Identifying Audit and Business Risk

This report analyzes the audit risk and business risk faced by Revesby Ltd and provides recommendations to mitigate these risks.

Running head: IDENTIFYING AUDIT AND BUSINESS RISK
Identifying Audit and Business Risk
Name of the Student
Name of the University
Author’s Note

1IDENTIFYING AUDIT AND BUSINESS RISK
Executive Summary
The first part of this report aims at analyzing the audit risk from the provided information
with the aim to recommend the correct audit steps to reduce these risks. The second parts
takes attempt to discuss about the business risks faced by the company.

2IDENTIFYING AUDIT AND BUSINESS RISK
Table of Contents
Introduction................................................................................................................................3
Par A: Audit Risks.....................................................................................................................3
Part B: Business Risks...............................................................................................................5
Conclusion and Recommendations............................................................................................6
References..................................................................................................................................7

3IDENTIFYING AUDIT AND BUSINESS RISK
Introduction
Auditing is considered as the process of the methodical inspection as well as
examination of the financial statements of the companies in order to make sure that they are
free from material misstatements (Knechel and Salterio 2016). At the time to develop the
audit plan, it is needed for the auditors to take into consideration the areas in the financial
statements having the risk of material misstatements and obtain the audit evidences for the
development of audit plan. The main aim of this report is the identification of the audit risks
and business risks from the provided situation.
Par A: Audit Risks
Account Analysis (Ratio and
Background
Information)
Audit Risk Audit Steps to
Reduce Risk
Accounts
Receivable
An increasing trend
can be seen in the
days in accounts
receivable from 2015
to 2017. It implies
that Revesby Ltd is
taking longer time to
collect the dues from
the debtors. It implies
that the company
may be providing
more credits to the
customers which
delaying the
collection period.
The main audit risk is
the deliberate
intention of Revesby
Ltd in delaying the
accounts receivable
days due to increase
in credit sales (Elder
et al. 2013).
The required audit
steps to reduce this
risk are to confirm
the balance of
accounts receivable,
to vouch the
subsequent period
collection,
methodical review of
the allowance
computation process
for ensuring their
consistency with the
prior year and
checking the
transactions by
looking at the
transaction cut off
days.
Property Assets As per the provided
information, there is
significant decrease
in return on total
The main audit risk is
the material
misstatements in the
financial statements
The key audit
procedures to reduce
this is to examine the
existence of the

4IDENTIFYING AUDIT AND BUSINESS RISK
assets ratio in 2017
from 2016. One key
reason for this can be
the decrease in the
net profit margin of
Revesby Ltd in the
same year. It
indicates towards the
fact that there may be
increase in debts and
the debts are paid out
of the assets.
due to the
manipulation in the
values of the
property assets.
property assets, to
test their occurrence
and to ascertain their
valuation (William
Jr, Glover and
Prawitt 2016).
Research and
Development
(Capitalization)
The provided
information shows
that the net margin
increases in 2016
from 2015 and
decreases in 2017
when there is
increase in the gross
margin. Significant
increase in the
research and
development cost due
to the development
of hip replacement
devise can be
considered as a major
contributor in this
decrease in
profitability.
The key audit risk in
this case is the fact
that the management
of Revesby Ltd can
capitalize this
research and
development
expenses in the
absence of any future
benefit (Christensen,
Glover and Wood
2013).
The key audit
process to mitigate
this risk is to ensure
the fact that whether
Revesby Ltd will
receive any future
benefit due to the
incurrence of this
research and
development expense
Loan Account It can be seen from
the provided
information that there
is increase in the debt
to equity ratio of
Revesby Ltd in 2017
from 2016. This
increase in debt has
affected the ability of
the company in
making increased
interest payment on
the debts. In addition,
The main audit risk
in this case is the
intention of the
company to
deliberately reduce
the debt amount in
the financial
statements for
showing good
financial position of
their business
(Groomer and
The main audit step
to reduce this risk is
to test the existence
as well as occurrence
of the debts of the
company for
ascertaining the
actual amount of
debts of the business.

5IDENTIFYING AUDIT AND BUSINESS RISK
the increase in debt
has decreased the
amount of equity
capital and thus,
decreases the return
on equity.
Murthy 2018).
Part B: Business Risks
It can be seen from the provided information of Revesby Ltd that there are certain
business risks that the company is exposed to and they are discussed below.
Interest Rate Risk – This risk occurs due to the change in the interest rate that can
negatively affected the business operation of Revesby Ltd. As per the provided information,
the company is under pressure due to the change in interest rate. Thus, this is a crucial risk
that needs to be taken into consideration (Drechsler, Savov and Schnabl 2018).
Credit Risk – The occurrence of the credit risk can be seen when counterparties who are
required to pay monies to the company fails to pay the money. Provided information
indicates that there is increase in the days in accounts receivable which indicates that many
counterparties are failing to pay the dues in time. This is a crucial business risk that Revesby
Ltd needs to consider in their business operation (Bielecki and Rutkowski 2013).
Liquidity Risk – Liquidity risk is considered as the risk that the company may not have
adequate cash balance and access for funding sources for meeting their current business
obligation. It can be seen from the provided information that there is fluctuation in the current
and quick ratios. In addition, the banks are changing lending process which can create major
liquidity risk for the company (Drehmann and Nikolaou 2013).
Risk of Competition – The occurrence of this particular risk can be seen when the company
is facing fierce competition from its competitors which can lead to loss in revenue as well as

6IDENTIFYING AUDIT AND BUSINESS RISK
decreased profitability. It can be seen from the information that Revesby Ltd is facing fierce
competition from its competitors since they are developing the same devises like Revesby
Ltd. For this reason, it can be considered as a crucial business risk.
Conclusion and Recommendations
It can be seen from the above discussion that the four major areas in the financial
statements of Revesby Ltd can lead to key audit risks that can be mitigated by the proposed
audit steps. In addition, the key business risks of Revesby Ltd are interest rates risk, credit
risks, liquidity risks and competition risk.
Based on the above discussion, the recommendation to Revesby Ltd is that they need
to conduct their financial information by complying with the required financial standards to
avoid material misstatements in the financial statements.

7IDENTIFYING AUDIT AND BUSINESS RISK
References
Bielecki, T.R. and Rutkowski, M., 2013. Credit risk: modeling, valuation and hedging.
Springer Science & Business Media.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current issues in auditing, 7(1), pp.P36-P42.
Drechsler, I., Savov, A. and Schnabl, P., 2018. Banking on deposits: Maturity transformation
without interest rate risk (No. w24582). National Bureau of Economic Research.
Drehmann, M. and Nikolaou, K., 2013. Funding liquidity risk: definition and
measurement. Journal of Banking & Finance, 37(7), pp.2173-2182.
Elder, R.J., Akresh, A.D., Glover, S.M., Higgs, J.L. and Liljegren, J., 2013. Audit sampling
research: A synthesis and implications for future research. Auditing: A Journal of Practice &
Theory, 32(sp1), pp.99-129.
Groomer, S.M. and Murthy, U.S., 2018. Continuous auditing of database applications: An
embedded audit module approach. In Continuous Auditing: Theory and Application (pp. 105-
124). Emerald Publishing Limited.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.