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  • Subject Name : Auditing and Assurance

Business Risks

Question 1

Business risks refer to the chances of a business getting operational and financial problems in a business surrounding. Majority of businesses usually encounter the business risks and often, the small businesses are more susceptible due to the insufficient availability of resources and minimal capital. The businesses may be caused by the deteriorating economic conditions as well as unfavorable government regulations and monetary policies. In the case of Bowlby Ltd, they faced a business challenge of increased competition from the businesses around.

The business risk being faced by the Bowlby Ltd may be referred to as the strategic business risk which occurs when there is rise in the competition in the economic market. The rise in competition, there could be creation of minimal market share and the profits obtained is low. The owners of the business are therefore forced to create more time and dedicate more resources to educate the users of a certain product and why they are more powerful than the substance produced by the competitor organizations. The large business organizations have a higher likelihood of surviving the existent competition from the competitors when compared with the small business organizations. The small scale businesses may also face the challenges of attempting to sustain enough supply of economic resources. The economic resources include the raw materials as well as labor and any other item required to produce the services and products of specialization.

The decision by the Bowlby Ltd to fight the competition from the nearing businesses to increase the quality of their products is a good strategy against the business risk. Implementing quality management system is useful since it allows an individual to audit themselves together with the certification body. The system initiated is based on strict policies of quality and therefore the customers of the products available do not have to participate in the audit process to the company. The quality system helps in the enhancement if the credibility of business and improves the firms image while ensuring that the customer’s needs are met.

Before a business decides to produce products of good quality, it is necessary that the business educates the employees to be among the development procedure. The staffs have to be given enough guidelines towards the creation of quality goods. The owner should not follow the employees too much that they lose their creativity. The employees should be given enough time to concentrate on the products being created and stick to the processes of the business and call for meetings where there is a challenge or a need for improvement.

The business should also ensure that they test their product and clearly evaluate it before it is launched. Also, researching more on the market is important to create understanding and the acceptance of the product hence giving a chance of increasing the accuracy of the product. Competition could make the situation of the business difficult but knowing more of the quality of product is useful since one can make informed decisions on how to create the product of interest from the beginning to the end of the business process.

Question 2

Current ratio: It is the balance-sheet showing the performance financially and is done through measuring the liquidity of the company.

Receivables turnover ratio: It provides the company with an idea with how to effectively gather its debts with the aim of fulfilling the credit extended with a minimal value indicating some higher efficiency.

Inventory turn ratio: it shows the number of times that the company has sold and replaced an inventory over a certain period of time. A low value indicates that the ratio is good and the sales made are high while the inventory levels are less.

Return on total assets: it measures the ability of the company to create some profits from the total assets.

Net profit ratio: it shows how much profit a company will get or the net income that is created as a percentage of revenue.

The conclusion drawn from the Zing Limited is that the company is less likely to settle its debts due to its low current ratio. Collection of its debts is also likely to create a challenge due to its high value of receivables turnover ratio when compared with industry average value. The sales of the company are also low meaning that it could land into future problems. However, the company is at a position where it can create maximum profits if all its assets are to be sold.

The other potential audit risks include;

Current acknowledgement of the sales revenue on an approximation basis where the estimate could be biased and not according to the realistic assumptions on the sales price.

The financial outcomes maybe manipulated to suit the market value of the shares before the transactions on sales were made.

The other possible risk is the overstatement of the evaluated company’s assets due to the unfair exploratory whose charges are expensed on the income statement.

Finally, the other risk is where the liabilities of the company are understated due to lack of the acknowledgement of the provision in regard to the litigation.

Question 3

Invoice Approval

Receiving department just stamps order received on its two copies of the purchase order. In this case the receiving department does not check the items supplied nor if the prices are in line with the purchase order.


Receiving all invoices centrally in accounts department then oversight is carried out by matching the documentation of the transaction to the appropriate records. Assembling the supplier invoice, receiving report, authorized purchase order then matching items in the supplier’s invoice to those in purchase order will ensure receipt of the goods procured. It helps to avoid double entry, checking for correct prices and specifics of the items. In addition, helps in checking the accuracy of the invoice calculations and verify if the supplier exists.

Lack of proper review and reconciliation

Assistant accountant undertakes a sequence check of all pre-numbered documents while financial accountant receives monthly bank statements for investigating any reconciling items through bank reconciliation. These review and reconciliation process may involve errors. From definition in accounting perspective, reconciliation is the process of comparative analysis of transactions through comparing activity to supporting documentation then resolving any discrepancies found. It will ensure that there were no unauthorized or improper transaction changes that may have occurred during the process as well as ensure validity and accuracy of the financial documents


Ensuring all transactions have been properly authorized by critical scrutinizing the source documents and comparing to the bank statement to review if there any potential changes to the process between approval and processing of the transactions. In the case report, review of the pre-numbered source documents is done by the assistant accountant separately from the reconciliation process. The reconciliation process is done after end month. Discrepancies and errors should be detected and resolved in appropriate timeliness. This process is then documented properly for verification that a thorough review was carried out. In case of errors a proper procedure for error correction should be clearly outlined.

Question 4

During an audit, the payroll transactions are assessed by determining the staffs who received payments and should not have been in the list and ensuring that the employees deserving the payment received the right amounts of funds. The auditors have to ensure that the payroll transactions are correctly stated in the financial reports accounts. During the procedure, there are assertions made on the payroll expense transactions which are discussed below.

The occurrence tests are conducted to check if the payment transactions took place. Jack has to ensure that the payroll tax expenses and payroll expenses records found in the company belong to the employees who are present and who did their work during the pay period. The accrued payroll liability and payroll balances must demonstrate the funds that the company owes according to the dates in the balance sheet. The assertion is tested using two major procedures. The first procedure involves assessing for any employees who have been terminated.

The auditor has to ensure that there are no terminated employees who still receive some payments. The assessment is done through taking a sample of the terminated employees from the list of the client and then followed up in the payroll register. The other procedure is through the verification of the information of the new staffs. The verification is done through taking a sample of the employees who were hired recently. The personnel files are thoroughly evaluated to ensure that each employee has the right documentation in line with the audit’s client’s policy manual and the human resource procedure.

The other assertion is the completeness. In a payroll procedure, the understatements are not a big issue since majority of the employees gives a notification to their employers when they fail to get a paycheck. Despite the above statement, the auditor has to do some tests to ensure that there is no understatement of payroll expense by the audit client. Completeness is tested through securing a list of the existent staffs from the human resource. A sample is then picked from the list where they are counterchecked at the payroll register and ensuring that the all the current staffs have received their payments.

Authorization is the other assertion that should be checked by the auditor. It involves the determination of whether the audit client sticks to the effective internal control and the management procedures when dealing with the payroll transactions. The auditor therefore has the role of ensuring that the personnel files are up-to date and that the time sheets are in line with the authorization. The assertion is tested through picking of a sample of employees listed in the payroll. The time sheets are assessed and ensuring that the management have approved the hours that the employees have been paid.

Accuracy is also checked whereby the transactions are evaluated to ensure that there are no errors in them. The auditor has to countercheck the amounts included in the payroll and the see that the categories of accounts are right. The other assertion is cutoff where the clients could attempt shifting the accounts transactions from one year to another with the aim of getting positive outcomes. Jack as an auditor has to assess whether there are enough records in the assurance company related to the transactions made in the payroll. The other way in which cutoff can be checked is through the testing of accruals.

Question 5

Substantive testing is useful during the auditing process since it gives one the pressure to accomplish their sales targets which could lead to the formation of overstatement risk. The process may lead to the general high inherent risk for instance the manipulations to reach the goals of the company. The testing is also important due to the size of the materials and the large transactions being conducted. The auditors may either apply the substantive testing procedures or the control testing procedures which are accompanied by the top level analytic processes.

Regarding the assertion of occurrence, the substantive testing will involve the assessment of whether the transactions have been recorded and if they actually occurred in accordance with the entity. For instance, the sales recorded match with the products that were ordered by the appropriate customers and their dispatchment is in line with the period of invoice. In summary, the sales should be genuine and that there is no overstatement. Completeness is also evaluated to ensure that the transactions made have a record that has been kept and nothing has been left out. On the other hand, accuracy of for revenue is tested to ensure that there are completely no errors during the preparation of the documents or when the transactions were being transferred to the ledgers. A reference to the disclosures which demonstrate the correct measurements and details indicate that the explanations and the figures given do not show any misstatement.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Auditing and Assurance Assignment Help

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