a) Inherent risk should be assessed as high because there is a possibility of misappropriation of assets since the company processes large amounts of sales transactions in cash. This situation may lead to an increase in fraud risk because the person may steal the money, embezzling receipts, or using company’s assets for personal use. Moreover, Opal Pty Ltd claims that they already have strong policies and procedures in place to monitor their employees when handling and safeguarding the cash, but the proper implementation of those policies have brought the previous auditor into questioned. It means that the policies and procedures that they have been implemented may not be effective and it may indicates possible misstatement due to fraud or error that will trigger control risk to increase. It can also be assumed that there is an improper segregation of duties since the auditor had been questioned about the implementation of the policies. Since Opal Pty Ltd is planning to expand their business using bank loan, there is also a chance of overstating the assets.
b) Since both inherent and control risk appear to be high, detection risk needs to be lowered by adopting pre-dominant substantive approach. In the audit plan, the transaction involving will be on the sales revenue and cash account as these accounts may be mishandled due to processing large amounts of sales transactions take place in the company. Therefore, the auditor will need to address the issue of fraud risk and possible misstatement to the owner to mitigate these problems. Auditor needs to perform more test of detail on the major day-to-day accounts during the year-end. In this case, the accounts are sales revenue and cash account. To check for the cash a...
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...ion (test counts). Besides, taking samples can be done by selecting purchases and vouching cost price back to supplier’s invoice or cost accounting records. The auditor may also check for subsequent sales prices and compare it with cost. The major issue of sales revenue is overstatement; therefore as an auditor, it is possible to perform vouching from entries in sales journal to supporting documents of sale (invoice or cheque). Another procedure is checking last sales invoice before balance date and first sales invoice recorded after balance date are recorded in the correct period. In addition, auditor may also perform less test of control for routine transactions (sales and inventory) such as taking samples of sales transactions in sales journal and review evidence that comparison with sales invoice undertaken and those prices traced to approved list and extension.
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