Audit Risk Assessment Task 2022

Audit risk
Module number

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Table of Contents
Introduction.................................................................................................................................................1
Answer to the question no-1........................................................................................................................1
Answer to the question no-2.......................................................................................................................2
Conclusion...................................................................................................................................................5

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Introduction
With the ramified economic changes, auditing and theories practices are used by the
auditors to assess the financial transparency of the company. In the starting of this report, ratio
analysis of the company has been taken into consideration. After that, assessment of the risk
factors in the audit receivables have been analyzed. It is analyzed that the reporting entity DAB
Pty. Ltd. is an export oriented company, and 80% the accounts receivables in the company’s
balance sheet consists of receivables from foreign customers, who pay in their denominations.
Therefore, audit risk of the company might be high due to its increased complexities. However,
IFRS accounting standards have been used to assess audit risk of the company.
Answer to the question no-1
RATIO ANALYSIS Un-audited Un-audited
11 Months 12 Months
30/11/14 31/12/13
$0 $0
Name Formula
Liquidity Ratios
Current ratio Current assets/Current liabilities 1.014491 0.5714826
Quick ratio (Current assets - Inventory)/Current liabilities 0.5694462 0.3780592
Leverage Ratios
Debt-equity ratio (Short term + Long term debt)/Share holders' equity 3.6825054 4.8796296
Debt ratio Long Teem debt/Total assets 2.7054236 3.2187696
Profitability Ratios
Gross profit margin ratio(Sales - COGS)/Sales 0.3349828 0.2263952
Net margin Net profit/Sales 0.0980657 0.044928
Activity Ratios
Inventory TurnoverCOGS/Average Inventory *** 3.6713576 7.5368832
Debtors Turnover Credit Sales/Average Debtors **** 5.5206954 9.7425501
Asset Turnover Sales/Net Assets 2.4006479 3.1297866

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Answer to the question no-2
Risk Factors in Auditing Receivables
As per the ASA 200, it is analyzed that apart from checking revenues and expenses, the auditor
should take into consideration the risk factors in relation to auditing of receivables. The risk
factors arise as companies often inflate receivables in order to show inflated revenues. So it is
not out of the box that some companies record non-existent receivables in order to show higher
income, as managers’ incentives are related to high level of revenue. The reporting entity DAB
Pty. Ltd. is an export oriented company, and 80% the accounts receivables in the company’s
balance sheet consists of receivables from foreign customers, who pay in their denominations.
The risks associated with accounts are receivables are the following:
Primary accounts receivables and assertions of revenue: The primary risks are that the
management deliberately overstate revenues and accounts receivables, collections from the
debtors are stolen by employees, in the absence of proper cut-off of the subsequent year’s
revenues there is high probability that overstatement of receivables take place, and allowances
are shown down-side.
Directional risk for accounts receivables: As per the AASB 101, presentation of the accounting
standards, it is given that directional risk in relation to accounts receivables is the risk of
overstatement. Hence while performing audit of accounts receivables, the auditor must verify
and ensure that the accounts receivables are not overstated. For this the cut-off procedures at the
yearend must be cautiously reviewed to see that revenues related to the subsequent period are not
included in the accounts of the current fiscal period. For this audit standard specifically requires
that the auditor measure the management bias, by reviewing current year’s allowances in the
light of last year’s write-offs and allowances. With this retrospection the auditor can judge
whether the current year’s estimate is fair. The risk in this connection is that the management
may decrease allowances to show higher revenues. Audit standards also recommend that that it
should be presumed that earnings are inflated, unless it can be clearly explained that the earnings
are not overstated.

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Common deficiencies associated with accounts receivables: This kind of risk arises with some
common deficiencies. Such risks arise where if one person executes many functions like billing
customers, receiving money from customers, making deposits in bank, posting the receipts in the
general ledger, and reconciling the bank accounts. Risks may also arise when the staff computing
the allowances do not have clear understanding of this matter, there is no surprise audit of
receivables, the place where cash is kept is accessible by more than one persons, the staff
entrusted to issue receipts of money received carelessly misses in issuing many receipts. It may
also happen that there is no second person to review the daily receipts. Opportunistic employees
with ability to manipulate customer receivable accounts are in charge of maintaining the
accounts, and there is no other person to review the receipts. In many cases it is seen that bad
debt recognition is done inconsistently with no one to correct that. The policy to recognize
revenue may not be clear and may be inconsistent with the reporting framework.
Material misstatement risk of accounts receivables: Risk assessment is an important part of audit,
and control testing may not be the right step in efficiently identifying risks. For this certain
substantive procedures are needed like confirmation of receivables and testing of subsequent
collections (Eilifsen, Hamilton, and Messier Jr, 2017).
Other Risk Factors
Some other risk factors apart from risk of accounts receivables are enumerated and discussed
below:
Control Risks: Control risks pertain to weaknesses in the internal control system of DAB Pty.
Ltd. The risk is that the internal control system of the company is not capable of preventing error
and misstatements in the financial statements of the company. Ideally management of DAB
needs to ensure efficiency and effectiveness of the internal control system of the company so that
no material misstatement or errors are cropped up in either the income statement or the balance
sheet. In the absence of adequate internal control system, there are chances that financial
statements of the company incorporates some material misstatements, errors and subsequently
the auditors are unable to identify the misstatements (Lakis, and Masiulevičius, 2017).

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The auditor must assess the internal control system of the company and must mention in the
audit report whether the system is adequate or not. If the auditor is satisfied that the internal
control system of DAB is adequate, then s/he must ensure that the internal control system works
properly by testing the control system herself. Auditors can use certain ways to minimize the
internal control risks that arises from inadequate internal control system. At the planning stage
the auditor should undertake a risk assessment program (Mobbs, 2015).
Audit Approach
Trade receivables:
 Check the period end accounts receivable aging tom check the total with amount in the general
ledger.
 Check the receivable report total from invoices to check whether they tally with the figure in the
general ledger.
 Check the accounts receivable ledgers to see whether there is any big amount, and if so demand
clarification.
 Check some invoices at random with supporting documents, to see whether correct amounts are
billed to correct customers.
 Contact with the some customers directly and check the unpaid amount.
 Check allowances in the doubtful accounts. The method used this year will be compared with the
method used in the last year to verify consistency in making allowances (Piper, 2019).
Inventories:
 Clearly see the cutoff, to see that no further inventories are received at the time of physical
counting and verification of inventories.
 Count the high value inventory physically.
 Double check for errors in error prone items, if the auditor has prior experience of such errors in
the same company or in the industry.
 Check whether the freight has been included in the inventory cost or has been treated as expenses
in the income statement. Either way, the auditor must ensure that the system is consistently
followed (AICPA.2018).

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 Check whether the inventory is valued at cost or market price. For this auditor must know the,
market price.
 If the inventory consists of high proportion of finished goods, then the auditor must see the bill
of materials (Carson, Fargher, & Zhang, 2016).
Conclusion
After assessing the available information on the company, it could be inferred that
accounts receivables in the company’s balance sheet consists of receivables from foreign
customers so it may have high audit risk. Now in the end, it could be inferred that check the
receivable report total from invoices to check whether they tally with the figure in the general
ledger. This will be used to assess the audit risk of the company.

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References
AICPA. (2018). Assessing and Responding to Audit Risk in a Financial Statement Audit, October 2016.
John Wiley & Sons.
Carson, E., Fargher, N., & Zhang, Y. (2016). Trends in auditor reporting in Australia: a synthesis and
opportunities for research. Australian Accounting Review, 26(3), 226-242.
Eilifsen, A., Hamilton, E. and Messier Jr, W.F., 2017. The Importance of Quantifying Uncertainty:
Examining the Effects of Sensitivity Analysis and Audit Materiality Disclosures on Investors’
Judgments and Decisions. Available at SSRN 2966291.
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS OF
FINANCIAL STATEMENTS. Journal of Management, 2(31).
Mobbs, P.M., 2015. The Mineral Industry of Zambia. Minerals Yearbook: Area Reports: International
Review 2012 Africa and the Middle East, 3, p.41.
Piper, D., 2019. Trade wars and Brexit quash early-year IPO excitement. Australia's Paydirt, 1(268),
p.28.

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