Examples of Overall Financial Statement Level Risks(1) PDF

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Summary

Overall Financial Statement Level Risks...

Description

No

Risk indicator

Description of risk

Component of audit risk

1.

Operations in regions or

The AFS may be materially misstated, as the

countries

strict

entity might not comply properly with the

different

relevant laws and regulations, possibly

with

regulations

/

Inherent risk

resulting in material misstatements of

regulations to SA.

unrecorded liabilities, expenses, etc. For instance, JSE regulations, environmental laws, labours laws, etc. 2.



Liquidity issues.

The AFS may be materially misstated, as the



Operating losses

going concern assumption might not be



Loss

properly accounted for and/or disclose due





of

significant

customers or suppliers.

to (relevant risk indicator).

Constraints

on

The AFS may be materially misstated because

availability of capital and

of the entity engaging in fraudulent financial

credit.

reporting to hide a going concern threat

Changes or loss of key

due to (relevant risk indicator).

personnel. 

Pending

significant

litigation. 

Operations in regions or countries

that

are

economically unstable. 

Operating

in

a

competitive environment. 

Dependent

on

technology.

1

Inherent risk

3.

Changes in the industry to

The AFS may be fraudulently materially

which management do not

misstated, as the entity might not comply

want to comply.

with the changes to laws (Companies Act,

Control risk

King IV, etc.), in the industry within which it operates, indicating lack of integrity by management. 4.

Expanding

into

new

The AFS may be materially misstated, as the

locations / decentralization

control environment in other locations might

of the entity.

not be operating effectively resulting in

Control risk

fraudulent activities or errors. 5.

Lack

of

personnel

with

The AFS may be materially misstated, as

appropriate accounting and

errors

might

be

occurring

in

financial reporting skills.

preparation of financial records due to

Control risk

the

personnel that lack accounting skills. 6.

New client.

The AFS may be materially misstated, as

Detection risk

material misstatements and errors could go undetected as we are not familiar with the client.

The AFS may be fraudulently materially

Inherent risk

misstated by management because the new auditors have limited knowledge of the entity. 7.

Management’s

integrity

questionable.

The AFS may be materially misstated, as the

Control risk /

control

Inherent risk

environment

might

be

compromised by management who lack integrity. 8.

Use of work of third party

The AFS may be materially misstated, as the

(component

[ISA

third party might not be competent and

600] / internal auditor [ISA

appropriately qualified to perform the work

610] /expert [ISA620]).

required for audit evidence.

auditor

2

Inherent risk

9.

Management

receive

bonuses driven by profits.

The AFS may be materially misstated, as

Inherent risk

directors might engage in fraudulent financial reporting, i.e. overstatement of revenue and understatement of expenses to maximize bonuses.

10.

Financials to be used to

The AFS may be materially misstated, as

obtain financing from the

directors might engage in fraudulent financial

bank.

reporting, i.e. overstatement of assets and

Inherent risk

profits and under-statement of liabilities and expenses to ensure that financing will be obtained.

The financial statements are used by a third

Detection risk

party to obtain finance, hence there is the risk for auditor that misstatements are contained in the financial statements and relied upon by a third party. 11.

Tight deadline.

The AFS may be materially misstated, as

Inherent risk

management might not have sufficient time to properly account and disclose post-balancesheet events (subsequent events).

There is a risk that the auditor might not have

Detection risk

sufficient time to obtain the audit evidence, resulting in material misstatement going undetected.

12.

Listed on the JSE Ltd.

The AFS might be materially misstated, as the company

might

not

comply

with

JSE

regulations, resulting in the delisting of the company and affecting the going concern of the company.

3

Inherent risk

13.

Change of the accounting

The AFS may be materially misstated, as the

Control risk /

software.

financial data might not be properly transferred

Inherent risk

from the old accounting system to the new accounting system. 14.

History

of

significant

15.

errors

adjustment

or

The AFS may be materially misstated due to

at

error, as the current financial statements might

year end.

include material misstatements.

Managers are the owners of

The AFS may be materially misstated, as

the entity (Owner managed).

directors might engage in fraudulent financial

Inherent risk

Inherent risk

reporting to present the performance and position of the entity in a more favourable light. 16.

Entity required to produce

The AFS may be materially misstated, as

group financial statements/

errors

Different accounting policies

because it involves an intricate process

in a group /

possibly resulting in material misstatements.

Different

might

occur

during

Inherent risk

consolidation

accounting

systems / reporting dates

The AFS may be materially misstated, as

Inherent risk

related party transactions might not be eliminated on consolidation. The AFS may be materially misstated, as the consolidation might not be properly done in terms of IAS 27. 17

Obtaining control of another

The AFS may be materially misstated, as

company.

IFRS 3 / IFRS 10 might not be properly accounted for.

4

Inherent risk...