Just for Feet

Also another risk factor that will increase the company’s inherent audit risk is the situation of its cash flow. If a retail company has a negative cash flow which means it not generating enough cash to maintain its operations, the risk of misstatement will accordingly increase. As stated in Q1, auditors should spend more efforts on examine the cash accounts if the cash flow of the company shows some abnormal signals.

13. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Eddy Auto Supplies Balance Sheet December 31, 2014 Cash $84,000 Accounts payable $110,000 Accounts receivable $80,000 Salaries and wages payable $20,000 Inventory $140,000 Mortgage payable $180,000 Prepaid insurance $60,000 Total liabilities $310,000 Stock investments $170,000 Land $190,000 Buildings $226,000 Common stock $240,000 Less: Accumulated Retained earnings $500,000 depreciation ($40,000) $186,000 Total

2. For the most recent year, what is the amount of inventory in the balance sheet? What does this amount represent?

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

The chief executive of the company was closely working with the vendors whose confirmations were vital in the auditing work and hence they could have submitted false confirmations. The auditing firm established a national risk management program for its clients and so national reviews were done to identify the high risk items in the financial statement. The vendor allowances were particularly high but they were not documented. As such, the auditors were supposed to demand for the documentations and compare them with the real figures. It is however noted that most of the documentations received were non-standard and this could have led to a different audit report given that vendor allowances were earlier identified as a high risk area. Inventory management was found to be poor especially in the allowances for inventory reserves. The audit firm was therefore obliged to carry out a thorough evaluation of the inventory reserves and determine whether it was reasonable. The valuation was also supposed to include all classes of inventory but for the case of the company, the evaluation excluded instances where no sales had been made. Hence, this evaluation could not accurately represent the position of the inventory reserve in the company. (Waters,2003)

The pressure from “tone at the top” to keep the expected level of revenues and profits

The risk that a company is insolvent is a component of audit risk, which should be taken into account by auditors. Audit risk is defined as "the risk that that the auditor will give an inappropriate audit opinion when the financial report is materially misstated". Auditors risk issuing an unqualified audit opinion on financial statements that are materially misstated or omit material transactions; therefore the procedures used in the audit must be planned according to the identified audit risk. The components of audit risk are inherent risk, control risk and detection risk.

Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance sheet items for Ford, General Motors, and DaimlerChrylser. The given information indicates that Ford carries the highest amount of cash and marketable securities among the three companies. In 1999, Ford had $25,173 of cash and marketable securities while General Motors and Daimler-Chrylser have only $12,140 and $9,163. Comparing at an industry level, we as a team

Our audit will include obtaining an understanding of your internal controls sufficient to plan the audit and to determine the nature, timing, and extent of audit procedures to be performed. An audit is not designed to provide assurance on internal controls or to identify reportable conditions, that is, significant deficiencies or material weaknesses in the design or operation of internal control. Accordingly, we have no responsibility to identify and communicate significant deficiencies or material weaknesses in your internal controls as part of this engagement, and our engagement cannot be relied upon to disclose the same. However, during the audit, if we become aware of such reportable conditions, we will communicate them to you.

Cash + cash equivalents + short term investments (marketable securities) + current receivables/ current liabilities

Most internal control systems implemented today are based on the five elements of the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) Internal Control-Integrated Framework (Laxman et al., 2014). The COSO framework was initially published in 1992 and formed the baseline for internal control systems implemented today. It defined internal controls as a continual process that provides reasonable assurance against fraudulent activity, and its success is directly affected by management’s ability to implement it. The COSO framework is composed of five components: the control environment, risk assessment, control activities, information and communication, and monitoring (Laxman et al., 2014). These components are discussed later in this paper.

When establishing internal control, it is important to remember the necessary components: control procedures, risk assessment, information system, monitoring of controls and environment (Miller-Nobels, Mattison, & Matsumura, 2016). The control procedures range from hiring trustworthy employees though securing digital information. Risk assessment deals with assessing the company and identifying the risks involved in operating the company. With rapid advancements in technology, information systems must be secured, information being a valuable resource. Monitoring of controls is another component that should not be overlooked. Internal and external audits can help safeguard the company’s assets. Finally, the environment can be thought of as the culture of the company. Top executives leading by example in honesty helps create a fraud resistant culture (Miller-Nobels, Mattison, & Matsumura, 2016).

The assets listed under current assets are as follows (in order): cash and cash equivalents, restricted cash, accounts receivable (billed), accounts receivable (unbilled), prepaid income taxes, deferred income taxes and prepaid expenses. There are no inventories listed, but otherwise these are listed in the proper order.

Internal audit as a risk management mechanism Internal auditors can add value to the entity by providing assurance that its risk exposures are properly understood and managed (Walker et al., 2003; Leithhead, 1999). Internal audit should play a key role in monitoring a company’s risk profile and identifying areas to improve risk management processes (Lindow and Race, 2002). As Walker et al. (2003, p. 52) assert, internal audit can “help organizations identify and evaluate risks, moving the profession into the front line of risk management”. We would therefore expect there to be a link between the use of internal audit and the company’s commitment to sound risk management. A strong organizational commitment to managing risks requires the development of a risk-based culture within the company (Kwan, 1999). Such a culture is established by the practices of senior management and the board of directors (Steinmetz and Arthus, 2001) and should result in the development of an integrated risk management framework (Kwan, 1999). One indication of an integrated framework is the existence of a separate committee or group responsible for risk management, comprised of directors and senior management. Internal audit can then provide the required support to ensure that internal controls are in place to adequately monitor the identified risks. We therefore predict that those companies that have established a separate risk management committee are

Liabilities & Equity Accounts Payable & other Long Term Debt Equity Total Liability & Equity