discrepancy in the bank statement. The inflated amount in the claim
form makes the equal cash outflow. But the inflated amount itself remains undetected,
notwithstanding equality of balance between bank statement and cash ledger.
Thus inherent risk of material misstatement in the financial statements arises due to a factor
which cannot be rectified by improvement in the internal control system. The auditor has to
assess the risk from his own estimation based on previous audit reports indicating amount found
to have been miscalculated and misstated in earlier periods’ statements.
ii) Control Risk: Control risk is the risk of material misstatement which has arisen due to
inefficiency of the internal control system at one or more points, or there is no internal control at
the points. This type of risks can be avoided to a great extent by implementing a well-designed
internals control system. Auditors assess the control risk on the basis of past experience of the
system of the entity being audited, and the nature of the account involved.
Control risk is more prevalent in small businesses where accounts are not maintained
systematically and financial statements are prepared with less authenticate documents, or are
prepared by unskilled workforce. Material misstatements in financial statements cannot be
prevented or corrected, even if detected due to lack of control (Dublin, 2019).