Audit Planning Memo : Risk Assessment

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Audit Planning Memo Inherent Risk Assessment 1) Profitability: The bank that issued Overlook Video’s (OVS) loan to fund their expansion is now concerned about the company’s profitability. This may mean that OVS is in danger of breaching any loan covenants that exist and may have trouble obtaining future financing. This may motivate OVS to window dress their financial statements to enhance performance. 2) Rapid change in demand of inventory: Demand for DVDs drops by 75% [((5-20)/20)*100%)] over a period of 2 months. The price OVS can obtain for the DVDs that are no longer in demand is 50% of their original purchase price. Therefore, there is an increased risk of incorrect valuation of DVD inventory. Control Risk Assessment 1) Inadequate collection policies for customer accounts: OVS does not have a sufficient set of controls in place to ensure that customers are paying amounts due on their account as a result of the “No Late Fees” program. A majority of customers refuse to pay and return the DVD or have yet to pay and return the DVD. 2) Poorly implemented new system that is heavily reliant on an outside vendor: The introduction of any new IT system increases risk because the controls previously in place may not be updated and/or sufficient to meet the needs of the new system. Additionally, the website programmed by MWD has experienced many crashes and is reliant on MWD for all fixes. Fraud Risk Assessment Incentives and Pressures to Commit Fraud 1) Operation in a highly

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