Question

SIGNIFICANT RISKS

In the overall audit strategy for the audit of Keystone Computers & Networks, Inc., Several significant risks were noted as a result of obtaining information about KCN and its environment, including:

1) KCN has engaged in a strategy to sell to customers with higher credit risk.

2) The officers of the company receive significant bonuses based on quarterly results.

For each of the two above risks, identify the implications and potential responses.

Answer 1

Answer -

No.	Risk	Implications and Response
1.	KCN has engaged in a strategy to sell to customers with higher credit risk.	The implication of this factor is there may be an increased risk of misstatement of bad debt expense and the allowance for bad debts. The auditors may decide to assign a more experienced auditor to this audit area. In addition, the auditors will decide to increase the evidence related to the adequacy of the allowance by perhaps examining the credit worthiness of more of the accounts.
2.	The officers of the company receive significant bonuses based on quarterly results.	The implication of this factor is an increased risk that management may misstate quarterly results to maximize bonuses. The auditors may respond by adjusting the staffing of the engagement, increasing the level of skepticism, adding more unpredictability to the audit procedures, or increasing the evidence collected.