INHERENT RISKSi) What : Market competition has been growing. Why : INCREASED INHERENT RISK. Since competition has been growing, it increases the pressure on the management to manipulate the F/Sii) What : owner and assistant are very involved and capable.Why: DECREASED INHERENT RISK. Since both of them know what they are doing, there is very little scope for error or misstatements.iii) What: Accounting staff have no designation and have no training.Why: INCREASES INHERENT RISK.
Since the staff have had no formal accounting training, there is a high chance of committing unintentional errors.iv) What: Accounting staff have been with the company for years.Why: DECREASES INHERENT RISKS.
Reduced risk of misstatements given that the employees have been around for yearsv) What: Expanding business overseas.Why:INCREASES INHERENT RISKS.There is an increased risk of misstatements resulting from complex intercompany transactions and foreign exchange transactions.vi) What: Loan will be approved only if Olanda maintains current ratio of 2.5:1Why: INCREASES INHERENT RISK.
Increases pressure on the auditor. He now has to see to it that the financial statements are thorough and error free.Conclusion: Inherent risks are very high in this organization.
b) CONTROL RISKSi) What: Implemented a new computer systemWhy: DECREASES CONTROL RISKS.Client is using an up-to-date financial reporting system.ii) What: The system developed is maintained by Olanda’s IT department.Why: DECREASES CONTROL RISKS. The client has an IT policies in place .Conclusion: Control risks are low in this organization.
c) The auditor will want to keep the audit risk as low as possible. Since the inherent risks in this organization is high, the detection risk will be low. This is because the auditor will place an increased reliance on detailed substantive procedures.3) By keeping risks at a minimum level, the auditor keeps the risks of errors and misstatements at a minimum. This can be done through planning.
The auditor will dedicate more of his time towards this. The auditor will first identify accounts that are most at risk and how those accounts are likely to be misstated.