RISKS Flashcards
Types of Risks
-Trigger and effect
🔸Business Risk
🔹Audit Risk
🔹(Audit Risk)
- RoMM (financial statement level and assertion level)
- Detection risk (inherent risk, control risk)
At assertion level:
🔺Start with general stuff
-Risk that there’s fraudulent financial reporting specifically relating to existence and valuation of eg inventory and accounts receivable
-Intentional misstatement by management (third party reliance, co is listed)
- Increased inherent risk that not all disclosures provided
- Risk of unintentional errors due to tight audit deadline
- There is a high risk that FS may be intentionally misstated by mngt in order to appear more favorable due to the fact that mngt integrity is questionable evidenced by….
- Link risk to assertions e.g protests affect valuation of assets of destroyed
Overall
- In terms of ISA 240 par .26 there is an assumed risk of fraud (occurance) included in revenue recognition
- Revenue is a material line item in the financials due to the nature of Pharmore’s operations, and therefore the risk that a misstatement is material increases.
- There is a possible decrease in the risk assessment as the financial manager is a Chartered Accountant and management competence has always been assessed as being high
ROMM- WHAT, HOW and SO WHAT
Respond to Risk at FS level
-Assign engagement partner and audit team with experience on JSE clients
-Firms IFRS specialist to review accounting treatment
-Assign experienced staff to test downstream transactions
-Use IT specialist/ fraud specialist
-Assign staff with experience on listed entities
-Lower materiality and increase sample sizes
-Communicate component materiality
-Perform detailed review of WP for OB testing ISA 510
-Testing related parties
-Specialist to audit complex areas eg, consolidations
-Increase awareness with components auditors of high risk areas and responses
-Place less reliance on controls and focus more on substantive procedures. Perform more TOD and less ARP
- Evaluate accounting policies may indicate fraud
- Increase substantive audit procedures on compliance with laws and regulations
- (Tight deadline)- combined approach with early verification and roll forward procedures
>Because of the system migration during the year
>Weak accounting control environment
TIMING:
-Balances focus at year end, transactions during the year
EXTENT:
-Less reliance on MRL and focus more on third parties
-Focus on using CAATs where possible to test the population
-Obtain detailed knowledge of business, control environment and accounting practices
-Perform early verification to verify A/L
-Review F/S for consistency with accounting policies
-Pay attention to FV, contingencies, goodwill, impairment and GOBP
-Comply with s45 reporting with RI
-Follow combined approach place reliance on TOC
-Discuss GC to test budgets, forecasts, cash projections etc
-Focus on subsequent events
- Detailed testing on high risk branches
- Consider other non compliance with laws and regulations especially Co Act
- Reassess the directors integrity or auditor etc
- RoMM at FS level is increased
Describe the effect that Matter 1 and Matter 2, discussed in the Social and Ethics Committee meeting will have on your assessment of the risk of material misstatement (ROMM) for Indlovu’s 2021 year-end audit.
- Overall there appears to be a weak control environment thus higher risk of errors and fraud due to the non compliance with King Iv as evidenced by various issues with the Social and Ethics Committees’ competence discussed in Part e.
- There appears to be weak management integrity at Indlovu thus high risk of fraud (ISA 240), evidenced by:
- The letter from the Chief not taken seriously by Caldon, the CEO and he didn’t report the matter to the Board.
- The elephant issue dealt with poorly ie. slammed down phone on the investigator
- Willingness of the Board to employ illegal immigrants, breach of South African law.
- With regard to the issue of the land and the village claiming ownership, the following risks arise:
- The rights of the land asset are questionable as it is a concern as to whether Indlovu is the rightful owner
- Protests may cause damage to the land and valuation of the asset may be affected by this
- Potential lawsuit which will arise and completeness of necessary provisions for compensation to the villagers
- Potential contingent liability will need to be disclosed - completeness of disclosure
- Potential legal fees to be paid to lawyers may not be accounted for, incomplete balance
- There may be various instances of non-compliance with laws and regulations in the financial statements due to the fact that Indlovu’s appointment of illegal immigrants and possibly the treatment of the elephants breach legislation
- This will most likely result in RI’s to be reported to IRBA (and possible NOCLAR)
- Potential lawsuits may result from the elephant acquisitions- thus completeness of provisions / contingent liabilities
- May be fines and penalties from SARS since Indlovu may already be employing some illegal immigrants at the four sanctuaries
- The going concern assumption may be incorrectly applied in the 2021 annual financial statements as a result of:
- The Investigators tweet and subsequent actions by animal activists may ruin Indlovu’s reputation and result in a significant loss of visitors to the sanctuaries / or other valid reason
- Indlovu may lose their license to operate / concessions granted by the government, due to these acquisitions
Risk at assertion level (Trigger and effect of assertions)
🎯Start with general stuff
🎯What assertions are relevant and why
🎯Relevant IFRS requirements
🎯Any FS level risks (integrity)
🎯Control issues
🎯Any applicable L&Rs
🎯Calculations that could have gone wrong
🎯Disclosure
- General
- The FD passed away who was responsible for the AFS, the FM might not have necessary experience and knowledge to deal with IAS 2 therefore increasing the risk on all assertions
- EOH is in distress, therefore there is an incentive for management to decrease expenses, undervaluing the expense/over valuing the asset relating to the intangible asset.
- Due to the change in economic environment there is significant indications of impairment of intangible assets which is considered complex therefore there is a risk of overstatement.
Cash and Cash equivalent:
- mention that due to increase in transactions in 2020 year and weak control environment there is a risk that all assertions on C+CE are misstated
- Errors in posting JE
- Cash and cash equivalents might be overstated as Martin can add fictitious transactions to the POS transaction listing, specifically card and Qikscan transactions. (existence)
- All transactions might not reflect in the POS transaction listing due to errors in the system therefore the cash and cash equivalents balance might not be complete.
- Balance might not exist
- Tellers might not scan items and steal cash
- Balance might not be complete (erase cash transaction)
Debit/Credit Card Transactions:
- The cash and cash equivalents balance might be overstated (existence) as the cash from debit/credit card payments close to year end might not reflect in the bank account of Brother’s Gin as payments can take days to clear.
- Cash and cash equivalents can be overstated (existence) due to fraudulent card payments which are reversed after transaction date.
- System was not implemented correctly eg bugs
- cash and cash equivalents balance might not exist as all the Qikscan payments before year end might not reflect in the bank account of Brother’s Gin as it can take up to 3 days for the payment from the Qikscan account to clear into the bank account.
- might not have the rights and obligations to all cash in the cash and cash equivalents balance as it collects payment on behalf of the municipality.
- statement received might be overstated or understated (accuracy )
- x is processing payments alone could lead to errors
Audit Risk
Therefore not obtaining sufficient appropriate audit evidence eg because of;
- Does not have the necessary knowledge/understanding of EOH, it’s industry, management and processes.
- instances of fraud is not discovered, which could lead to the incorrect audit opinion
- Reportable Irregularity needs to be reported to IRBA due to the possible fraud tender, and the necessary disclosure provided with the audit opinion.
- newly appointed auditors management may use this as an opportunity to manipulate the financial statements due to the auditors being unfamiliar with EOH
- risk of material misstatement at overall financial statement level as the internal control environment appears to be compromised, to have allowed for the fraud to occur.
- payment of bribes can cause significant fines and penalties to be payable which might not be accounted for appropriately as management might manipulate the financials to reflect a better picture of the current circumstances.
Detection Risk
- New auditors therefore no necessary knowledge or understanding
- Not all fraud discovered therefore incorrect audit opinion
- RI should be reported
Threats: Assertion level
- Theft
- PAYE
- Bad debts
- Acquisition
- Buyback of shares
1
- Risk profits may be overstated and expenses understated (O,C)
- Liabilities understated including false debt (C)
- Risk of incorrect classification (C)
- Payment delayed (cut off issues)
2
- Penalties and interest non pmt understated, profit overstated (C)
- Non disclosure of contingent liabilities or provisions (P&D)
- Other third payments (C)
- Legal claims understated (C)
3
- Allowance of credit losses is understated (C)
- Bad debts are not recorded therefore profits and accounts receivable overstated (C)
- Internal control breaches irt overstatement of debtors (E,V)
4
- Goodwill may be incorrectly calculated, incorrect NAV (V, E)
- Incorrect apportionment of time (All assertions)
- Re-acquired right not identified (V)
- Overstatement of profits by incl profits before acquisition date (O)
- Risk that related party trxns are not at FV (classification, P&D)
- Control assessment IFRS 10, incorrect consolidation (All assertions)
- Intercompany trnxs not eliminated at YE (V)
- Incorrect acquisition (All assertions)
5
- Risk trxns not approved for CoAct not disclosed in FS (C)
- Risk that related party disclosure not recorded resulting in completeness and accuracy of related parties (C, A)
- Accounting for share buy back not ito IFRS in group statements (P&D, A, V)
- Risk that accounting for investment not ito IFRS (P&D, A, V)
Fraud Risk
- Opportunity: New auditor, weak controls, new IFRS
- Incentive: Motivation or pressure (bonuses or listing)
- Rationalization : Justifying actions
Modify the NTE of audit procedures at any stage when fraud becomes evident
Control Risk
- Issue could negatively affect assessment of control risk
- Obtain understanding of internal controls
- Use control framework
- Discuss shareholding and impact
- Any collusion, independence
- Conclude if high or not
