Question

Manhattan is a thriving technology company that has had success producing smartphone games with in-app purchases. Manhattan has recently acquired two other companies to expand its game offerings and increase its workforce. The Founder and CEO started the company a few years ago and is an app developer himself. He does not have any training or experience in accounting or finance but has decided it is important to surround himself with the best people possible. He has hired several accountants with professional designations to help with the financial reporting.

The company’s accounting relies heavily on estimates because most of the company’s assets relate to work in progress as new games are always being developed. Once a game has been released it can generate significant revenue, but consumers tend to tire of games quickly and the long-term value of the product is never certain. As a result, assets are hard to value and complex accounting methods must be used.

The CFO is a designated accountant and a former partner at an audit firm. She has used the company’s technology skills to ensure that the IT controls around accounting information are strong. She has placed a real emphasis on segregation of duties and accounting staff take turns checking each other’s work as a means of detecting mistakes and learning from each other.

Required:

As an auditor how would you assess the control risk, high or low? Provide two reasons to support your assessment.

Answer 1

When we talk of Control Risk , it means risk of material misstatement in financial statements. In other words, it refers to any default or error in financial statement which are materialistic (worth to notice) for company . These material misstatement are result of either improper control means inadequate internal audits or failure of internal audit control system.

To assess the control risk we have to look at how well the interal control mechanism is placed and how well the functions are segregated.

In above mentioned case study, we can say as auditor that there is low control risk.

There are two reason for this conclusion :-

a) Internal Controls are rightly placed as mentioned -

(i) IT controls around accounting information are strong.

b) Duties are adequately segregated and check and balance system is well emphasised-

As mentioned -

(i) She has placed a real emphasis on segregation of duties.

(ii) Accounting staff take turns checking each other’s work as a means of detecting mistakes and learning from each other.