Question

1)      Analytical review of current financials against prior year

	2016	2015	% Change
	$’000	$’000
INCOME / (EXPENSES)
Premiums	5,771,000	5,858,000	?
Operating Expenses	(2,323,000)	(2,397,000)	?
Claims Expenses	(3,710,000)	(3,843,000)	?
Payroll Costs	(880,000)	(680,000)	?
Investment Income	856,000	851,000	?
Net Income	2,088,000	940,000	?
ASSETS/ (LIABILITIES)
Fixed Assets	941,000	1,064,000	?
Investments	11,383.000	10,577,000	?
Outstanding Claim Settlement	(8,483,000)	(8,795,000)	?
Shareholders’ Equity	(6,088,000)	(4,993,000)	?
RATIOS
Net Margin	?	?	?
Return on Investment	?	?	?

On the social scene it was the talk that the Managing Director had deposited funds on a property in a high-scale community and that he was awaiting profit-share to pay off the outstanding amount.

Tom is a bit concerned that the level of audit work required will far exceed the cost for the audit. He has to be thinking of ways and means by which he can cut down the work. He hoped that the test of controls will allow him to reduce the level of testing.

Required:

1.       Identify at least five (5) significant risk factors in the scenario above                     

2.       State the type of risk for each risk noted in (1) above                                                 

3.       Using your judgement, assign an appropriate risk rating for

-          Inherent Risk

-          Control Risk

Provide a brief justification for your risk rating. Use the table below as a guide to assign ratings         

Risk Level	Risk Rating
High	80 – 100%
Medium	50% - 79%
Low	0% - 49%

4.       Assuming that the Audit Risk is set to 10%, determine the rating for Detection Risk using the Audit Risk Model                                                                                                                             

5.       If Detection Risk based on preliminary audit procedures is estimated as 15%; what should be done to achieve the desired level of audit risk. How will this impact on the concern expressed for a curtailment in audit costs?                                                                                                           

6.       Complete the table above for changes in the items noted

Make an appropriate comment against the change computed, indicating how the change will impact the audit risk assessment and the audit work to be done on that area                     

7.       Compute the following ratios:

i)                    Net Margin

ii)                   Return on Investments

Make an appropriate comment against the change computed indicating how the change will impact the risk assessment and audit work to be done on that area                                                       

Answer 1

I am not aware much about auditing and their risks.

I am answering 6 & 7

Premium have declined by 1.49% compared to last year. Operating & Claims expenses have fallen by 3.09% and 3.46% respectively. On the other hand payroll costs have increased substantially by 29.41%.

Investment income has almost been the same, just slight increase by 0.59%.

Despite revenue been low compared to last year and no signifcant reduction in costs, Net Income has gone up tremendoulsy by a whopping 122%. The only possible source of such high income can be from investments which have been liquidated almost by 99%. However no such investment income is reflected here.

Auditor should investigate the underlying risk below such exceptional results

Part 7

Due to high net income, net margins and Return on investments have increased substantially by 125% and 82% respectively. Auditor has to start with finding the basis of net income and then all other things will be traced automatically