Risk Assessments - Preliminary risks Flashcards
New audit client
Lack of cumulative audit knowledge and experience
Increased risk of misstatement in opening balances
Firm appointed after the year-end:
Potentially limits procedures available to verify certain figures, increasing risk of inappropriate audit opinion
Domineering/intimidating attitude of management
Domineering attitude and possible doubts on management integrity increases inherent risk of the audit
Company is trying to raise finance:
Increases risk of management bias in the financial statements to comply with covenants attached to loan
Bank loan
If company fails to comply with terms and conditions (covenants) of the bank loan, the facility may be withdrawn (going concern risk)
Economic uncertainty and company’s rapid expansion
May indicate a risk that the company is not a going concern
Overseas element of operations
Increased risk of failure to meet overseas regulatory requirements overseas
Poor internal controls due to geographically dispersed operations
Possible errors in translating any transactions in overseas currency
Contracts are renewable
Contracts are renewable so there is no guarantee of future revenue streams (going concern risk)
Directors have NO finance background
Increase risk of misstatements in the accounting records and financial statements
Outdated accounting system
Increase risk of misstatements in the accounting records and financial statements
Regulated industry
Failure of company to comply with industry regulations may result in fines which may not be provided for or disclosed as a contingent liability in the financial statements
If company fails to comply with laws and regulations, its operating licence may be withdrawn (going concern risk)
Acquisition of subsidiary
Preparing consolidated statements for the first time, company may lack proficiency in their preparation
Increased risk of consolidation adjustments errors such as goodwill
