Question :1. Identify what you consider to be the 'key' inherent risk factors that could have an impact on the audit of Dick Smith for the year ended 31st December 2015 and/or future audits.
For each of the inherent risk factors identified, describe the risk clearly and state how and why you consider the issue may create the risk of potential material misstatement in the financial statements of Dick Smith for the year ended 31st December 2015 and beyond. You are expected to identify five (5) critical inherent risks.
ASSIGNMENT 2 BROAD GUIDANCE NOTES
Identify what you consider are the inherent risk factors which would impact on the audit of Dick Smith. You are encouraged to use financial information relating to Dick Smith and the industry in which it operates for the period in question. Once again, simply discussing the announcement of profits, budgets or dividends or revised financial forecasts, of themselves, is not considered a major event or an inherent risk and this will not accrue any marks if identified and discussed as inherent risks. Non-financial information can be a goldmine which can assist you in identifying potential inherent risks by giving you clues as to what to research.
Be careful to answer the question - that is, it asks what are the "inherent risk factors". You should be clear about what "inherent risk factors" mean. Another term often used is "areas of concern". Overall these terms mean what areas of the financial statements are there likely to be risks of material misstatements (which might ultimately impact on the auditor's opinion and report). Specifically, the information may lead you to think that some areas may have an error (mistake) or fraud in them as a direct result of certain events or issues that the company has experienced or may experience. Your task for this assignment is to identify that information and how and why it may present a possible risk of material misstatement in the financial reports.
Further, you will need to clearly explain why and how you have arrived at each risk factor. Simply stating information without applying it to a risk factor will not attract any marks.
How you set out the answer to question 1 is up to you, but you must clearly address all three aspects of the question:
1. What is the inherent risk? (A simple explanation will suffice for this part of the question).
2. Why is it an inherent risk? (To do this, you need to explain and give an example of a specific misstatement that could occur if this risk is present in Dick Smith). Do not simply state "this will cause potential misstatement" or 'this may result in fraud' or 'the directors will misstate the financial statements'. You must provide a specific example of a potential misstatement that could occur. This is not as easy as it sounds. The potential misstatement must be specifically related to Dick Smith and be both reasonable and plausible.
You may use 'bullet points' or a table format in answering this question, but correct and adequate sentence structure must be adhered to, in addition to referencing protocol.
As a general example, you might find an article which says that 10% of staff had their jobs terminated due to a restructure of the entity. This may be an inherent risk because terminations normally involve the calculation of employee entitlements which are complex in nature and the need to crate provisions for employee redundancy. Hence, there is a greater chance that there will be calculation errors due to things such as eligible termination payments, and leave entitlements. You must provide specific examples of potential misstatements that could occur in the financial reports. (Once again, this example cannot be used as one of the risks identified in your submission - zero marks will be awarded to a discussion of this as an inherent risk).
Attachment:- assignment.pdf