Inherent Risk Essay
i) expanded into a national manufacturer of high technology sustainable energy products brings with it a range of uncertainties, including compliance requirements and logistical problems increased potential for misstatement due to the judgements required requiring more judgement such as research and development (valuation), intangible assets (valuation), inventory (valuation) and property plant and equipment (valuation).
ii) assets include “intellectual property rights” potential for misstatement when valuing advanced technology and intangible assets because of their nature Intellectual property rights (valuation).
iii) Nature of the client’s business – a high technology industry highly susceptible to change in technology makes valuation of inventory and property plant and equipment more difficult misstatements Inventory (valuation); intangible assets (e.g. intellectual property rights) (valuation); property plant and equipment (valuation).
iv) new management team, no experience in the high technology industries difficult to exercise appropriate judgement misstatement Sales (occurrence); accounts receivable/ provision for doubtful debts (valuation);inventory (valuation); intellectual property rights (valuation).
v) Management remuneration is based on bonuses paid on reported profit engage in earnings management. For example, sales may be recognised earlier than they should, or provisions, such as for doubtful debts, may be underestimated Sales (occurrence/cut off); accounts receivable/ provision for doubtful debts (valuation); research and development (valuation)
vi) New information system Risk of losing data in changeover. Also, staff will not be familiar with the new system, therefore susceptible to more errors Any significant account when changing over to the new system. Completeness due to loss of data; occurrence due to double inputting; accuracy due to human error.
ANSWER Internal control weakness | Internal control improvements | Other departments can raise requisitions for goods and services without proper authorisation. | Pre-numbered requisitions orders should be raised and signed by authorised personnel. Requisitioning authority should be related to authority and function. A signed requisition order is necessary before raising purchase orders. | Purchase orders are unnumbered and unaccounted for. | Pre-numbered purchase orders should be signed by an authorised purchasing department staff member and a copy forward to the requisitioner, goods receiving and accounts departments. Pre-numbered purchase orders should ensure completeness. | Purchasing dept obtains goods and services as soon as the requisition is received. | Orders should be placed with approved suppliers on the best terms and quality. | Blank purchase orders are accessible to all purchasing staff and open to theft and misappropriation. | Blank purchase orders should be kept in a secure place to avoid misuse and should be accounted for; that is, checked for sequential continuity. |