Audit Risk Assessment of Forest Limited

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

AUDITING
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,