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In: Accounting

What are some of the inherent risks associated with the revenue, cash and marketable securities accounts?...

What are some of the inherent risks associated with the revenue, cash and marketable securities accounts? What are some of substantive tests associate with auditing these accounts?

Solutions

Expert Solution

Inherent Risk associated with the Revenue Account are as follows:

1. Quality of company’s management 2. Change in accounting principles 3. Non-armed transactions 4. Slashing expenses 5. Old plants

Industry-related factors: You consider any external events that have an effect on revenue and cash flow. Two examples are an increase in market share by the competition (meaning the competition is stealing your client’s customers) and a lessening of demand for the goods or services the company provides.

Complexity of revenue recognition: This risk factor means that the client uses detailed calculations to determine its revenue recognition. A good example is long-term contracts that span several accounting periods.

Difficulty of auditing the transactions: This factor shows up when revenue accounts include accounts that are difficult to audit because estimates or other revenue accounting theories are in use. Allowance for uncollectible customer accounts is an example.

Misstatements in prior audits: Any account that reflects mistakes in prior audits is always deemed to be inherently risky.

Inherent risks associated with cash accounts:

Liquidity risk

Liquidity risk is also known as the dangers of funding is the risk that the difficulty facing the company in terms of providing the necessary funds to meet the obligations company manages liquidity risk by maintaining reserves ongoing actual cash flows, control and alignment of financial assets and benefits with financial liabilities.

Fraud type:

Theft of cash

Inherent risk associated with marketable securities account are as follows:

1)Liquidity of assets

2)susceptibility of mishandling

3)difficulty in understanding financial risks associated with derivatives.

4)complexity of some financial instruments

Some of the substantive test associated with auditing these accounts are as follows:

(i)Understanding of internal control is obtained through inquiry,observation,and review of client documentation.

(ii)Auditors use flowcharts,memos,and questionnaires to document their understanding.

(iii)If auditor assesses control risk as low and believes it is control-effective to rely on the controls,an audit program for testing the controls is developed.

(iv)The program is designed around the basic control objectives and is cross-referenced to the audit objectives.

(v)Based on the results of testing, the auditor reassesses control risk and develops procedures to substantively test cash account balances.


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