SOLUTION: identify the inherent risk | My Assignment Tutor

Name – ID – Course Name – Instructor Name – Date of Submission – Executive Summary In this assignment, will audit the Qantas Ltd and Woolworth Ltd recent financial statements to identify the inherent risk and accordingly planned audit procedures to carry out inherent risk as well as high risk of both the companies. Some of the ethical and legal responsibilities of the auditors will also be discussed in this assignment. Introduction Inherent risk is the risk caused by an error or omission in a financial statement due to an aspect other than a failure of internal control. In a financial audit, inherent risk is occurring when transactions are difficult or in case that requisite a high degree of judgement in regard to financial evaluates. For example: financial transactions that require composite computation are inherently more likely to be misrepresenting than simple calculations. Cash on hand is by nature more susceptible to theft than a large inventory of coal. It is one of the major parts of the audit risk. In order to attain or realize an entity’s goals and before actions are taken to change the risk’s effect. (Corporate Finance Institute) Inherent risk is one of the risk auditors must focus when assessing the financial statements of any company along with control risk and detection risk. Control Risk: It happens when a financial misstatement results from the absence of proper accounting controls in the firm. This is most likely to aspect in the form of fraud or lazy accounting practices. It contains three main types of internal control: detective, preventative, and corrective. Detective internal controls are those that are used after the fact of an optional event. Preventative controls are those controls put in place to turn away a negative event from occurring. Corrective internal control is that put in place after the detective internal controls to locate/find a problem. Detection Risk: It is the chance that an auditor will fail to find facts misstatements that exist in a company’s financial statements. These misstatements may be due to either fraud or error. Auditors make use of audit procedures to detect these misstatements. For example, auditor’s frequently sample a certain type of company transaction because inspecting every transaction is inappropriate. Increasing the sample size can reduce detection risk, but some risk will always remain. Audit Risk: Audit risk is the risk that financial statements are significantly incorrect; regardless the audit belief states that the financial reports are free of any material misstatements. Audit Procedures to carry out inherent risk: It is evaluated first and foremost by the auditor’s knowledge and judgment regarding the industry, the types of account transactions occurring at a particular company and the assets that the company owns. An auditor evaluates each audit area as low, medium or high in inherent risk. The main tips to identify audit clients risks are: Don’t be scared to ask questions. To plan audit, need to recognize client’s particular risks.Know about the client’s industry and their account transaction cycles.Identify client’s controls.Assess/Evaluate the design and implementation of client’s controls.Discover and detect Harding, CPA and Principal.Inquiries of management and of others within the company who in the auditor’s judgment may have information that is likely to evaluate in identifying risks of material misstatement due to fraud or error.If the consultation associate has performed other engagements for the company, the associate shall consider whether information obtained is suitable to identifying risks of material misstatement.The auditor plans to use information acquired from the auditor’s previous experience with the company.The auditor shall regulate whether changes have appeared since the previous audit that may influence its relevance to the current audit.The consultation partner shall decide which matters are to be communicated to engagement team members not involved in the discussion. Areas of high risk asper the company’s financial statement Qantas Ltd (Annual Report 2020) The three main high risks that can affect the company’s operations such as changes in changes in Government regulations, fuel and foreign exchange volatility and customer risk. Changes in Government regulations: If government can change any policy related to taxes or imposed any new tax can affect the company’s operations. These will happen when a company is releasing profit guidance for future quarters. Government policy will “have to change” to guarantee the airline’s role as Australia’s national carrier. This act restricts foreign ownership in the airline to 49 per cent.Fuel and foreign exchange volatility: The Company is subject to fuel and foreign exchange risks. These risks are an inherent part of the operations of an airline. Accordingly, the size of the company’s fuel and foreign exchange risk will differ in line with operational changes.Customer Risk: The company success is depends on the customer satisfaction and loyalty. But currently due to the pandemic COVID-19, a reduction of customer satisfaction due to the cancellation and refund policies of the company may affect the company’s reputation and its ability to attract customers in the future. Woolworth Ltd (Annual Report 2020) Operational, Financial and Climate change are the high risk areas which affect the company Operational Risk: It is related to business disturbance, product failure, loss of suppliers, health and safety. In recent year due to coronavirus company loss the operation activity due to lockdown in that period all the stores need to be closed down, it leads to the huge loss to the store or company due to non-activity. (Rmahq.org. 2021)Financial Risk: It occurs or happens due to losing of money on an investment. Company invested on the orders of stock of goods which need to be supplied to customers but due to covid-19 all the stock keep stores in its warehouse as it stored for long time due to lockdown some of the stocks got expired. It leads to the financial loss to the company.Climate Change Risk: Sudden of change in climate also lead to waste of products or loss of money which are invested on the products. Substantive Audit procedures have planned to carry out in response to the high risks or problem areas. Substantive procedures are calculated to generate evidence/proof that an auditor gathers to support the opinion that there are no material misstatements in view to the validity, completeness and accuracy of the financial records of a company. It is used for both internal and external audits. It has two categories – analytical procedure and tests of detail. Analytical procedures generally provide less dependable proof/evidence, tests of detail are only claimed in the considerable testing stage. The two main concepts involved in the substantive audit approach. First, auditors analysis the client’s internal control system that elaborated with the financial reporting system or the areas being audited. (Auditor Forum) For example – internal control on cash collection, financial reporting etc. They are doing this by recording all key control areas, and related procedures. After the understanding of internal control is done, the auditor needs to certify the key control to make sure that all key control areas are working properly and no overrule from management. At the end of validating key control, the audit will then come to an end whether those key control areas are genuine or not. Ethical and legal responsibilities/liabilities of the auditors (Portal.abuad.edu.ng. 2021) The auditor is simply/only responsible for making sure that the financial statements are presented fairly against the proper evaluation criteria. In addition, unjustified legal action also may involve the occurrence of audit risk. The nature of liabilities of an auditor is discussed below: Civil Liability/debt: It means breach of duty.Liability for Negligence: An auditor is a representative/negotiator of the shareholders.Liability for Misfeasance: It means break/rupture of trust. Safeguards available to the auditors Ethical safeguards can be grouped into two broad categories: Safeguards designed externally, by legislation: (a) the requirements for individuals to have education and training and work experience, for membership of the professional body. (b) The continuing professional development (CPD) requirements for qualified members, to make sure that they maintain a keep going level of competence. (c) Corporate governance regulations, linking/relating to auditing, internal control and financial reporting. (d) Professional standards, such as auditing and financial reporting standards. (e) External analysis/evaluation by a legally-empowered third party. Safeguards set within the work environment: (A) Safeguards that put in the entire company: i. a code of ethics for the company and suitable ethical leadership from senior management ii. A sound system of internal rule, with strong internal protocols iii. The execution of appropriate policies and procedures for observing the quality of work done for clients. iv. Policies that control the dependence of the firm on the fee income from a single client. (B) Safeguards that are set to a particular item of work: i. keeping individuals away from work where there might be a threat to their consent with the fundamental principles. ii. In the case of audit firms, rotating the audit partner so that the same audit partner is not responsible for the audit of the same client company for more than a set out maximum number of years. iii. The application of strong internal controls. iv. Make use of another accountant to review the work that has been done by a teammate/colleague. v. Considering ethical issues with those people in the company who are responsible for governance issues, such as senior non-executive director, the audit committee and board of directors. Conclusions In risk management, inherent risk is the natural risk level without using powers to reduce its affects. Risk control procedures can lower the effects of inherent risk, and the remaining risk is known as residual risk. It measures the possibility of a facts and figures financial misstatement caused by factors beyond internal control. Inherent risk is high in certain sectors, and the financial services sector is a distinguished example. Financial institutions such as banks are highly controlled, and the regulations are complex and always changing. The wide span of networks between financial institutions and client companies, as well as a large variety of financial derivatives, further increases the complexity of the operation and transactions. All the said reasons lead to the notably higher inherent risk in financial services than in other sectors. References Auditor Forum – A Question Answer Platform for Strong Business Skills. 2021. What are Substantive procedures in auditing with examples. [online] Available at: [Accessed 7 April 2021]. Corporate Finance Institute. 2021. Inherent Risk – Overview, Residual Risk, & Other Audit Risks. [online] Available at: [Accessed 7 April 2021]. Investor.qantas.com. 2021. [online] Available at: [Accessed 7 April 2021]. Rmahq.org. 2021. Operational Risk Management Training & Resources. [online] Available at: [Accessed 7 April 2021]. Woolworthsgroup.com.au. 2021. [online] Available at: [Accessed 7 April 2021]. Portal.abuad.edu.ng. 2021. [online] Available at: [Accessed 7 April 2021].