Auditing And Band Risk Assessment Of Wowdecor Assignment Sample

Introduction 100 words

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In the domain of auditing and risk assessment, the study of WowDecor, an expanded international decor and design company, offers an effective case study. As auditors venture on the assignment to assess the internal controls and financial health of WowDecor, they are filled with a curtain of opportunities and challenges. With the business expanding its procedures globally, meeting market competitors, and steering complex problems like customer returns, financial investments, and inventory management, the audit function must rigorously address these difficulties. This audit of WowDecor presents various explorations of how auditors operate materiality determination and strategic risk assessment to confirm the reliability and accuracy of financial statements in an active business landscape.

Risk Assessment 400 words

• identify and explain whether the item relates to inherent risks or control risks, and its effects on specific aspects of the audit plan.
• for each risk identified, suggest the associated KEY financial accounts and assertions that would be affected.
• if there is a control risk identified, suggest controls that can be implemented to prevent and detect potential errors.

Matter 1

Due to the competitive nature of the Australian and European markets, as well as the bankruptcy of WowDecor’s major customers, this matter classifies as an Inherent Risk, as those risks are associated with the nature of the business, industry, and economic conditions that could impact the financial statements [textbook reference].

Matter 2

The stricter environmental regulations in Vietnam and Malaysia are external factors affecting the company's purchase costs. Therefore, it’s Inherent Risk.

Matter 3

The issue of losing track of inventory on consignment indicates a breakdown in internal controls. This suggests a Control Risk, as those risks are associated with the effectiveness and reliability of the company's internal controls, policies, and procedures.

 

Matter	Inherent Risk (IR) or Control Risk (CR)	Effects on Audit Plan	Accounts	Assertions
1	IR	Revenue Recognition	Revenue	Completeness, Valuation, Existence
		Accounts Receivable	Accounts Receivable	Completeness, Valuation, Existence
		Going Concern	Goodwill	Valuation
2	IR	Cost of Goods Sold	Cost of Goods Sold	Valuation
		Inventory Valuation	Inventory	Valuation

 

Matter	Potential Risks	Effects on the Audit Plan	Accounts	Assertions	Transaction-level internal control
1	Inherent	greater likelihood of indebtedness and problems with accounting for revenue.  Effect on the going-concern presumption that might occur.	Accounts Receivable Revenue Going Concern	Existence Valuation Completeness	Set limits on credit and conduct verification of credit on consumers. Evaluate the capacity to make payments on remaining debts on an ongoing basis. Keep a tight eye on your income and solvency.
2	Inherent	cost of goods sold (COGS) rise. Possibly have an effect on profit.	Cost of Goods Sold Profit and Loss Statement	Valuation  Accuracy	To preserve revenue, evaluate and modify your selling tactics. Keep an eye out for legislative developments in the clothing sector.
3	Control	Possibility of incomplete or incorrect stock valuations. Impacts on accounting records are a possibility.	Inventory Income Statement	Existence  Completeness Valuation	bolster the safeguards for managing inventories.  Assess the items you own frequently. Adjust transactions and acquisitions with the supply data.
4	Control	enhanced age computation and tracking of inventories  decreased danger of outdated stock.	Inventory Balance Sheet	Valuation  Existence	Make sure that the fresh system has accurate data submission and inspection. regularly assess and revise your beliefs on asset ageing.
5	Inherent	Consumer payment holdups have an impact on the flow of cash.  To alleviate financing concerns, securities may be sold.	Cash Investments Cash Flow Statement	Existence  Valuation  Presentation and Disclosure	Observe how much liquidity and earnings projections. Keep a record of the justification for investment sales.
6	Control	Stock misrepresentation can be possible as a result of mistakes in management and larceny. Possibility of affecting the precision of inventories.	Inventory Income Statement	Completeness  Valuation  Accuracy	Provide refund processing courses for retail workers. Increase safeguards to deter robbery. Adjust the purchase and replace the data with the storage information.

Planning Materiality 200 words

Three Reasons for Justifying the Base “Turnover”

The choice of the base for planning materiality should be based on the specific circumstances of WowDecor, as well as the risks and financial metrics most relevant to the company's financial statements (Chapman,2019). In this case, I would recommend using "Turnover" as the base for planning materiality for the following reasons:

Relevance to Business Operations: Turnover (or revenue) is a fundamental indicator of a company's core business operations. In the context of WowDecor, which is facing challenges related to sales and revenue recognition (as noted in Matter 1), using turnover as the base for planning materiality aligns with the core issue the company is facing (Kour,2020). It directly addresses the risk associated with revenue recognition and the financial impact of struggling markets.

Impact on Key Financial Accounts: Turnover directly affects key financial accounts like revenue, accounts receivable, and potentially inventory (through cost of goods sold). The issues related to sales, inventory management, and accounts receivable are crucial aspects of WowDecor's financial statements and can significantly impact the overall financial results.

Consistency with Industry Standards: Using turnover as the base for planning materiality is a common practice in many industries, especially retail and manufacturing. It allows for benchmarking against industry standards and facilitates comparisons with peers (Dehaye, 2020). This can be valuable in assessing the company's financial performance in relation to its competitors.

Given these reasons and considering the specific challenges WowDecor is facing, using turnover as the base for planning materiality (within the range of 0.5-1%) would provide a reasonable and focused approach to materiality determination for the audit plan.

Calculate and Suggest the Planning Materiality That Is Used For the Client

Figure 1: Calculation of Planning Material

(Source: Excel)

According to the details that are provided on the conceivable hazards to the recognition of revenue and the significance of turnover in the economic and financial statements and declarations, a planning materiality percentage of 0.75% appears to be reasonable (Salijeni,2021). This is a practical mid-point within the determining range.

Analytical Procedures 400 words

Trend and Common Size Analysis

Figure 2: Calculation of Trend Analysis of Income Statement

(Source: Excel)

In the analysis of the chart of trend analysis of the Income statement, the comparison of the revenue variances could be observed in the growth trend. As it shows the increase in revenue with respect to the variances of the expenditures and market development costs (Maguire, 2019). This would be significant in the predictive business development of Wowdecor. As the income statement crucially shows the income and expense situation of the organization and the development of the criteria of market development.

Figure 3: Calculation of Trend Analysis of Balance Sheet

(Source: Excel)

Through the understanding of the trend analysis of the Balance sheet, the Assets are slightly higher in nature in comparison with the liability factor. As for the development of a business in a competitive market, the instigation and the upgradation of the assets should be developed as it would be a crucial factor for the understanding of business variances.

Figure 4: Chart of Common-Sized Analysis of Income Statement

(Source: Excel)

Through the assessment of the chart of common-sized income statements, the changes significantly impacted the income variances of the business operability. At some point are low trend is observed (Akinrolabu, 2019). As the figure shows, business development could be positively impactful in organizational development and future market strategies.

Figure 5: Chart of Common-Sized Analysis of Balance Sheets

(Source: Excel)

Through the assessment of the chart of common-sized balance sheets, the changes significantly impacted the total assets of the business operability. As the figure shows, business development could be positively impactful in the 1st, 2nd, 4th, and 5th sections rather than the 3rd and 6th sections.

Discussion Of Results Of The Analytical Procedures By Outlining Six Potential Problem Areas 

In order to determine if the findings of financial statements are fair and to spot any possible red flags or significant inaccuracies in reports on finances, statistical techniques are a crucial component of auditing (Northern, 2021). Here are six probable issues with the statements of affairs and associated claims that need to be addressed in the inspection, as determined by the preparation materials:

Sales Revenue (30.6.2023):

Potentially problematic: revenue from sales for the fiscal year beginning June 30, 2023, decreased by 19.70% from the prior year. This might be a sign of problems with business, such as decreasing demand, low prices, or even errors in accounting for revenue.

Corresponding Assertions: The presence, incidence, and correctness of recognition of revenue are the main claims to look at in this case.

FX Gain/Loss (30.6.2023):

Likely Issue Area: The FX Gain/Loss is very high relative to last year (up 765.20%), which is a considerable rise. It might point to changes in foreign exchange operations that require to have their correctness and thoroughness checked.

Connected Claims: Reliability and comprehensiveness are two statements connected to FX Gain/Loss.

Salaries Expenses (30.6.2023):

Potentially problematic area: Salaries costs for the fiscal year beginning June 30, 2023, have decreased significantly (24.37%) from the prior year (Daffern, 2019). This might lead to worries about wages, job cuts, or even mistakes with expenditure identification.

Related claims: Cut-off, correctness, and fullness are the three main claims to pay attention to.

Current Liabilities - Accounts Payable (30.6.2023):

Potential Problem Area: Accounts Payables have grown considerably by 40.29% as compared to the prior year. A large rise in payables might be a sign that the business is having trouble covering its "short-term obligations" or that there have been mistakes in the accounting of payables.

Related Assertions: Accounts Payable-related assertions include cutoff, existence, and completeness.

Current Assets - Cash (30.6.2023):

Potential Problem Area: The Cash balance is now 30.93% lower than it was last year. Such a large decrease in cash could be an indication of cash flow issues or possible money theft (Shendkar, 2021).

Related Assertions: Cash-related assertions cover its existence, fullness, and accuracy.

Non-Current Liabilities - Interest Bearing Liabilities (30.6.2023):

Potential Problem Area: Interest Bearing Liabilities have decreased by 40.00% over the previous year (Cpahalltalk.com, 2023). A significant decrease in long-term debt could be a sign of refinancing problems or possible accounting mistakes.

Related Assertions: The existence, totality, and value of Interest Bearing Liabilities are all asserted.

Auditors should be worried about the accuracy and consistency of accounting procedures used in addition to the previously listed areas, particularly in light of the notable swings in some accounts (Poleto, 2021). The judgments and estimates of management should be evaluated by auditors to see if they are accurate and consistent with prior periods.

Conclusion 150 words

Preliminary financial statement analysis revealed a number of possible issue areas, including notable drops in sales revenue and salary costs, odd swings in the gain/loss on foreign exchange transactions, and adjustments to 'current and non-current liabilities". Problems with revenue recognition, spending recognition, and stability in finances are brought up by these areas. Even though these results are in line with the risks noted during audit planning, a thorough audit is necessary to determine whether there are any material misstatements and to guarantee the reliability and completeness of the financial reporting. In order to address these issues and offer a well-informed audit conclusion, more testing and substantive processes will be essential.

References APA 6^th

Book

• Chapman, R. (2019). The rules of project risk management: Implementation guidelines for major projects. Routledge. Avaliable at https://www.taylorfrancis.com/books/mono/10.4324/9780429281822/rules-project-risk-management-robert-chapman [Accessed on: 19.9.2023]

Journals

• Kour, R., Singh, A., & Ahire, N. (2020). An implementation study on hazard identification and risk assessment (HIRA) technique in the critical care unit of a tertiary care hospital. Indian Journal of Forensic Medicine & Toxicology, 14(4), 4018-4026. Retrieve from https://www.academia.edu/download/86496548/11273.pdf [Retrieve on: 19.9.2023]
• Dehaye, P. O., & Reardon, J. (2020). SwissCovid: a critical analysis of risk assessment by Swiss authorities. arXiv preprint arXiv:2006.10719. Retrieve from https://arxiv.org/pdf/2006.10719 [Retrieve on: 19.9.2023]
• Salijeni, G., Samsonova-Taddei, A., & Turley, S. (2021). Understanding how big data technologies reconfigure the nature and organization of financial statement audits: A sociomaterial analysis. European Accounting Review, 30(3), 531-555. Retrieve from https://www.tandfonline.com/doi/pdf/10.1080/09638180.2021.1882320 [Retrieve on: 19.9.2023]
• Maguire, T. (2019). Enhancing risk assessment and nursing interventions to prevent aggression and reduce the use of restrictive interventions in forensic mental health units. Retrieved from Swinburne University of Technology Thesis repository. Retrieve from https://researchbank.swinburne.edu.au/items/adcff870-5575-49d7-9524-7165b98c8c1d/1/tessa_maguire_thesis.pdf [Retrieve on: 19.9.2023]
• Akinrolabu, O., Nurse, J. R., Martin, A., & New, S. (2019). Cyber risk assessment in cloud provider environments: Current models and future needs. Computers & Security, 87, 101600. Retrieve from https://ora.ox.ac.uk/objects/uuid:e656a71c-596b-453c-a68b-b03ff3b5a2b8/download_file?file_format=pdf&safe_file=CS-Cloud-Risk.pdf&type_of_work=Journal+article [Retrieve on: 19.9.2023]
• Northern, B., Burks, T., Hatcher, M., Rogers, M., & Ulybyshev, D. (2021). Vercasm-cps: Vulnerability analysis and cyber risk assessment for cyber-physical systems. Information, 12(10), 408. Retrieve from https://www.mdpi.com/2078-2489/12/10/408/pdf [Retrieve on: 19.9.2023]
• Shendkar, M.R., Pradeep Kumar, R., Mandal, S., Maiti, P.R. and Kontoni, D.P.N., 2021. Seismic risk assessment of reinforced concrete buildings in Koyna-Warna region through EDRI method. Innovative Infrastructure Solutions, 6, pp.1-25. . Retrieve from https://www.researchgate.net/profile/Mangeshkumar-Shendkar/publication/350921913_Seismic_risk_assessment_of_reinforced_concrete_buildings_in_Koyna-Warna_region_through_EDRI_method/links/6423dc1a92cfd54f84388f27/Seismic-risk-assessment-of-reinforced-concrete-buildings-in-Koyna-Warna-region-through-EDRI-method.pdf [Retrieve on: 19.9.2023]
• Poleto, T., Silva, M. M., Clemente, T. R. N., de Gusmão, A. P. H., Araújo, A. P. D. B., & Costa, A. P. C. S. (2021). A risk assessment framework proposal based on bow-tie analysis for medical image diagnosis sharing within telemedicine. Sensors, 21(7), 2426. Retrieve from https://www.mdpi.com/1424-8220/21/7/2426/pdf [Retrieve on: 19.9.2023]

Article

• Maguire, T., Daffern, M., Bowe, S. J., & McKenna, B. (2019). Evaluating the impact of an electronic application of the dynamic appraisal of situational aggression with an embedded aggression prevention protocol on aggression and restrictive interventions on a forensic mental health unit. International Journal of Mental Health Nursing, 28(5), 1186-1197. Available at https://onlinelibrary.wiley.com/doi/abs/10.1111/inm.12630 [Accessed on: 19.9.2023]

Website

• Cpahalltalk.com, (2023) Audit Risk Assessment Available at https://cpahalltalk.com/audit-risk-assessment/ [Accessed on: 19.9.2023]