Inherent Risk in Auditing & Assurance

This article discusses the inherent risks in auditing and assurance, including lack of internal audit team, hostile takeovers, and non-adherence to accounting standards. It also provides recommendations for auditors to mitigate these risks.

Running head: AUDITING & ASSURANCE 1
Auditing & Assurance
Name
Professor
Institution
Date
Number 2

AUDITING & ASSURANCE 2
Inherent risk description
(including Accounts and
Assertions affected)
Inherent risk assessment
(likelihood and materiality)
Proposed substantive
procedures
Lack of internal audit team
Sheridan AV lacks an
independent internal audit team
to oversee the accounting
function of the company and its
internal controls. The company
is therefore at high risk of
experiencing material fraud. As
such, its cash assets are not
appropriately safeguarded as
there is no segregation of duty,
especially in the safe cash
department. For instance, Mark,
Rosie, and Kara would be
tempted to steal the company
cash from time to time due to
the weak internal controls and
lack of an internal audit team
that generally oversees the
transactions. Additionally, the
company would most likely
face suddenly level second
turnover which may have
significant fraud (Minaxi
Rachchh et al., 2015).
Materiality: High
Lack of an internal audit
control department is
significant material inherent
risk whose need for a solution
is of a high prioritization by
the management. The high
materiality of this risk stems
from the degree to which it
would expose the company to
possible defrauding, both
internal and external (Kumar
& Sharma, 2015).
Likelihood: High
There is a high likelihood that
Sheridan AV will face
material loses due to the
potential fraud that may be
perpetuated through its lack
of an internal audit team. The
role of the internal audit
department in any
organization cannot be under-
estimated (Pallais, 2010).
The auditor would need to
perform procedures that help
in detecting fraud due to the
lack of an internal audit team.
As such, he must evaluate the
internal controls of Sheridan
AV, especially the cash
controls (Giove, 2015).
It is also essential for the
auditor to examine the
company’s financial and
operating information, review
its operating activities, and
review its compliance with
laws and regulations.
The auditor must test the
internal controls of Sheridan
AV to determine whether he
should rely on them.
Small company listed Materiality: High
Hostile takeovers have
The auditor can perform
several substantive tests to

AUDITING & ASSURANCE 3
Sheridan AV is a small
financial company. It, therefore,
may be prone to a hostile
takeover.
Many factors, such as a small
market share, will often compel
it to consider a merger or
takeover (V., 2011).
Also, as people seek to buy the
company shares, they may
defraud it through the use of
activities which make them
look good. Any small company
is most likely to be ‘swallowed’
by the bigger ones, even if it
does not wish so (Basu, 2010).
material implications on the
audit since the going concern
of the company is put at
significant risk. The company
ceases to exist and therefore
does not need to prepare any
financial statements
(Moeller, 2009).
Likelihood: High
Sheridan AV is a small
company. Therefore, there is
a high possibility of being
absorbed by other larger
companies in the industry.
Also, it faces a high risk of
hostile take-overs due to
various factors. For instance,
lack of capital may
significantly expose to take-
overs and mergers, which
would potentially lead to its
non-existence (Gay &
Simnett, 2018).
ascertain the possibility of
Sheridan AV being absorbed
by the bigger companies in
the industry (Leung, Coram
& Cooper, 2012).
He should assess the
company’s financial leverage
to ascertain any financial
challenges that could lead it
to possible hostile take-overs
(Whittington & Pany, 2013).
Additionally, he must also
consider assessing the market
share of Sheridan AV to
ascertain if the company has a
sustainable market that would
encourage it to continue
carrying out its business
operations in the future
(Gibson, 2012).
Not following proper
accounting standards
One of the inherent risk that
Sheridan AV faces is the lack
of adherence to the appropriate
standards of accounting, which
could result from inadequate or
missing documentation of
Materiality: High
An audit engagement is
centered on determining the
accuracy of the financial
statements of a company. As
such, any poor documentation
or lack of adherence to the set
accounting policies would
The auditor should perform
substantive procedures that
aim to confirm the extent of
the company’s use of proper
accounting documentation
(Roos & Stainbank, 2017).
He can send confirmations to
customers to ascertain the

AUDITING & ASSURANCE 4
accounting records. lead to inaccurate financial
reports produced by the
company. Therefore, the
matter of not following
proper accounting standards
could be highly material in
the context of the audit
(Layton, 2018).
Likelihood: High
As a small company,
Sheridan AV stands a high
chance of not adhering to the
recommended accounting
policies and financial
reporting guidelines. The
company may not have an
appropriate accounting
system that allows it to
produce proper financial
statements at the end of the
accounting period (AICPA,
2017).
amounts of products that the
company offered to them
(Chandler & Edwards, 2014).
He should also inquire from
the company’s sales and
marketing personnel the sales
that the company made in
particular periods (Wiley,
2018).
Furthermore, he can consider
testing controls to confirm
whether electronically
initiated transactions provide
adequate assurance that the
company carries out proper
accounting recording and
documentation
(Bagshaw, 2013).
Additionally, he should
consider examining the
financial statements of the
company for the detection of
possible non-adherence to
accounting policies (AICPA,
2018).
References

AUDITING & ASSURANCE 5
AICPA. (2017). Audit and Accounting Guide: Construction Contractors, 2017. Hoboken, NJ:
John Wiley & Sons.
AICPA. (2017). Audit and Accounting Guide: Investment Companies, 2017. John Wiley &
Sons.
AICPA. (2018). Audit Risk Alert: General Accounting and Auditing Developments 2018/19.
Hoboken, NJ: Wiley.
Bagshaw, K. (2013). Audit and Assurance Essentials: For Professional Accountancy Exams.
Hoboken, NJ: John Wiley & Sons.
Basu. (2010). Fundamentals of Auditing. Delhi, India: Pearson Education India.
Chandler, R. A., & Edwards, J. R. (2014). Recurring Issues in Auditing (RLE Accounting):
Professional Debate 1875-1900. London, England: Routledge.
Gay, G., & Simnett, R. (2018). Auditing and Assurance Services in Australia, Seventh Edition.
McGraw-Hill Education Australia.
Gibson, C. H. (2012). Financial Reporting and Analysis. Boston, MA: Cengage Learning.
Giove, F. C. (2015). Auditing Essentials. Research & Education Assoc.
Gramling, A. A., Johnstone, K. M., & Rittenberg, L. E. (2012). Auditing. Boston, MA: Cengage
Learning.
Kumar, R., & Sharma, V. (2015). Auditing: Principles and Practice. New Delhi, Delhi: PHI
Learning Pvt.
Layton, R. (2018). Introduction to Auditing and Assurance Services.
Leung, P., Coram, P., & Cooper, B. J. (2012). Modern Auditing and Assurance Services,
Google eBook. Hoboken, NJ: John Wiley & Sons.

AUDITING & ASSURANCE 6
Minaxi Rachchh; Siddheshwar T. Gadade & Gunvantrai Rachchh. (2015). Introduction to
Auditing (University of Mumbai). New Delhi, India: Vikas Publishing House.
Moeller, R. R. (2009). Brink's Modern Internal Auditing: A Common Body of Knowledge.
Hoboken, NJ: John Wiley & Sons.
Pallais, D. (2010). Audits and Other Accountants' Services: A Handbook for Lawyers. American
Bar Association.
Roos, M., & Stainbank, L. (2017). Accounting and Auditing Practices in Africa. AFRICAN
SUN MeDIA.
V., R. (2011). Financial Accounting. Delhi, India: Pearson Education India.
Whittington, R., & Pany. (2013). Principles of Auditing and Other Assurance Services with
Student Acl Cd.
Wiley. (2018). Wiley CIAexcel Exam Review 2018, Part 1: Internal Audit Basics. John Wiley &
Sons.