Present report is based on case study of SIMEC group. Current assignment will discuss key inherent risk factors that can impact on SIMEC group auditing. It will first define the objective of auditing and then will describe inherent risk related with the same. Furthermore, assignment will explain impact of risk on evidence mix for planning of audit of SIMEC.
Inherent risk are issues factors that determine possibilities of occurring errors in organization. Inherent risk is misstatement in financial statement that can spoil entire brand image of company. The main objective of audit is to conduct risk analysis and find out issue in business (Alles, Kogan and Vasarhelyi, 2018). By this way, authorities can make effective strategies and can improve the business performance. Agenda of conducting audit in the organization is to measure effectiveness of assessment, identifying deficiency and verifying ongoing documents. If the firm is facing huge financial issues then it may make misstate in its financial information in order to show the good profit. If this misstatement in financial records was found by the auditor then it affects brand image of company to a great extent (Chan and Vasarhelyi, 2018). Auditor conducts audit in order to obtain reasonable assurance so that it can be measured that whether financial testaments have been prepared with accuracy.
One of the major risk factors that is associated with audit in SIMEC is impairment of goodwill. It can affect the overall brand image because audit helps auditor in analysing assets and liabilities of firm. By this way, it can be determined that whether firm is able to generate income in the future or not (Collins, 2017). It helps in measuring the availability of resources.
Another inherent risk is related with accuracy in account balance of SIMEC financial statements. There are many assets of the business. Some equipment which are considered as assets have accumulated depreciation due to which overall value of assets will get down. It is considered as control risk (Ridley-Duff and Bull, 2015). It is the type of risk which is related with material mismanagement. Main reason of arisen this issue is due to in efficiency in controlling over operational aspects of the business.
Another inherent risk factor is result of previous audits. If in the previous audit there was misstatements discovered then there is high chances that same mistake occur in current reports as well (Fung, 2014). Thus, it is the inherent risk factor and auditor has to check each record, voucher carefully so that mistake can be identified (Lake, 2016). Sometimes, vouchers and other values of equipment do not matched then auditor has to find out this issue ad have to inform to the firms regarding the same.
AAS-7 explains that relying on work of internal auditor is inherent risk factor that may impact on entire auditing procedure to a great extent. It is the responsibility of external auditor to cross check each transactions carefully. If same client is associated with organization for longer duration then auditor will feel little confident with financial transactions with the client (Quick, 2016).
All these key inherent risk factors put direct impact on the audit of SIMEC group for current year and future audits as well. The objective of conducting audit is to check financial transaction reliability and accuracy but if auditor rely of previous audits or earlier work of auditors then it may enhance risk because individual may fail to cross check each materiel properly (KovaÄ and et.al, 2016). By this way this audit report will not be accurate. It may contains some errors and entity may get faced to find out its issues.
Staff redundancies is the major inherent risk to the audit. As company is liable to give dividend at the end of each financial year. But in the audit report it is analysed that cited firm is unable to give dividend to its employees as per the standards.
Company aims to generate more revenues for that it tries to enhance its brand image. In order to increase good will of the firm every year each firm conduct audit so that it can ensure its clients that all the transactions that have been done by the firm are accurate and there is not issues (Moroney and Trotman, 2016). But if misstatement in financial reports have been identified by the auditor then goodwill of business unit can be affected badly. This will create issue for the firm to carry out their operations significantly. If such type of mistakes identifies that risk related to size, products, supply chain can be increased in the corporation which will affect sustainability of the firm significantly (Audit evidence and specific considerations for certain items, 2015).
In order to judge inherent risk of business, it is essential for auditor to take support of professional judgements so that specific risk can be analysed. In order to follow these standards in an effective manner, auditors discuss financial transactions of firm with decision makers and financial department of firm and estimate financial errors in business. This help in meeting with the objective and making effective strategies so that overall goal of the firm can be accomplished (Alles, Kogan and Vasarhelyi, 2018).
It is responsibility of the auditor that to look at the each financial records in properly and check these transcations carefully in order to meet with the purpose of auditing. If entity fails to do the same then it may increase risk on the auditor and entire auditing report may contains issues. From the above audit inherent risk it has been identified that SIMEC has major inherent risk of good will (Chan and Vasarhelyi, 2018). Due to misstatements its brand image may get affected. Goodwill is considered as intangible asset that define the value of business unit. Good will impact on profit of the firm and help the entity in raising its profitability to great extent. If firm does not have good brand reputation then it may impact on overall sustainability of the organization to a great extent (Ridley-Duff and Bull, 2015). Auditor can calculate goodwill by looking at its balance sheet.
Evidence mix for measuring the goodwill is as following:
- Calculating the purchasing items, amount of goodwill is equilibrium to major difference between net asset and price paid to purchase assets. If there is huge difference between both then auditor can find out evidences for the risk.
- Revaluation of assets is another evidence through which auditor can calculate the goodwill. Many times firms revalued its assets so that good will can be increased. By looking at this section in balance sheet individual can calculate brand reputation in the market (Quick, 2016).
- SIMEC has to maintain record of new partner. By looking at time of admission, retirement and death of partners good will of the company can be measured effectively (Moroney and Trotman, 2016).
- By looking at earlier records and comparing value of goodwill with the current records, auditor can investigate value of goodwill of company.
- Verifying partnership deed is another major evidence that helps in confirming goodwill of firm (Lake, 2016).
Staff redundancies is another major inherent risk to the SIMEC group. In order to understand the audit evidence mix for this inherent issue, auditor can check company's balance sheet, financial transactions, etc.
Evidence mix for the risk is as follows:
- Dividend paid to employees is reflected in profit and loss account of firm. By calculating dividend, staff redundancies risk can be measured and identified by the auditor.
- Taxation implication (Audit evidence and specific considerations for certain items, 2015).
- Calculating entitlement, redundancies and potentiality are the major evidences through which this risk can be analysed.
- By looking at the last year’s profit and comparing it with the current year’s profit, auditor can give evidence for the staff redundancies risk factor.
- Esops of the firm is the method through which this risk can be identified, stock option given to the employees. By calculating this option auditor can calculate Staff redundancies risk and give evidences of surplus workers. If the amount of Esops is higher as compare to estimated amount then it can be measured that there is issue in the financial statements (Chan and Vasarhelyi, 2018).
Inaccuracy in account balance is the main inherent risk that can spoil the entire performance of company. It has been identified that if such risk is being measured by the auditor then this may put high impact on the overall image of entity.
This is the major risk that can be calculated in following manner.
- Depreciation value of equipment and compare it with the previous records is the method through which risk can be identified. This is authentic evidence that shows risk of business (Ridley-Duff and Bull, 2015).
- Difference in net assets values and gross assets value is another evidence that calculate inaccuracy in account balance.
- Checking sales records against nominal ledger, cross check of appropriate sales invoice and customer orders (Moroney and Trotman, 2016).
- Relevant test such as invoice positing to ledger accounts, purchasing of raw material and payment made in expenses side in the profit and loss account is the another evidence through which this risk can be measured.
- Another evidence mix is cross check bill cross checked with ledger in order to find out this inaccuracy risk.
Considering internal audit records and having trust on auditor is the major inherent risk that causes difficulty to the business (Ridley-Duff and Bull, 2015). If external auditor considered same report then individuals may do mistake in conducting auditing for firm.
Evidences mix for this inherent risk are as follows:
- Changes occurred in firm in respect to quality, and calculating profit against liabilities can help in giving evidences for this risk.
- Recalculation of overall performance of firm, analytical procedures help in inquiry for the issue and presenting evidences for the same (Alles, Kogan and Vasarhelyi, 2018).
- Total calculation of valuation and allocation is a good option through which this risk can be analysed. Auditor has to ensure that whether company has involved liabilities, equity interest in the financial statements in the records carefully or not.
- Capital investment calculation is the major evidence that reflects risk of business. If company has poor capital investment strategies but return over assets are different from the capital investments then it shows the inherent risk of internal audit reports (Chan and Vasarhelyi, 2018).
- Taxation implication is another major evidence that helps in showing the risk of business.
From the above report, it can be concluded that each firm is required to conduct audit every year in order to increase assurance of financial transaction. But there many inherent risk factors associated with the audit such as goodwill, inaccuracy of financial transactions, internet audit reports, etc. All these risks put impact on the overall performance of entity to a great extent. It is essential for the auditor to test balances, transactions and analytical procedure in order to give evidence for all types of risks. By this way, organization can become able to analyse their mistake and take action to improve its errors.
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