ACCT3000 - Auditing and Assurance: Risk Assessment for Almond Limited

This assignment is an audit risk assessment memo prepared by an audit senior for the audit manager concerning Almond Limited. The memo identifies three key accounts at risk of material misstatements: sales, accounts receivable, and accounts payable. The risk assessment is based on ASA 315, considering factors such as delayed shipments, competitor actions, and issues with a key customer. The memo highlights the inherent and control risks associated with each account, including potential overstatements or understatements. The memo recommends a predominantly substantive audit approach, including tests of details and limited analytical procedures, and addresses going concern issues. Specific audit procedures are suggested for each account, such as scrutinizing sales prices, verifying accounts receivable balances, and testing internal controls for accounts payable. The goal is to reduce audit risks and ensure accurate financial reporting.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

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MEMO
Ref:
To: Audit Manager
From: Audit Senior
Date: XX/XX/XXXX
Subject: Almond Limited
Introduction and Scope
The preliminary assessment as a vital part of the audit of the Almond Limited has just come to an
end. The main purpose of this memo is to outline three key accounts of Almond Limited that are
at risk of material misstatements in accordance with the standards of ASA 315 ‘Identifying and
Assessing the Risks of Material Misstatements through Understanding the Entity and its
Environment’ (legislation.gov.au 2019). This memo also includes in providing the necessary
recommendation regarding the required audit approaches need to be taken in accordance with the
standards of ASA 300 ‘Planning an Audit of a Financial Report’.
Risk Assessment
The presence of three key accounts can be seen in Almond Limited that is at risk of material
misstatements due to certain reasons. The effect of tight checks by Australian custom officials
has caused delay in many of the shipments of Almond milk and it will have certain impact on the
sales account of the firm. There can be decrease in the sales revenue of Almond Limited due to
the 20% deduction from the sales amount due to Chinese customers. In addition, the main
competitor of Almond Limited, Tasty Milk, has taken this advantage by reducing the selling
price and Almond Limited can face going concern issue due to this. These two issues lead to the

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increase inherent risk of Almond Limited (Griffiths 2016). In the presence of these situations,
there is a high probability of overstatement in the sales account of Almond Limited by its
management in order to portray their financial condition in better manner. The key assertions
involved in this account are occurrence/existence which needs to be considered in the audit
process.
The presence of high level of carrageenan will have certain impact on the receivable account of
Almond Limited which can lead to the risk in this account. As per the claim of one key customer
of Almond Limited, Super Dairy Limited (SDL), the batch of milk they received contains high
levels of carrageenan which can lead to gastrointestinal inflammation. For this reason, SDL is
refusing to make the payments of the receivables that have been due for six months. This will
lead to the reduction in the revenue of Almond Limited from receivables. This aspect increases
the inherent risk of the company related to the accounts receivable account (Johnstone et al.
2013). There is a high probability that the management of Almond Limited overstates the
balance of accounts receivable in order to better their liquidity position. Two assertions are
associated with this risk which are existence and valuation which the auditor needs to consider in
the audit planning stage.
The presence of problems in the accounts payable system of Almond Limited can have major
negative effect on the accounts payable account. Almond Limited is needed to make the payment
to the almond suppliers prior to supply almond in $US since 60% of the suppliers are owned by
the US firms. However, the recent problems in the accounts payable system of Almond Limited
has contribute to the recording of $US in $AUD which has increased the balance of the creditors
of Almond Limited. This particular situation increased the control risk in Almond Limited due to
the presence of their internal control related to accounts payable (Reding et al. 2013). It

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contributes towards the possibility that the management of Almond Limited may understate the
balance of accounts payable account in order to portray their financial position in better manner.
Two audit assertions related to this risk are existence and valuation that need to be considered.
Audit Approach
Almond Limited has high inherent and control risk and it is needed to reduce the detection risk
which can be achieved with wide substantive testing. It is needed to apply the audit procedures
of test of details of transactions and accounts balances while there needs to be limited
dependence on analytical testing. Test of control also needs to be applied. After taking into
account the three risks of Almond Limited, the recommendation is to apply pre-dominant
substantive approaches where there is high volume routine transactions like accounts payable,
accounts receivable and sales (Glover et al. 2014). In addition, the auditor is needed to
discussion with the management of Almond Limited regarding the going concern problems with
the aim to develop plan to minimize this risk in accordance with ASA 570 ‘Going Concern’
(auasb.gov.au 2019).
While considering the three accounts at risk, it is needed for the auditor to take into consideration
checking the number of delay cases in the delivery of Almond milk where the Chinese customers
have deduced 20% of the sales revenue. For this, the selling prices need to be scrutinized. At the
same time, the auditor is needed to test the details of the sales related transactions, entries and
accounting books so that the presence of any overstatement in sales can be identified, if there is
any (Glover et al. 2016).
In case of the accounts receivable account, the auditor is needed to look into the number of issue
including SDL where there is a claim of the presence of high level of carrageenan. The auditor is

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also needed to verify the balances of accounts receivable with the help of confirmation requests.
One major area that needs to be investigated is the provision for doubtful debts. These tests will
help the auditor in identifying the overstatements in the accounts receivable balance.
In case of accounts payable account, it is needed for the auditor to test the internal control of
Almond Limited regarding the accounts payable system. After that, the auditor is needed to test
the details of accounts receivable by looking into the relevant documents, transactions, entries
and other accounting books. These processes will help the auditor in identifying the inaccurate
creditor balances and the understatement of the creditor balance (Christensen et al. 2014). On the
overall basis, adoption of the above-mentioned audit procedures is necessary for the reduction of
audit risks.

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References
" ASA 315 - Identifying And Assessing The Risks Of Material Misstatement Through
Understanding The Entity And Its Environment - October 2009 ". 2019. Legislation.Gov.Au.
Accessed May 9 2019. https://www.legislation.gov.au/Details/F2
2019. Auasb.Gov.Au. Accessed May 9 2019.
https://www.auasb.gov.au/admin/file/conte102/c3/ASA_2015.pdf
Christensen, Brant E., Randal J. Elder, and Steven M. Glover. "Behind the numbers: Insights into
large audit firm sampling policies." Accounting Horizons 29, no. 1 (2014): 61-81.
Glover, Steven M., Douglas F. Prawitt, and Michael S. Drake. "Between a rock and a hard place:
A path forward for using substantive analytical procedures in auditing large P&L accounts:
Commentary and analysis." Auditing: A Journal of Practice & Theory 34, no. 3 (2014): 161-179.
Glover, Steven M., Mark H. Taylor, and Yi-Jing Wu. "Current practices and challenges in
auditing fair value measurements and complex estimates: Implications for auditing standards and
the academy." Auditing: A Journal of Practice & Theory36, no. 1 (2016): 63-84.
Griffiths, Phil. Risk-based auditing. Routledge, 2016.
Johnstone, Karla, Audrey Gramling, and Larry E. Rittenberg. Auditing: a risk-based approach to
conducting a quality audit. Cengage learning, 2013.
Reding, Kurt F., Paul J. Sobel, Urton L. Anderson, Michael J. Head, Sridhar Ramamoorti, Mark
Salamasick, and Cris Riddle. "Internal Auditing: Assurance & Advisory Services." (2013).