Comilla University

Department of Accounting & Information Systems

Faculty of Business Studies
Assignment on : Some selected problem on audit risk

Course Name: Fundamentals of audit and assurance

Course Code: 323

Submitted To:
Muhammad Shajib Rahman
Lecturer
Department of Accounting & Information Systems
Comilla University

Submitted By:
Sabeconnahar Linda
ID: 11806001
Department of Accounting & Information Systems
Comilla University

Problem -1
Interactive question 5: Forsythia is a small limited company offering garden landscaping
services. It is partly owned by three BUsiness associates, Mr Rose, Mr White and Mr Grass,
who each hold 10% of the shares. The major shareholder is the parent company, Poppy Ltd.
This company owns shares in 20 different companies, Which operate in a variety of
industries, One of them Is a garden centre, and Forsythia regularly trades with it. Poppy Ltd
is in turn wholly owned by a parent, White Holdings Ltd.
The management structure at Forsythia is simple. Of the three non-corporate shareholders,
only Mr Rose has any involvement in management. He runs the day to day operations of the
company (marketing, sales, purchasing etc) although the company employs two landscape
gardeners to actually Carry out projects. The accounts department employs a purchase clerk
and a sales clerk, who deal with all aspects of their function. The sales clerk is Mr Rose's
daughter, Justine. Mr Rose authorises and produces the payroll. The company ledgers are
kept on Mr Rose's personal computer. Two weeks after the year end, the sales ledger
records were severely damaged by a virus. Justine has a single print out of the balances as
at year end, which shows the total owed by each customer.

Forsythia owns the equipment which the gardeners use and they pay them a salary and a
bonus based on performance. Mr Rose is remunerated entirely on a commission basis
relating to sales and, as a shareholder he receives dividends annually, which are substantial.
Forsythia does not carry any inventories. When materials are required for a project, they are
purchased on behalf of the client and charged directly to them. Most customers pay within
the 60-day credit period, take up the extended credit period which Forsythia offer. However,
there are a number of accounts that appear to have been outstanding for a significant
period.
Justine and her father do not appear to have a very good working relationship. She does not
live at home and her salary is not significant. However, she appears to have recently
purchased a sports car,which is not a company car.The audit partner has recently accepted
the audit of Forsythia as a new client. You have been assigned the task of planning the first
audit.
Requirement
(i)Identify and explain the audit risks arising from the above scenario.

Answer :
In this above scenario two types of risks are involved -
(i)Inherent Risks
(iil)Control Risks

Inherent Risks-We know that, Inherent risk is the risk posed by an error or omission in a
financial statement due to a factor other than a failure of internal control. In a financial audit,
inherent risk is most likely to occur when transactions are complex, or in situations that
require a high degree of judgment in regard to financial estimates.

Here in this above problem, Forshythia involve in complex structure of business.There arise
various types of risks which is difficult to ascertain,also forshythia is a garden landscaping
service company but when they require any inventory for their customer they purchase
directly for their customer. There is possibility of fraud in this above case, the company
ledger are Store in mr Rose personal computer which is damaged by virus and mr Rose
have only involvement in management.Mr Rose is remunerated entirely on a commission
basis relating to sales and, as a shareholder, he receives dividends annually, which are
substantial.Furthermore Justine didn’t get significant salary but he purchased a brand new
sport car which is not company car.

Control Risks- Control Risk is the risk of a material misstatement in the financial statements
arising due to absence or failure in the operation of relevant controls of the entity.
Organizations must have adequate internal controls in place to prevent and detect instances
of fraud and error.

Because of the complex structure of the company there is no one who will take significant
decision for the company. Because of segregated structure of shareholders they didn't have
adequate internal control to prevent fraud and mistreatment.
Problem-2
Interactive question 4: Fonesforall is a mobile phone network provider with its own retail
outlets. It is currently offering the following package for £30 per month. ZX4 mobile phone
handset 12-month subscription to the network 300 'free' call minutes per month (for 12
months) 500 'free' texts per month (for 12 months) Any unused call minutes or texts may be
carried forward to the following month The fair value of this package is estimated to be £500.
Requirement
Identify the risks associated with the treatment of revenue in relation to this package in the
financial statements of Fonesforall.

Answer :
By examining the above question,there is significant involvement of inherent risks.Here they
depend on the single product which is not relevant. They combined all individual item and
provide one handset with various types of offer.

Also the fair value of the package is 500 and they offer the package 30 per month the annual
amount of the package is 360.So Fonesforall offer the package( 500-360)=140 £ less. So
they suffer loss by selling this package. The risks is inherently involved in Their marketing
strategy .

Problem-3
(Q.N.- 6) : You are the partner in charge of the audit of TXT. The following matter has been
brought to your attention in the audit working papers.
During the year TXT spent Tk.500,000 on applied research, trying to find an application for a
new process it had developed. TXT's management has capitalized this expenditure. TXT
management is refusing to change its accounting treatment as it does not want to reduce the
year's profit. The draft financial statements show revenue of Tk.40 million and net profit of
Tk.4.5 million.
Required:
(i) Explain what is meant by "materiality" AND whether the matter highlighted above is
material.
(ii) Identify the type of audit report that would be appropriate to the above statements.
assuming that TXT's management continue to refuse to change the financial statements.

Answer:

Requirement (i):- Materiality refers to the impact of an omission or misstatement of

information in a company's financial statements on the user of those statements.

The matter which is highlighted above is material, TXT spent 5,00,000 tk on applied
research but they treated it as capital expenditure instead of expenditure,here the
information is mistreated.

Requirement-(ii):- In this statement qualified audit opinion report is appropriate.

Because it has a single misstatement in financial statement. They treat their spent to
capitalized expenditure in financial position instead of statement of comprehensive income.
That means they could not follow the accounting principles of recording process in financial
statement.
It is 11.11% of net profit (Tk. 45,00,000) which is exceed the normal range of the net income
after tax.