Analyzing Audit Risk: Business Scenarios and Component Evaluation

This assignment provides solutions to audit risk assessment questions based on provided business scenarios. It analyzes how inherent and control risks are affected by factors such as government policies, data processing changes, and declining financial performance. Specific scenarios include a uniform manufacturer facing tariff reductions, a supermarket chain outsourcing payroll, and a company experiencing declining sales. The solutions identify the impact on audit risk components and discuss the potential for material misstatements in financial statements due to weaknesses in internal controls or fraudulent activities. Desklib offers this assignment as a resource for students studying audit and assurance services, providing a practical understanding of risk assessment in real-world contexts.

Running head: AUDIT
Audit
Name of the Student
Name of the University
Author’s Note

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Table of Contents
4.24 Easy..........................................................................................................................................2
Requirement [a]...........................................................................................................................2
Requirement [b]...........................................................................................................................2
Requirement [c]...........................................................................................................................3
4.25 Medium....................................................................................................................................3
Requirement [a]...........................................................................................................................3
Requirement [b]...........................................................................................................................4
Requirement [c]...........................................................................................................................4
References........................................................................................................................................5

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4.24 Easy
Requirement [a]
From the provided situation, it can be observed that the government has introduce a tariff
reduction policy in the garment manufacturing industry and for this, the companies have to face
direct competition from the cheaper uniform manufacturer form overseas. After this, in order to
retain market share, Clothing has been selling one part of the school uniform at below cost. It
needs to be mentioned that inherent risk is the kind of risk that the internal control of the
companies cannot detect. Some of the major external environmental factors like political factors,
government decision and others can affect inherent risk (Griffiths 2016). Thus, in this case
inherent risk will be affected as the internal control of Clothing does not have any control over
the decision of the government as it is an external factor.
Requirement [b]
As per the provided situation, the data processing for payroll transactions in Foodstuffs
Ltd will be carried on by an independent computer service bureau instead of the company’s IT
Departments. This situation has connection with the control risk of the company. Control risk is
the kind of risk that the internal control of the companies fails to detect and it can lead to the
material missstements of the financial statements (William Jr, Glover and Prawitt 2016). In the
provided situation, the independent computer service bureau can do fraud or manipulation with
the payroll transaction of the company as they are not controlled by the company’s IT
Department. For this reason, there is a possibility that the internal control of the company may
not be able to detect this manipulation in the payroll system that can lead to the risk of material
misstatements. Thus, control risk will be affected,

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Requirement [c]
In the given situation, the provided information indicates towards the declining financial
situation of Machinery as there has been major decrease in the sales of the company and the
company is facing difficulty in cost cutting. All these aspects indicate towards the weakness in
the internal control of the company for financial reporting. This situation indicates towards the
fact that lack of effective financial strategy might be the reason for the ineffective financial
performance of the company; and ineffective financial strategy indicates towards the presence of
weak internal control of the company (Ashley-Smith 2013). In the presence of weak internal
control, high chance of the misstatements in the financial statements can be seen; and there is
also high chance that the auditors will not be able in detecting the material missstements. All
these aspects increase the audit risk. Hence, the control risk component would be affected.
4.25 Medium
Requirement [a]
The provided situation indicates towards the problem for Kitchen Ltd related to the
increase in warranty claims on the product named Quick Serve. The main problem is related to
the quality of the product related to glass turntable that can shatter in case the oven is used
constantly at the full power. This aspect indicates towards the control risk in the company. In this
case, the main reason behind the decrease in the quality of the product is weak internal control
related to the production of Quick Serve. Degradation in the product quality increase the number
of complaints from the customers and the company has to either replaced the product or repairs
them. For this total matter, Kitchen Ltd will have to incur cost (Eilifsen et al. 2013). This aspect

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can lead to the audit risk as there is a chance that the auditors will not be able to find the material
missstements in the financial statements. Thus, the control risk component would be affected.
Requirement [b]
From the provided information, it can be observed that the accountant of Wings, Louise,
has not been able to deal with the questions of the auditors related to the accounting operations
of the company and it may be due to lack of Knowledge, experience or skill. This aspect
indicates towards the control risk related to the company. It needs to be mentioned that the
control risks is the risk of material missstements in the financial statements due to the class of
accounting treatments, transactions and others (Leung et al. 2014). In the provided situation, it
might be happen that Louise did not follow all the accounting standards and principles while
maintaining the foreign currency related accounting records and it can lead to material
missstements in the financial statements. Thus, control risk component is involved here.
Requirement [c]
From the provided situation, it can be seen that four members of Alpha involved in the
activities related to stealing and fraudulent activities. This situation can be connected to the
inherent risk. As per the earlier discussion, internal control cannot detect the inherent risks. This
risk is high when the transactions involve human judgment. In this case, these fraudulent
activities have lead to material missstements of the financial statements (Knechel and Salterio
2016). Thus, inherent risk component is involved in this case. However, it needs to be mentioned
that it is not the responsibility of the auditors to detect fraud. In this case, the responsibility of the
auditors is to assess the fraud risk that can lead to material missstements.

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References
Ashley-Smith, J., 2013. Risk assessment for object conservation. Routledge.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance
services. McGraw-Hill.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance
Services 6e. Wiley.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.