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May 02, 2023

Answers

Requirement (A):

Judging by the discussions presented in the case study of CariBev Co, the audit risks that have been identified during the planning stage of conducting an audit has been illustrated in a tabular format as follows:

No.

Risk Identification

Risk Explanation

1

CariBev is involved in supplying 60% of its goods to FoodForAll at significantly reduced selling price per unit of good. This can result in the closing balance if inventory to be overvalued.

Inventories are required to be valued in the statement of financial position at the lower of costs or net realisable value (Knechel & Salterio, 2016).  As the selling price per unit is significantly less, this would subsequently result in a lower net realisable value which in turn will cause in the overvaluation of inventories.

2

Another potential audit risk that can be ascertained is with respect to the recoverability of debts against the accounts receivable because of the prevailing credit terms allowed.

The normal credit period which is offered by CariBev to all of its customers is one month. However, when it comes to FoodForAll, the credit period provided has been significantly extended to four months. This poses a risk of recoverability as outstanding balances get due past the normal credit period allowed.

3

Another audit risk that has been identified in the case study concerns the way in which CariBev values its plant and equipments.

CariBev’s production facility comprises of a significant number of old plants and equipments which are now redundant. It is important for CariBev to impair such assets which must be stated at a value which is lower of the carrying value and the recoverable value (Arens et al., 2016). This may be the scarp value of the asset which is dependent upon the age and condition of the asset.

4

The cut off of inventory and purchases are not accurate.

CariBev over the recent years has reduced its production levels and has started to import drinks from South Asia. The company is estimated to import 60% while resorts to manufacturing worth 40%. These inventories are accounted once received. Goods can stay up to 2 months in transit. Hence, only goods which are received in the warehouse must be recorded as the year end date.

5

The introduction of the perpetual/continuous inventory counting system may potentially result in the misstatement of inventory balances.

The company will now rely upon the new inventory system for measuring the closing balance of inventory as at the year end date. However, if there are any potential issues concerning the initial set up of this system, there is a risk that ending balanced may not be stated fairly.

6

Removal of provisions concerning the value of inventory.

CariBev has always maintained a provision of 1% on the inventory value which the company has now removed as they believe it is no longer needed. This results in an increase in risk exposure to the overstatement of inventory balance (Griffiths, 2016).

7

Disclosure requirements concerning provisions or contingent liability is not appropriate.

The finance director at CariBev left after a dispute and has notified the company of his intent in suing the company for unfair dismissal. The company refuses to disclose any provision or a contingent liability for the same.

8

The exposure to inherent risk is quite high considering the aftermath of the finance director leaving.

After quitting because of a dispute, CariBev has replaced the former finance director with the finance controller who has been asked to take up the role for a temporary tenure until a suitable replacement is recruited by the company. The controller lacks experience which can increase the risk of errors in financial statements of the company. Furthermore, the finance director is not available for help to the audit team. Therefore, the inherent risk is quite high.

Requirement (B):

On accepting the audit engagement from CariBev Co, Riskam and Co was required to undertake a tour of the plant facilities of the client. Any observations made by the auditor during such a tour can help the auditor in audit planning and conducting the audit. This is because on visiting the plant, the auditor has the opportunity of inspect the inventory areas of the company and make note of types, location, general conditions and security of the inventories. The auditor can also gain access for inspecting different documents which can help the auditor in a preliminary control risk assessment concerning inventories. Furthermore, it allows the auditor to identify issues concerning slow moving, scrap or obsolete inventories. Lastly, the auditor can also commence formulating plans such as staffing and also carry out an observation of the physical inventory. In a nutshell as per ISA 315, the process of touring allows for observations which is one of the main procedures for the auditor to gain an understanding of the business and environment of the client (Lessambo, Lessambo & Weis, 2018).

Requirement (C):

As per the requirements of ISA 315, the auditing standard requires the auditor in identifying and assessing risks of material misstatements (either because of fraud or because of error) at the assertion and financial statement levels. The auditor is required to thoroughly assess the engagement risk during the planning stage of audit. This is because it will allow the auditor to focus early upon areas which are most susceptible to any sort of material misstatements. An auditor is also required to fully understand the client entity before undertaking an audit and a thorough risk assessment will help the auditor to gain such knowledge. As a result of assessing risks, any transactions of unusual nature can also be identified in advance which can result in the auditor timely addressing such concerns. Auditors mostly tend to adopt a risk-based approach in auditing and an early assessment during the planning stage will allow the auditor in effectively developing audit strategies and work programmes (Kumar & Sharma, 2015). Early risk assessments can also result in an effectively conclusive audit as the team will focus upon key areas of concerns rather than focusing their efforts on immaterial transactions or balances. Lastly, a thorough analysis will help the auditor in to frame an appropriate audit opinion which is in best interests for the users of financial information (William, Glover & Prawitt, 2016).

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