The following risk factors were identified by various audit teams during the aud
ID: 2344049 • Letter: T
Question
The following risk factors were identified by various audit teams during the audit of their clients1 The client has a strong control environment and good controls over the existence of inventory.
2 The client is in an industry that has both significant regulatory oversight and complex regulations.
3 The client has recently experienced turnover in its information technology group, resulting in decreased segregation of duties
and a deterionration of computer general controls.
4 The client is a private university with primarily full time students, a small amount of receivables at year end, and good internal contorls over revenues
5 A company's business plans are dependent on the success of entering new foreign markets with existing products.
6 The client has used significant borrowing to fund expansion in a competitive industry and has a narrow toerance range regaruding debt covenants.
7 Analytical procedures for a manufacturer show significant increases in both profit margins and inventory turn days.
8 Inventory items are small in size and high in value.
9 The telecommunications client is in a capital intensive industry, and fixed assets additions involve complex accounting issues.
10 The audit team has experienced several attempts by management to justify marginal or inappropriate accounting on the basis of immateriality.
11 Analytical procedures for a manufacturer show significant increases in both revenue growth and accounts receivable turn days.
For each risk factor (a) identify the type of misstatement that can occur and
(b) an audit strategy that is relevant to the risk factor.
Example Risk Factor Type of Potential Misstatement Audit Strategy
1
2
3
4
5
6
7
8
9
10
11
Explanation / Answer
The following risk factors were identified by various audit teams during the audit of their clients
1 The client has a strong control environment and good controls over the existence of inventory. ----------- Controls are relevant to the existence of inventory---------- A lower assessed level of control risk approach
2 The client is in an industry that has both significant regulatory oversight and complex regulations. ------------ Misstatements may occur in many assertions or accounts---------- A primarily substantive approach.
3 The client has recently experienced turnover in its information technology group, resulting in decreased segregation of duties and a deterionration of computer general controls. ------------- Misstatements may occur in many assertions or accounts------------ A primarily substantive approach.
4 The client is a private university with primarily full time students, a small amount of receivables at year end, and good internal contorls over revenues -- Issues relate primarily to the occurrence of revenues and the existence of receivables-------- Predictability of transactions may allow for a response to lower inherent risk and analytical procedures.
5 A company's business plans are dependent on the success of entering new foreign markets with existing products.- Issues relate primarily to the occurrence of revenues and the existence of receivables------------- A primarily substantive approach.-
6 The client has used significant borrowing to fund expansion in a competitive industry and has a narrow toerance range regaruding debt covenants.---------- Issues relate both to the disclosure assertion for long-term debt and to other assertions affected by debt covenants. ----- A primarily substantive approach.
7 Analytical procedures for a manufacturer show significant increases in both profit margins and inventory turn days. ------- The existence of inventory--------- A primarily substantive approach.
8 Inventory items are small in size and high in value. --------- The existence of inventory------- A primarily substantive approach.
9 The telecommunications client is in a capital intensive industry, and fixed assets additions involve complex accounting issues. ------- Valuation and allocation for fixed assets------ A primarily substantive approach..
10 The audit team has experienced several attempts by management to justify marginal or inappropriate accounting on the basis of immateriality. --- Issues may have a pervasive impact on multiple assertions----- A primarily substantive approach.