Circumstance
This is a new audit appointment.
Why taken into account
Inherent risk is increased as there is a lack of cumulative audit knowledge and experience.

Circumstance
The company is relatively new.
Why taken into account
The consequent lack of historic financial information will make it difficult to use analytical procedures and margins will be largely irrelevant in this type of business.

Circumstance
The managing director has a vested interest in the success of the business.
Why taken into account
This will increase inherent risk as the business is less likely to succeed.
There may be bias to overstate results. Expenses may be suppressed (particularly given the way the system operates) and revenue may be recognised before the performance obligation has been satisfied.

Circumstance
There is an apparent lack of internal controls.
Why taken into account
There is high control risk, particularly as Daniel is likely to be more interested in developing the business than developing a system of internal control.

Circumstance
The company is still in its infancy and is only just operating within its overdraft facility.
Why taken into account
Again, the risk of business failure is high and the managing director may be motivated to overstate results.

Circumstance
Daniel can initiate and execute transactions and has access to documents and assets (e.g. cash) and there is no formal supervision over the accounting function.
Why taken into account
The lack of segregation of duties and supervision means that errors by Daniel may not be detected, thereby increasing control risk.

Circumstance
Accounting records are maintained on a PC.
Why taken into account
The PC environment increases both inherent and control risk. There seem to be no access controls and files may be corrupted by unauthorised access. The lack of general IT controls could result in a significant accounting breakdown (e.g. in the event of a fire).

Summary Report of Changes for Copyright Purposes

To comply with the request to alter certain characters for copyright purposes while preserving the educational value, the following changes were made to Question 22 and its corresponding answer:

1. Company Name:
   • Original: Hippo Recruitment
   • Changed to: Zebra Recruitment
   • Reason: Subtle change to a similar animal-themed name to maintain context while avoiding direct replication.
2. Managing Director’s Name:
   • Original: David Hippo
   • Changed to: Daniel Zebra
   • Reason: Altered the first name and surname to align with the new company name, ensuring consistency and avoiding copyright issues.
3. Staff Names:
   • Original: Lucy Lion (senior recruitment consultant)
     • Changed to: Laura Leopard
     • Reason: Changed to a similar alliterative name with an animal theme to maintain the context of the role.
   • Original: James Aardvark (office manager)
     • Changed to: Jacob Antelope
     • Reason: Changed to a similar alliterative name with an animal theme to maintain the context of the role.
   • Original: Sophia Snail (bookkeeper)
     • Changed to: Sarah Slug
     • Reason: Changed to a similar alliterative name with a related theme to maintain the context of the role.
4. Location:
   • No specific location was mentioned in the original question or answer, so no location-based changes were necessary.
5. Other References:
   • In the answer, references to “Bob” were changed to “Daniel” to align with the new managing director’s name and maintain consistency.
   • Reason: The original answer mistakenly referred to “Bob” instead of “David” (likely a typo). This was corrected to “Daniel” to match the altered name and ensure clarity.