The Why and How of Auditing Series

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

AUDITING1
Table of Contents
Part A: RISK ASSESSMENT AND AUDIT STRATEGY.......................................................2
Answer to Requirement (1)....................................................................................................2
Answer to Requirement (2)....................................................................................................3
Answer to Requirement (3)....................................................................................................5
Part B: AUDIT STRATEGY AND TESTING..........................................................................5
Answer to Requirement (4)....................................................................................................5
Answer to Requirement (5)....................................................................................................6
Answer to Requirement (6)....................................................................................................6
References..................................................................................................................................7

AUDITING2
Part A: RISK ASSESSMENT AND AUDIT STRATEGY
Answer to Requirement (1)
Inherent risks are considered as risks which leads to the increased possibility to
develop material misstatements in the financial reports due to the reasons other than internal
control failure over financial reporting (Ruhnke & Schmidt, 2014). There are certain factors
that will increase or decrease the inherent risk of material misstatements in Crème Limited
and they are discussed below:
Industry Growth – As stated in the provided case study that Creme Limited operates in the
beauty industry of Australia that is a going through a good phase and it is expected that the
industry will register further growth in future. This is a good aspect for Creme Limited that is
one of the market leaders in this industry; and it implies that Creme Limited will perform
well in the future. This aspect reduces the possibility of manipulating with the financial
figures by the management in order to increase its financial performance in manipulative
manner. This decreases the inherent risk of material misstatements (Coetzee & Lubbe, 2014).
Highly Competitive Nature of Industry – The provided information states that the beauty
products industry of Australia is highly competitive where the large competitors take full
advantage of innovation in sustainable product. This is a threat for Creme Limited since there
can be business loss for the competitors. Business loss refers to the decrease in sales,
decrease in profits, increase in expenses and others. This leads to the high probability that the
managements of Creme Limited may involve in manipulating the sales revenue figures by
overstating them and the expenses by understating them for improving the financial
performance and position than its competitors. It is a key inherent risk which can contribute
to material misstatements in the financial reports of Creme Limited (Burk & Hendry, 2014).