For The Purposes Of This Assignment, You Are To Imagine That

For The Purposes Of This Assignment You Are To Imagine That You Work

For the purposes of this assignment, you are to imagine that you work as an Audit Manager for a company called Amazing Accountants. Your new audit client is a listed company in the Australian or Singapore Stock Exchange (your choice). The client has asked you to perform their financial report audit for the financial year ended 31 December 2020. Review the last audited financial statements, identify and justify five (5) inherent risks and your response to those inherent risks during your audit.

Paper For Above instruction

In this paper, I will explore the inherent risks associated with auditing a listed company, specifically focusing on the financial statements for the year ending 31 December 2020. As the Audit Manager at Amazing Accountants, my goal is to identify and justify five significant inherent risks based on the last audited financial statements of the client, and to discuss appropriate audit responses to mitigate those risks.

Introduction

Auditing financial statements of listed companies involves addressing numerous inherent risks arising from complex transactions, management estimates, and the external environment in which the company operates. These risks are innate to the entity's operations and the nature of financial reporting, and they require auditors to design effective audit procedures to obtain reasonable assurance about the financial statements' accuracy and completeness.

1. Revenue Recognition Risks

One of the primary inherent risks relates to revenue recognition. Listed companies often engage in complex sales arrangements, including performance obligations, discounts, rebates, or multiple-element arrangements. There is a significant risk that revenue could be overstated or recognized prematurely to meet market expectations or financial targets. The previous audited statements may have highlighted discrepancies or aggressive revenue recognition policies.

Audit Response: To address this, I would perform detailed testing of revenue transactions near the period-end, verify relevant contracts, and obtain third-party confirmations. I would also review the company's revenue recognition policies for compliance with Australian Accounting Standards (AASB 15 or equivalent) and test a sample of transactions for proper classification and timing.

2. Valuation of Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets pose a significant inherent risk due to the subjective assumptions involved in impairment testing, such as growth rates, discount rates, and forecasts. Listed companies often have substantial goodwill balances, increasing the risk of impairment not being appropriately recognized or disclosed.

Audit Response: I would evaluate management’s impairment models, test the reasonableness of the assumptions, and consider external market data. Additionally, I would assess whether impairment testing was performed timely and accurately, reviewing disclosures for compliance with relevant accounting standards.

3. Foreign Currency and Hedging Risks

For companies operating internationally, foreign currency transactions and hedging strategies introduce inherent risks, especially if foreign operations are significant. The risk exists that exchange rate fluctuations could impact reported earnings or that hedging activities might not be properly documented or valued.

Audit Response: I would review foreign currency transactions, assess hedge documentation, and evaluate the effectiveness of hedging strategies. Additionally, I would verify translation adjustments and related disclosures as per applicable standards (AASB 9 or equivalent).

4. Complex Tax Positions and Deferred Tax Assets

Tax-related inherent risks are prevalent in listed companies due to complex structures and aggressive tax planning. There is a risk that deferred tax assets or liabilities are misstated, or that tax provisions are understated, especially if management’s assumptions about future taxable profits are overly optimistic.

Audit Response: The audit would include testing the reasonableness of management’s forecasts, reviewing supporting documentation for the recognition of deferred tax assets, and assessing the adequacy of tax provisions in accordance with AASB 112.

5. Management Override of Controls

Despite internal controls, management override remains an inherent risk because of the potential for manipulation of estimates, transactions, or disclosures to achieve desired financial results. This risk is heightened in a listed company due to pressure to meet market expectations.

Audit Response: To counter this, I would employ substantive procedures such as journal entry testing, review of estimates and judgments, and unannounced walkthroughs. Additionally, I would maintain professional skepticism and involve those independent of management to review estimates and disclosures.

Conclusion

Inherent risks are intrinsic to the audit of listed companies’ financial statements and require diligent responses. The identified risks—revenue recognition, goodwill valuation, foreign currency exposure, complex tax positions, and management override—are critical areas that demand comprehensive audit procedures. By carefully assessing and addressing these risks, the auditor can enhance the likelihood of providing an accurate and reliable opinion on the company's financial health for the fiscal year ending 31 December 2020.

References

  • Australian Accounting Standards Board. (2019). AASB 15 Revenue from Contracts with Customers.
  • Australian Accounting Standards Board. (2019). AASB 9 Financial Instruments.
  • Australian Accounting Standards Board. (2019). AASB 112 Income Taxes.
  • IAASB. (2018). International Standard on Auditing (ISA) 315, Identifying and Assessing the Risks of Material Misstatement.
  • Heim, K., & Wilkins, M. (2019). Auditing and Assurance Services. McGraw-Hill Education.
  • IFRS Foundation. (2020). International Financial Reporting Standards (IFRSs).
  • Simnett, R., & Green, W. (2018). Auditing and Assurance Services in Australia. Oxford University Press.
  • Camfferman, K., & Zeff, S. (2015). Financial Reporting and Auditing Standards: The Evolution of Global Standards. Routledge.
  • Powell, A., & Smith, J. (2017). Critical Audit Matters and Their Impact on Audit Quality. Journal of Accounting and Public Policy, 36(4), 350-375.
  • DeFond, M., & Zhang, J. (2014). A Review of Archival Auditing Research. Journal of Accounting and Economics, 58(2-3), 275-326.

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