Comprehensive Report on Audit Risks, Impact and Solution Analysis

This report identifies and analyzes various audit risks that can affect a business's financial statements, including risks related to bankrupt customers, inappropriate classification of leased assets, accounts receivable management, property, plant, and equipment, goodwill valuation, and cash management. For each identified risk, the report explains the potential impact on the financial statements and proposes solutions involving enhanced internal controls, adherence to accounting standards, and improved management practices. The goal is to ensure accurate financial reporting and maintain the integrity of the business's financial position. Desklib provides access to similar solved assignments and study tools for students.

Running head: AUDIT RISKS
AUDIT RISKS
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AUDIT RISKS
Table of Contents
Identification of Audit Risks...........................................................................................................2
Reference.........................................................................................................................................6

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AUDIT RISKS
Identification of Audit Risks
Factors Type of
Risks
Impact Explanation Solutions
Two of the Major
customers of
Eastjet became
bankrupt
Inherent
risks
Increases The business needs
incorporate such
losses in the
financial statement
of the business.
This will also bring
about a loss in
revenue of the
business.
The losses need to be
disclose in the income
statement of the
business derived from
such customers
showing true and fair
representation.
Appropriate
classification of
leased assets.
Control
Risks
Decrease In appropriate
classification of
leases into
operating leases
which would not be
displayed in the
annual accounts as
per AASB 17.
The management needs
to set up an appropriate
internal control system.
The management needs
to follow the
accounting standards
related to leases.
Account Receivable
Management
Control
Risks
Decrease The policy of
EasyJet is record
The management can
change the credit policy

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AUDIT RISKS
revenue which is
not earned yet as
unearned revenue or
account receivable
and a part of the
revenue which is
earned as income. A
part of unearned
revenue was
included in books of
account which have
direct impact on
profitability and
revenue generated
by the business
(Louwers et al.,
2015).
of the debtors of the
business and also
reporting for the same
in the annual reports of
the business.
Credit Balance in
Account Receivable
Account
Detection
Risks
Increase The management
need make a
scrutiny analysis of
the debtor’s
account.
The management can
cross check the
balances which are
related to credit sales.
account receivables so
as to ensure that there is

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AUDIT RISKS
no omission or an
alternative approach
can be adopted which is
internal audit in a
business.
Property, Plants and
Equipment
Control
risks
Increase Changes in
property, plant and
equipment would
affect the balance
sheet and income
statement as well
(Bigus, 2015). The
depreciation on the
asset would affect
the income
statement of the
business.
The fixed assets of the
business are important
components of the
business and the same
should be appropriately
portrayed in annual
reports considering the
effects of depreciation
and impairments.
Goodwill Detection
Risks
Increase The goodwill of a
business forms part
of intangible assets
and the same should
be valued
appropriately and
The management needs
to check the valuations
which is done for
intangible assets and
also follow respective
accounting standards

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AUDIT RISKS
any manipulations
or cooking of books
can affect the entire
financial statement.
relating to intangible
assets.
Cash Management Control
Risks
Increase The cash reflects
the liquidity aspects
of a business and
the same needs to
be managed
effectively.
The management needs
to establish an
appropriate cash
management system for
maintaining the
liquidity of the
business.

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AUDIT RISKS
Reference
Bigus, J., 2015. Loss aversion, audit risk judgments, and auditor liability. European Accounting
Review, 24(3), pp.581-606.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C.
(2015). Auditing & assurance services. McGraw-Hill Education.