Question

Question 4: Risk, Assertions, Materiality & Audit Strategy

Blue Cow is a long-established soft drink organisation, manufacturing a popular product for major supermarket chains. The audit of the company has been straightforward in the past, and the company has reliable suppliers and loyal customers. In addition, the directors and senior management are highly respected for their abilities and the strong ethical culture they inspire, as well as the excellent internal controls they demand.

The company only sells one product – a 300ml can, which has historically been priced at a 331/3 % markup on cost, yielding a gross profit percentage (GP%) of 25%. In the past any variations on the GP% have never been outside the range of 24% to 26%.

Required: a) Identify the three components of audit risk and explain what your assessment of risk is for each component, based on the above information (use only ‘high’, ‘medium’ or ‘low’).

b) Explain how your risk assessments in (a) above would impact on planned substantive procedures.

Answer 1

(A) Audit risk- The audit risk is the risk which is begin when auditor gives the incorrect audit statement or an opinion to a financial statement. In other words it is associated when auditor can't detect eroor or fraud in a financial statement.

T​​​​​He three types of audit risks are

1. Inherent risk - These are the risks which occurred due to the factors which can't be controlled and they also began when the error or omission is there from which the material misstatements occurs. In this case the inherent risk is low as company only deals with single product so and there is no complicated transaction involved.

2. Detection risk-​​ This risk occurs when auditor fails to detect and material misstatements. It is also happens when misapplication or omission happens but in this case this risk is also low as there is no omission or detection.

3. Control risk  ​​​- This risk occurs when there is an internal control failure of the company which can led to material misstatements in financial statements and this is high risk when the company does not have enough internal controls which can detect errors or omission in a financial statements and in these case company have low control risk because there is no process lapses or failure of internal controls.

(B) As per the assessment of risks which are low in every case it will not have any effect on the planned substantive procedures basically substantive procedures are done to detect if there is any fraud or ommisions so if there is less risk invovled so there is no impact on planning of substantive procedures.