Assignment 2 Auditing 300 Trimester 3a Beststeel Ltd

Assignment 2 Auditing 300 Trimester 3a 20131 Beststeel Ltd Has B

Identify and discuss why the above situations represent a risk. Apply auditing knowledge to identify the main account or group of accounts affected by these risks in the audit plan. Explain how the audit plan will be affected by these risks and recommend specific audit procedures to address them.

Paper For Above instruction

The described scenarios present significant risks that auditors need to carefully evaluate to ensure the accuracy and reliability of financial statements. Each scenario involves unique operational or strategic issues that could potentially lead to misstatements or distortions in financial reporting, either intentionally or inadvertently. Analyzing these risks is essential for developing an effective audit strategy that mitigates potential errors or frauds.

Risk 1: BestSteel Ltd’s Market Decline Due to Competition

BestSteel Ltd’s situation embodies a market risk driven by competition, which could have profound financial implications. The company’s forecast indicating a potential 40% demand drop suggests risk exposure primarily associated with revenue recognition, inventory valuation, and possibly impairments of assets. If the company overestimates demand or inaccurately reports inventory or receivables, financial statements could be misleading.

This competitive pressure may induce management to manipulate revenues, defer expenses, or prematurely recognize income to present a healthier financial position. Furthermore, the reliance on high-end machinery and technological differentiation points to complexities in valuing manufacturing assets and intangible assets which may be impaired due to declining sales.

Risk 2: Sprinkles Ltd.’s Accounting Practices and Tax Filings

The scenario involving Sprinkles Ltd reveals higher inherent audit risks related to fraud, misstatements, or manipulation. The auditor’s concern about the company’s history of exploiting legislative loopholes indicates a likelihood of intentional misstatements, especially in areas related to revenue, expenses, and tax provisions. Repeated instances of the Australian Tax Office (ATO) requiring additional support highlight potential deficiencies in accounting or tax reporting processes.

This environment increases the risk of understated liabilities, overstated assets, or misclassified transactions which could distort financial position and profitability. The risk extends to possible non-compliance with tax laws, affecting both the accuracy of financial statements and the entity’s legal standing.

Risk 3: BPharm Ltd’s Cash Transactions and Expansion Plans

BPharm Ltd's reliance on primarily cash transactions elevates risks related to revenue recognition and cash handling, increasing susceptibility to misappropriation or errors in recording transactions. When a significant portion of income is received in cash, there is an inherent risk of underreporting income or misappropriating cash, which can distort profitability and liquidity figures.

Furthermore, the company’s plans to expand into new markets and applying for loans place pressure on the accuracy of financial statements necessary for obtaining funding. Any misstatement or omission regarding cash holdings, receivables, or liabilities can significantly impact the bank’s decision-making process and the company’s credibility.

Main Accounts and Audit Response

Given these risks, the main account groups affected include revenue and receivables for BestSteel, tax liabilities and related accounts for Sprinkles, and cash and sales-related accounts for BPharm. The audit plan must incorporate procedures to verify the existence, accuracy, and completeness of these accounts.

For BestSteel, procedures should focus on inventory valuation, revenue cut-offs, and impairment assessments. For Sprinkles, the focus should be on substantive testing of tax-related accounts, revenue recognition, and linked disclosures. For BPharm, procedures should include cash count and reconciliation, sales testing, and assessment of internal controls over cash handling.

Impact on Audit Planning and Procedures

The risks identified lead to a tailored audit approach prioritizing areas of highest concern. For BestSteel, auditors must perform detailed inventory audits, analyze revenue trends, and evaluate asset impairments. They should also scrutinize management’s forecasts and assumptions regarding market decline to assess any potential manipulation.

In Sprinkles’ case, the audit should emphasize substantive procedures, including confirmation of tax liabilities, examination of supporting documentation, and a review of journal entries correlated with tax and revenue accounts. It is also advisable to evaluate the internal control environment to determine the risk of management override or fraud.

For BPharm, the audit plan must include extensive testing of cash transactions, reconciliation of bank statements, and verification of sales documentation. Additionally, location audits may be necessary to confirm physical cash balances, and procedures should validate the internal controls over cash management.

Specific Audit Procedures to Address Risks

  • Review and test inventory valuation methods, including physical stock counts and impairment reviews for BestSteel.
  • Perform analytical procedures on revenue and sales figures, including trend analysis, to detect anomalies.
  • Examine supporting documentation for revenue recognition and assess cut-off procedures to prevent misstatements.
  • Verify the accuracy of tax calculations and review correspondence with ATO to assess compliance for Sprinkles.
  • Conduct substantive tests of tax provisions, including analytical review and detailed testing of tax-related accounts.
  • Reconcile cash receipts and disbursements for BPharm; perform surprise cash counts; review internal control procedures over cash handling.
  • Confirm cash balances with bank statements and cross-check sales recorded with bank deposits.
  • Assess the internal control environment and perform walk-throughs to identify potential breakdowns or areas of risk.
  • Obtain management representations regarding market forecasts, tax positions, and cash procedures, along with evidence supporting their assertions.

In conclusion, understanding these potential risks equips auditors with strategies to design targeted procedures, thereby enhancing the reliability of financial statements and ensuring regulatory compliance. Vigilance and comprehensive testing are essential in safeguarding stakeholder interests and maintaining audit quality amid challenging circumstances.

References

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