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Hi sir
I was wondering what types of inhenrent risk and control risks that would be in place for accounts receivables to be materially misstated.
Inherent risks include:
Uncredit-worthy customers
Fraudulent customers
A poor/deterioratef economy
Poor/inexperienced staff
New IT system so that errors are made in posting amountsControl risks include
No checks on new customers
No credit limits
No aged analyses
No statements sent to customers
Poor training
Poor supervisionthank you for your reply sir. Also, i was wondering how online news about the client at engagement level will impact the nature of audit procedures. say for instance, the client was in news for negligent claim?
thanks
Anything you hear about a client is of potential interest. In the example you give, it implies a liability/contingent liability problem. You should also worry about legal costs that might have accrued and whether any other claims might emerge.
Ultimately, if the claim is serious, goodwill may be lost and the company could have going concern problems too if customers abandon it..
thank you.. i am very sorry for bothering you with loads of questions but i just wanted to ask further that is it necessary for the client to notify the auditors of such claims happening if for instance they believe that it wasnt necessary because they had an insurance policy.
No problems about the questions.
They should tell the auditor.
However, auditors have a duty to look for such potential liabilities eg by scrutinising board minutes, correspondence with lawyers and correspondence with customers.
Statements to the effect that all liabilities have been included, no legal actions pending etc will normally be included in the letter of representation that the client signs and sends to the auditor before the audit report is issued.
okay thanks… so how will this impact the audit i.e what key aspects should an auditor focus on? would paying more attention to the revenue be one due to a bad image because of the claim.
hope i make sense.thanks
Liabilities certainly need to be looked at. If the issue is serious, revenue early in the new financial year would be compared to equivalent periods in the previous year to see if it had materiality decreased.
and when you going concern, in terms of the audit, could the auditor consider whether they would get paid
and when you say liablities need to be looked.. do you mean carry out analytical procedures?
because what the case study says is that.. the company’s yacht was exploded with the two customer abroad and it was an issue with loose connection in engine but anyhow the customer is claiming for £7.2 million in damages.
and so the question asks what aspects should an auditor pay audit focus on. so i was just trying to make sense of what points to consider?
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