Advanced Auditing: Financial Risk Analysis in Case Studies 8.2 & 8.5

This assignment analyzes two case studies related to advanced auditing. Case study 8.2 examines key business risks, including payment and receipt issues, and the lack of director oversight. It identifies affected accounts and associated assertions like completeness and accuracy. Case study 8.5 focuses on risks faced by Electronic Enterprise Limited, such as errors in classifying entries and outdated budgeting systems. The analysis proposes risk mitigating techniques, including improved classification systems and updated budgeting methods. The assignment also outlines relevant assertions and audit procedures, emphasizing the importance of verifying transaction data and considering variances in budget preparation and analysis. The content is designed to help students understand financial risks and develop effective auditing strategies.

Running head: ADVANCED AUDITING ISSUE
Advanced auditing issue
Name of the student
Name of the university
Student ID
Author note

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Case study 8.2
Answer 3
Key business risks associated with the business of Travel X are as follows –
 Payment – agents make the payment directly to the airlines and wholesalers through
EFT (electronic fund transfer) for the purpose of travel arrangement. However, no
hard copy is retained by the company for the payments. Here the risk is that in case of
any technical issues the payment details may be lost. Further, if any error is found
related to payment it will be hard to recover.
 Receipts – receipt issued for all the monies received, however, the receipts are not
pre-numbered. Amounts received through checks are deposited in bank at the end of
each day. The risk associated here is that in case any receipt related issues it will not
be possible to find out the transaction to which the issue is actually related. The
reason behind this is that the receipts are not issued with pre-numbered receipts and is
deposited into the bank at the end of the day.
Answer 4
Accounts that will be affected due to above mentioned risks are as follows –
 Payment – account payable and bank accounts will be affected. If payment is
overstated the bank account will be understated and if the payment is understated the
bank account will be overstated. Key assertion involved with the payment related risk
is completeness. This assertion states that all the payment related transaction those
were supposed to be listed under the financial statement actually may not have been
listed.

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 Receipts – accounts receivable account, bank accounts and cash accounts will be
affected. If receipt is overstated it will reduce the amount of receivable and at the
same time bank or cash account will be overstated. Conversely, if the receipt is
understated it will increase the amount of receivable and at the same time bank or
cash account will be understated. Key assertion involved with the payment related
risk is accuracy. This assertion states that receipt related transactions may not have
been accurately recorded at accurate amounts.
Answer 5
Apart from payments and receipts control risk another risk is that director B is in
entire control for financial aspects. However, Mr B only works once in a week that leaves
wide scope for financial misstatement and it will be difficult to identify the error or fraud, if
any.
Answer 6
Various accounts associated with the above mentioned risk is sales, expense, cash and
bank balances. Key assertion involved with these risks are – (i) completeness - all the related
transaction those were supposed to be listed under the financial statement actually may not
have been listed (ii) accuracy - all the related transactions may not have been accurately
recorded at accurate amounts.
Case study 8.5
Answer 1
Risks faced by the Electronic Enterprise Limited are as follows –
 Errors in classification of adjusting entries within the divisions mainly with regard to
daily sales data.

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 Fundamental system for budgeting and for variance analysis have been same for years
and did not update
 Lot of negotiations are carried out before finalising the ultimate budget and last year’s
result are not taken much into consideration
 Volume variances are not given much importance, only cost variances are given
importance.
Answer 2
Risk mitigating techniques
 Proper system shall be established for classifying the entries for divisions. For
instance, transaction for sales or expenses shall be recorded to the particular division
to which it relates.
 Appropriate system shall be developed for budgeting and variance analysis that will
be best suited for the entity. For instance, based on the nature of business and trends
of incomes and expenses budget and variance analysis system shall be updated.
 Instead of negotiations, budget shall be developed based on the result and variance of
previous years
 Volume variances shall be considered as the cost variances are considered by the
company. Volume variance also plays important role in analysing budget and
variances. For instance, if the company’s budgeted sales are 1000 units, however, if it
ends up with selling only 200 units, volume variance will be (1000 – 200) = 800 units.
It plays important role in budget and therefore shall be considered.
Answer 3
Various assertions associated with above risks are –

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 Completeness - all the related transaction those were supposed to be listed under the
financial statement actually may not have been listed
 Accuracy - all the related transactions may not have been accurately recorded at
accurate amounts.
Answer 4
Audit procedures shall be as follows –
All the transaction data shall be verified with the associated documents. Further, the
budget shall be prepared by considering the last year’s variance and budget areas. Moreover,
all the variances shall be taken into consideration while preparing and analysing the budget.

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