Any auditors about?

[Kemik]

*dons flame suit* I know, do you're own homework and all that but I need some guidance, not full answers.

I have a piece of coursework to do for Audit. One part of one section is on Inherent risk and control risk in relation to material misstatement from error (so not arising from fraud).

I've done the relevant inherent risk for a few points on the case study but need a bit of help identifying the rest.

This is a pre-teen toy company.

• Major part of income made up of bonuses by achieving aggressive, regional sales targets and profitability. [I would say this is neither IR/CR as any risk would be from fraud]
• New inventory control system installed near year end. Implementation didn't go well but now considered reliable and accurate. Software company that develops and maintains system is run by brother-in-law of MD. [CR here but need some help expanding on it. Again, fraud in relation to bro-in-law.]
• Poor market conditions. Major competitor closed from pressure on revenue & margins. [Included this as IR with section saying adds pressure to management -> more chance of mistakes. Feel free to expand]
• Obsolete toys donated to charities. Classification of obsolete is decision of local management. No co-wide policy. Limited documentation of disposals (note in inventory records). [Having no policy makes me think this is IR as there are no controls. My flat mate would say the lack of controls makes it a CR but definitions of CR state otherwise. The CR here might be the limited documentation but I'm really not sure.]
• MD keen to expand in to EU and internet. Co going to stock market to raise capital via share issue. [IR in expanding to new markets. Not 100% sure how I could write much more than that]

Thanks for any help. /waits for required "do your own homework!" replies.

 

[Sawell]

With regards to the second one, don't third party stock systems have risks? Support and development is not kept in-house, so there is a failure dependence on an integral part of material misstatement.

I'm no auditor but I know for our systems the manufactures are always assessed as risks, which is why we have sad and tedious long support and development contracts to ensure there is accountability, but there's still inherent risks involved even after that, due to a lack of control.

 

[Kemik]

With regards to the second one, don't third party stock systems have risks? Support and development is not kept in-house, so there is a failure dependence on an integral part of material misstatement

Thanks mate. I knew there was control risk there (the risk of material misstatement going undetected by the internal controls) but I didn't think about it being a third party. I've written that with it being a third party they may not understand the company's systems fully and so, may not test for certain errors which could pass through undetected.

 

[csmager]

I wouldn't have said fraud was completely a separate issue - controls are there to prevent fraud as well as mistakes, for example.

I would say the first point is an inherent risk - the fact that the employees are chasing bonuses might lead to more of a risk they might try something fraudulent than a company that wasn't.

I'll have more of a think in the morning. My 'Principles of Auditing and Reporting' exam bored me to tears - I can't say I'm a fan of audit!

 

[Kemik]

I wouldn't have said fraud was completely a separate issue - controls are there to prevent fraud as well as mistakes, for example.

I would say the first point is an inherent risk - the fact that the employees are chasing bonuses might lead to more of a risk they might try something fraudulent than a company that wasn't.

The question states "What are the inherent risks and control risks in relation to material misstatement other than those arising from fraud". Fraudulent reporting and misappropriation of assets is covered in the question before this one. That's why it's so hard for me to find erroneous risks

 

[csmager]

The question states "What are the inherent risks and control risks in relation to material misstatement other than those arising from fraud". Fraudulent reporting and misappropriation of assets is covered in the question before this one. That's why it's so hard for me to find erroneous risks

Ah, I see why you're totally discounting it now!

 

[Sawell]

Thanks mate. I knew there was control risk there (the risk of material misstatement going undetected by the internal controls) but I didn't think about it being a third party. I've written that with it being a third party they may not understand the company's systems fully and so, may not test for certain errors which could pass through undetected.

Sounds about perfect, glad I could be of assistance.

The only other thing I thought of was stress regarding the first point, if staff are being close to the limit with barely reachable targets to increase turnover and profitability is there not a risk of work related stress and depression leading to sickness and potentially mistakes with stock? I.e. said employee gets 3 orders for big distributors on the same day, is working on getting their orders done but is also trying to chase new leads to reach his targets and forgets or puts aside the task to run the orders through the stock system.

Pressure always leads to a risk in human error and illness, right?