Inherent Risk – Knowsia

AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

Question

Which of the following may be factors contributing to inherent risk?

1 Number of customers

2 Strength of internal controls

3 Number of products

4 Rate of staff turnover

A 1,2 and 3 only

B 1,3 and 4 only

C 2,3 and 4 only

D 1,2 and 4 only

Answer

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Tags: Customers, Inherent Risk, Internal controls, Products, Risk Assessment, Staff turnover
Level: Level 3

Topic: Audit Evidence

AA – L2 – SA – Q4.4 – Inherent Risk Factors

Identifying non-inherent risk factor.

Question

Which of the following is NOT an inherent risk factor?

A Control environment

B Subjectivity

C Uncertainty

D Change

Answer

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Tags: Audit Planning, ICAG, Inherent Risk, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Risk Environment

AA – L2 – Q64 – Audit of Financial Statements

Identify the financial statement assertion with the greatest inherent risk for trade payables audit.

Question

Peak Cycles is a small manufacturing company of which your firm of Chartered Accountants is the external auditor. You have been assigned to the audit of the payables.
The audit file indicates that control risk for purchases and payments transactions is assessed as slightly less than high because of limitations in the extent of segregation of duties due to the small number of accounts personnel. There are no other identified control problems or prior year audit problems.
Narrative notes on the accounting system contain the following descriptions.
Purchases are requisitioned by the user department and ordered, using prenumbered order forms, by the purchasing manager.
Raw materials and manufacturing supplies are delivered to the receiving department of the factory where the receiver issues pre-numbered goods inward notes (GINs).
Purchases of other goods and services are delivered directly to the requisitioning department and no GINs are issued.
The accounts department checks suppliers’ invoices with purchase orders, and

for production department purchases, with GINs
for other purchases, sends the invoices to the requisitioning department manager who initials the invoice to indicate that it is appropriate to pay.
Invoices are then processed to the accounting records using proprietary software.
All suppliers are paid at the end of the month following the month of receipt of the invoice.
Payables at 31 October 20X8 therefore represent goods and services invoiced in October. In addition, invoices received between 1 and 15 November were divided into those relating to goods received or services provided before and after 31 October, the former being recorded in the accounting records before the October trial balance was produced. On 15 November, any unmatched GINs relating to deliveries before 31 October were posted to the accounts as at 31 October at the estimated amounts of the invoices.
Suppliers’ invoices are filed alphabetically with supporting documentation, all of which is cancelled with the date of payment when the cheque is issued. Suppliers’ monthly statements are also filed with the invoices. These are scrutinised by the accounts department for unusual items, such as overdue invoices, but are not regularly reconciled with the company’s own records.
Required:
(a) In your audit of trade payables in the 31 October 20X8 financial statements explain which of the financial statement assertions you would regard as presenting the greatest inherent risk.

(b) Discuss the reasons for undertaking or not undertaking a payables’ circularisation.

(c) Outline substantive procedures you would apply in your audit of trade payables relating to production department purchases.

(d) Explain additional procedures you would perform in verifying the completeness of non-production department payables.

(e) Set out the audit procedures you would perform on share capital and reserves.

Answer

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Tags: Completeness, Financial Statement Assertions, Inherent Risk, Trade Payables
Level: Level 2

Topic: Audit of Financial Statements

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

Question

Your firm has just been appointed the first auditor to the Lagos branch of Pinnacle Furnishings, a Nigerian manufacturer of household furniture. The branch has only been in existence for thirteen months. The branch is involved in importing and distributing the furniture through wholesalers and major retailers in Nigeria. The auditors of the Nigerian company are a medium-sized Nigerian firm. There is no legal requirement for a branch audit, but management has expressed concern about the Lagos operations.

A complex computerised accounting and inventory control system is maintained. You have ascertained that the mainframe installation is in Nigeria. The terminals in Nigeria (Lagos) are linked to the mainframe by private telecommunications lines. All input is performed in Lagos with overnight batch processing and output the following day.

The software used is a Nigerian package and all user manuals are written in Yoruba; there are nine volumes (nine manuals) in total. The IT personnel in Lagos are competent users of the system but none of the staff has a detailed knowledge of the actual software.

The Lagos branch has been expanding rapidly and problems have been experienced because its IT department has been unable to keep pace with developments.

An internal auditor is employed, and he reports directly to the manager of the branch, who has set down his programme of work. The internal auditor is not a qualified accountant and his working papers and reporting are not very formalised. He performs daily checking of certain areas and has an audit programme. The programme of work is structured in such a way that a specific area is examined each month.

Required

Identify and comment on the issues raised as they affect your planning of the audit of the Lagos branch.

Answer

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Tags: Audit Planning, Branch Audit, Computerised Systems, Control Risk, Inherent Risk, Internal Audit, Substantive Approach
Level: Level 3

Topic: Planning

AA – L2 – Q20 – Risk Assessment and Internal Control

Identify risks associated with auditing ConnectSphere Mobile, a mobile phone service provider with expansion plans. Discuss ethical considerations for accepting the audit of ConnectSphere Mobile, including technical and logistical capabilities. Conclude whether to accept or decline the audit of ConnectSphere Mobile, providing principal reasons.

Question

You are the partner in charge of a four partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of ConnectSphere Mobile for the year ended 31 December 20X8.

ConnectSphere Mobile was established two years ago, and provides a mobile phone service for individuals and business. The system being established by the company comprises:

Small portable mobile phones, which allow subscribers (users) to contact or be contacted by any other telephone.
The mobile phones can be used within range of a local relay station, which receives calls from and sends calls to the mobile phone.
The local relay stations are linked to a central computer which connects the calls to other users. Frequently, this is through a computer’s telephone network.

Currently, the local relay stations cover one large city with a population of about 1,000,000. Within the next year the system will cover all large cities in Zamora with a population of over 250,000. By 20X7, the system will cover all trunk roads and cities with a population of over 100,000. Extending the coverage of the system will involve considerable capital expenditure on new relay stations and require additional borrowings.

The cost of the relay stations and central computer are capitalised and are written off over six years.

The mobile phones are manufactured by other companies and sold through retailers. ConnectSphere Mobile does not sell the phones, but it pays ₵2,000 to the retailer for each phone sold and subscription by the customer to ConnectSphere Mobile. This payment is capitalised in the financial statements of ConnectSphere Mobile and written off over four years.

Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Other operators are charged for the time spent by their customers contacting ConnectSphere Mobile’s subscribers (customers). These charges are logged and calculated by the company’s main computer.

All the shares are owned by three wealthy individuals who are non-executive directors. They will receive a fixed salary. They do not plan to make any further investment in the company.

Establishing the network of relay stations and subscribers will result in the company making losses for at least three years. Current borrowings are about 20% of the shareholders’ funds. Because of the substantial capital expenditure and trading losses, it is expected the company will be highly geared by 20X7.

As the company will not be profitable, the non-executive directors have decided that executive directors should receive a basic salary and a bonus based on the number of subscribers to the system.

The owners plan to float the company on the Zamora Stock Exchange in 20X7. The flotation will involve:

issuing new shares to the general public to provide funds for the company; and
the three non-executive directors selling some of their shares.

You are aware that ConnectSphere Mobile has a number of very large competitors, each of which has a large number of users and comprehensive coverage (i.e. over 90% of the population are within range of a relay station).

Required:

(a) Consider the risks associated with the audit of ConnectSphere Mobile.

(b) Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit. This should include considering whether your firm has the technical and logistical ability to carry out the audit.

(c) Conclude on whether you would advise your firm to accept or decline the audit, giving your principal reasons for coming to this decision.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Risk, Complex Systems, Control Risk, Financial Stability, Going Concern, Inherent Risk, Mobile Technology
Level: Level 2

Topic: Risk Assessment and Internal Control

Tag (SQ): Inherent Risk

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AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

AA – L2 – SA – Q4.4 – Inherent Risk Factors

Identifying non-inherent risk factor.

AA – L2 – Q64 – Audit of Financial Statements

Identify the financial statement assertion with the greatest inherent risk for trade payables audit.

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

AA – L2 – Q20 – Risk Assessment and Internal Control

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AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

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AA – L2 – SA – Q4.4 – Inherent Risk Factors

Identifying non-inherent risk factor.

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AA – L2 – Q64 – Audit of Financial Statements

Identify the financial statement assertion with the greatest inherent risk for trade payables audit.

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AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

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AA – L2 – Q20 – Risk Assessment and Internal Control

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