Auditing and Assurance Services: Risk Assessment and Opinion Formation

This document presents a comprehensive solution to an auditing and assurance services assignment. It begins with an analysis of Globecom's business model, identifying various risks such as reputation risk, intense competition, and fraud. For each risk, appropriate responses and improvements are suggested. The assignment then delves into the going concern principle, evaluating the ability of Rainbow Forest to continue as a going concern and outlining the steps an auditor should take when an entity depends on another company. The solution also provides audit opinions for various scenarios, including legal cases, post-balance sheet events, and inventory issues. Finally, the assignment analyzes key assertions for accounts like sales, cash, and inventory, explaining their accuracy, rights, and obligations. The document references multiple academic sources to support its findings and provides a bibliography.

Running head: AUDITING AND ASSURANCE SERVICES
AUDITING AND ASSURANCE SERVICES
Name of the Student
Name of the University
Author’s Note:

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Table of Contents
Answer to question no.1..................................................................................................................2
a) Identification of risks in relation to Globecom’s business model...........................................2
b) Appropriate risk response or improvement.............................................................................2
Answer to question no.2..................................................................................................................4
Answer to question no.3..................................................................................................................5
Answer to question no.4..................................................................................................................7
References........................................................................................................................................9
Bibliogarphy..................................................................................................................................10

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Answer to question no.1
a) Identification of risks in relation to Globecom’s business model
i. Reputation risk- Any imperfection in satisfaction of customer can impact its
reputation at a great level. In addition, as the reputation gets hamper, it will lead
to decline the growth of the business (Muda, Mohd & Hassan, 2016).
ii. Intense Competition- There is a risk of intense competition due to the existence of
limited competitors to make entry which can affect the revenue growth of
Globecom’s business.
iii. Failure to Comply with Laws and Legislation- If the business is not maintaining
its validation of agreements such as advertising and business license, lease
agreements, it can cause them to incur financial losses and closure of their
business (Jideani et al.2018).
iv. Risk of double entry- There can be risk of double entry if the payable amount is
not recorded in the accounts payable register as soon as the payment made.
v. Fraud and Theft- Counterfeit money or credit cards payment from customers can
lead to fraud risk.
b) Appropriate risk response or improvement
Risks Risk Response / Improvement / Recommendation
Reputation Risks  Proper consumer satisfaction surveys should be conducted to
measure their satisfaction level and meet customer needs and
expectations.
 Providing proper training to employees to deal with the

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situation.
 Customer relation management system should be established
to deal with any complaints and inquiries.
Intense
Competition
 Must determines its competitors and supervise price of the
product in the market.
 Embrace a product pricing strategy by understanding the
purchasing decision of the consumer and their behavior.
Failure to comply
with rules and
regulation
 To be updated to get comply with any changes made to laws
and legislations such as Human Resources Policy and
Procedures in this case.
 Must fixes a time period for implementing the action required
for renewing agreements and licenses before the date of
expiry.
Risk of double
entry
 All the payable amount should be recorded in the accounts
payable register as soon as the payment made to avoid any
double entry.
 There should be avoidance of having one employee to handle
the cash receipts, bank reconciliation.
 The bank reconciliation should be prepared periodically and
reviewed frequently.
Fraud and Theft  Must have personal identification of customers or go through

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any further checks before making any refund to them.
 Must implement a clear policy on discounts given to
customers, keeping an update on a periodic report on the
same.
Answer to question no.2
a) The going concern principle states that the business is assumed to be continued in the
future period until and unless it is restricted by the government or court. When an
auditor examines any accounting records of any company he or she has the obligation
to check the company’s ability to continue as a going concern. If the auditor founds
any doubt regarding the company’s ability to continue in the future, than he or she has
to disclose the matter during the opinion regarding the company’s financial statement
(Bochkay et al., 2018). So the most relevant indicator for evaluating the Rainbow
Forest ability to continue as a going concern is negative trends, employee status,
record keeping system, legal proceedings against the company, business structure and
the company financing.
b) The steps that should be taken by an auditor to confirm the ability of a going concern
when an entity is dependent on another company are as follows:
 By checking the degree of uncertainty associated with the outcome of an event by the
parent company.
 Competition of the parent company in market need to be analyzed.
 Examining the funding ability of the parent company.

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 Examining the cash flow statement of both the company as it will give the clear view
of the company’s cash generation ability.
 Examining the minutes of the shareholders meeting of the parent company.
c) The auditor has to express an unmodified or adverse opinion in his audit opinion
regarding the financial statement declaring that there is no adequate disclosure of
basic accounting. Auditor opinion must contain a brief description of all the issues
relating to the financial statement (Berglund, Eshleman & Guo, 2018). Auditor should
examine if any material uncertainty exist their which may create any doubt on the
ability of continuing as a going concern. If adequate discloser is made in the financial
statement, than the auditor should express an unqualified opinion. While if adequate
discloser is not made, than the auditor should express a qualified and adverse opinion.
Answer to question no.3
Situation Audit Opinion Explanation
(i) Auditor is auditing a
company and seek a lawyer’s
help to defend the company
in a legal case.
The auditor should issue an
adverse opinion.
The new information will have a
financial impact on financial
statements and there were no
disclosures made by the company
previously. Hence, adverse
opinion since the misstatement is
material and will have a material
impact on financial statements.
(ii) Post-balance sheet event.
Client holds note receivable
The auditor should issue a It is a post-balance sheet item,
since it occurred after balance

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and post the financial
reporting period note maker
filed the bankruptcy petition.
Client is not ready to make
any changes.
qualified opinion. sheet date but financial report is
not yet issued (Choudhary,
Merkley & Schipper, 2019).
Since the report is not yet issued,
the changes have to be made to
financial statement.
(iii) Inventory’s accounting
records are no reliable, and
annual physical inventory
count has been made once by
the company
The auditor should issue
adverse opinion.
Since the records of inventory are
not reliable and also asking to
perform physical inventory only
on a small sample this means
there is material misstatement
and is pervasive in nature.
(iv) The accounting method
was changed from FIFO to
LIFO and the change is not
recorded by the management
as advised by the auditor. It is
75% of total assets
The auditor can issue
unqualified opinion.
It is a change in accounting
method and not a change in
accounting policy (Conley et al.
2019). The auditor can obtain a
written representation.
(v) A subsequent material
event is not adjusted and
auditor has not signed yet
Modified opinion There is amaterial subsequent
event for the reporting period and
it is not adjusted by management

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Answer to question no.4
Accounts Key Assertions Explanation
1. Sales Accuracy and valuation The revenue is not correctly valued, since the
return will be accounted for.
Rights and obligation The company has no right on 50% sale, and
have to refund it to the consumers who have
returned the clothes.
2. Cash
account
Accuracy and valuation The company will have to compensate for the
low employee cost
Rights and obligation The company has the right and obligation over
cash of the company. Only the cash which
flowed to entity or flowed from the company
ahs been recorded. And it will be affected most
due to the negative news.
Inventory Completeness The inventory which belongs to the company
has been recorded accurately. It will be
impacted more due to negative news.
Rights and Obligations The company has the ownership over the
inventory to use the inventory for the business
activities. The asset recorded in the balance
sheet is controlled by the company and owned
by the company as well. In case any inventory
which is held by them on account of another

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company, the same is not considered by the
company in the valuation of inventory.
(Antipova, 2016)

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References
Antipova, T. (2016). Auditing for financial reporting. In Global Encyclopedia of Public
Administration, Public Policy, and Governance. Springer.
Berglund, N. R., Eshleman, J. D., & Guo, P. (2018). Auditor size and going concern
reporting. Auditing: A Journal of Practice & Theory, 37(2), 1-25.
Bochkay, K., Chychyla, R., Sankaraguruswamy, S., & Willenborg, M. (2018). Management
disclosures of going concern uncertainties: The case of initial public offerings. The
Accounting Review, 93(6), 29-59.
Choudhary, P., Merkley, K. J., & Schipper, K. (2019). The last chance to improve financial
reporting reliability: Evidence from recorded and waived audit adjustments. Available at
SSRN 3112957.
Conley, K., Natarajarathinam, M., Lu, W., & Rangan, S. (2019). Effect of Accounting Policies
on Effectiveness of Inventory Management Strategies. Engineering Management
Journal, 31(4), 246-256.
Jideani, P., Leenen, L., Alexander, B., & Barnes, J. (2018, August). Towards an Electronic retail
cybersecurity framework. In 2018 International Conference on Advances in Big Data,
Computing and Data Communication Systems (IcABCD) (pp. 1-6). IEEE.
Muda, M., Mohd, R., & Hassan, S. (2016). Online purchase behavior of generation Y in
Malaysia. Procedia Economics and Finance, 37(16), 292-298.

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Bibliogarphy
Mortimer, G., Fazal e Hasan, S., Andrews, L., & Martin, J. (2016). Online grocery shopping: the
impact of shopping frequency on perceived risk. The International Review of Retail,
Distribution and Consumer Research, 26(2), 202-223.