Audit Risk Assessment of Forest Limited

This memorandum assesses the organizational factors that can increase the audit risk in Forest Limited. It discusses the three accounts that are subjected to increase the audit risk and the reasons behind them. The accounts are Accounts Payable account, Accounts Receivable account and Inventory account. The audit approach includes evaluation of internal control and conducting substantive audit tests.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

AUDITING
MEMORANDUM
TO: The Audit Manager
FROM: Audit Senior
DATE: June 30, 20X8
SUBJECT: Audit Risk Assessment of Forest Limited
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 of 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

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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,

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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:

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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.

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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.