Audit Risks, Essay Example

Happiness Express Inc.

Audit risk (AR) refers to threats caused by error or fraud that can lead to unqualified report from the auditor due to failure to identify misstatement. It is also referred to as Residual risk.  Risks compose of Inherent risk (IR), Control risk (CR) and detection risk (DR). There are several factors affecting audit risk, these are engagement risk, this is being associated with a particular client and where there  are inappropriate design and application controls. Audit risk can also occur when there is cost-benefit constraints and circumventing of controls.

Existence/Occurrence: The actual revenue balances should be verified with the amounts actually owed as of the date of the balance sheet. It should also be established that sales represents goods and services rendered during the period of the financials. Completeness and Accuracy: It should be determined and verified that all amounts to the organization are included in the financial statements.  All goods sold, services rendered, returns and allowances are captured in the financial in an accurately computed manner, based on correct quantities and prices. Presentation and disclosure: The actual results and revenues for the period are properly described and classified.

One can prevent misstatement by conducting unpredictable audit test. When an audit test is done at a set time, the management will have a chance to commit fraud and reduce the effectiveness of audit test in detecting test. It can also be prevented by keeping proper documentation and obtaining representations from management, this will enable the management to acknowledge their controls to detect risk, assessment of the risk and disclose to the auditor their comprehension of fraud or suspected fraud.  Both substantive test and test of internal controls will be required, in this case, to access the accuracy of various financial statement assertions.

The auditor did not set aside enough time to adequately plan the audit. It is noted that they did not obtain a thorough understanding of the organization’s operation and internal controls. The auditor also did not involve the client in the audit, and this brought about some glaring mistakes in the audit report, for example, the suspicious nature of the large receivables from Wow Wee and West Coast. They also failed or forgot to follow the risks, and this is shown by their reliance on the previous year’s information.

The auditor could have tested for the internal controls of the company. These would have given a lot of information of how the company operates and show the loopholes that exist. They should also have reviewed the processes that the organization uses for example, the accounts receivable process. They could also have interviewed accounting employees and verified balances with clients. The analytical procedures could also have been undertaken to benchmark the organization’s ratios with the industry.