Question

Review the Financial Year 2019 audited annual reports including financial statements presented to the shareholders for the following organisations:

 Ramsay Health Care Ltd

 Telstra Ltd

Assume that your audit team is responsible for planning the audits for both companies for the most recent financial year.

REQUIRE:

Identify at least three inherent risks that you would have to consider for each company in the audit planning phase and justify your answer. Cite the relevant ASAs/ISAs to support your answer.

Answer 1

Inherent Risks:

Inherent risk refers to the risk that could not be protected or detected by the entity’s internal control. This risk could happen as a result of the complexity of the client’s nature of business or transactions.

Sometime, that nature of business could link to the complexity of financial transactions and require high involvement with judgment.

The risk is normally high if the transaction or even involve highly with human judgment. For example, the exposure in the complex derivative instrument.

This kind of risk could also be affected by the external environment; for example, climate change, political problem, or some other PESTEL effect on the business.

Auditors required to assess those kinds of risks and set up audit procedures to address inherent risks properly.

For example, the auditor needs to set up a proper audit plan, audit approach, and audit strategy so that all relevance inherent risks that might affect the financial statements are identified and rectified on time.

Those include sufficient time for the audit team to work on the significant areas or having a member that has a deep understanding of the business as well as accounting transactions of the auditing financial statements.

In case auditor being aware that the potential client has high exposure to inherent risks, and auditor also know that the current resources are not capable to handle such client, the audit should not accept the engagement.

This procedure could help the auditor to minimize audit risks that come from inherent risks

Types of Inherent risks

• #1 – Risk Due to Manual Intervention – Human intervention can undoubtedly lead to errors in processing. No human can be perfect at all times. There are chances of mistakes/errors.
• #2 – Complexity of Transaction – Certain accounting transactions may be easy to record/report, but the situation is not the same every time. There might occur complex transaction which may not be quickly recorded/reported.
• #3 – Complexity of Organisational Structure – Some organization may form a very complex type of organizational structure which may contain many subsidiaries/holding company/joint ventures etc. This may lead to difficulty in understanding and recording of transactions in between.
• #4 – Collusion among Employee – To reduce the risk of fraud, errors organization segregates duties in between multiple employees or other stakeholders. This is a kind of internal control. If employees collude with mala fide intentions, chances of control lapse increases and leads to fraud, error, misstatement in the financial statement.

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