(a) Explain four (4) key risks of material misstatement at the financial statement level and determine the overall audit response to address each risk.(280 words) (Hint: Management override of control etc)
(b) Explain two (2) key risks of material misstatement at the assertion level other than those identified in the case study information about accommodation revenue. For each, identify the key assertion and accounts at risk.(200 words)
(c) Review the materiality workpaper prepared by the audit senior. Recommend corrections to all the errors in the working paper. (260 words) (Hint: Public listed so Profit before tax is appropriate etc.)
(d) For each of the identified risks in the walkthrough of accommodation revenue and receipts cycle, identify the associated assertion. Prepare a risk and control matrix for the accommodation revenue and receipts process. (260 words) (Hint: refer to attached sample risk and control matrix workbook to get idea how to answer)
(a) Four key risks of material misstatement at the financial statement level are:
Management override of controls: Management may intentionally or unintentionally override the controls implemented by the company to manipulate financial statements. This risk can be addressed by increasing the extent of substantive testing, such as testing journal entries and reviewing significant estimates made by management.
Inaccurate or incomplete financial reporting framework: The financial reporting framework may not be appropriately applied, leading to errors in the financial statements. This risk can be addressed by performing detailed testing of significant transactions and balances to ensure that they have been correctly classified and disclosed in accordance with the applicable financial reporting framework.
Accounting estimates and judgments: The use of estimates and judgments in financial reporting can introduce a degree of subjectivity and complexity, leading to errors in the financial statements. This risk can be addressed by testing the reasonableness of accounting estimates and judgments, and considering the inputs and assumptions used to make these estimates.
Non-compliance with laws and regulations: Non-compliance with laws and regulations can lead to fines, penalties, and reputational damage for the company. This risk can be addressed by performing testing to ensure that the company is in compliance with applicable laws and regulations.
(b) Two key risks of material misstatement at the assertion level, other than those identified in the case study information about accommodation revenue, are:
Valuation: This risk relates to the risk of misstatement in the valuation of assets or liabilities. The key assertion at risk is the valuation assertion, and the accounts at risk are those that involve significant judgments or estimates, such as goodwill or intangible assets.
Completeness: This risk relates to the risk of material misstatement due to omissions or errors in the financial statements. The key assertion at risk is the completeness assertion, and the accounts at risk are those that involve a high volume of transactions or balances, such as accounts receivable or inventory.
(c) The materiality workpaper prepared by the audit senior needs the following corrections:
The materiality threshold should be based on the appropriate level of profit before tax (PBT) rather than the profit after tax (PAT).
The tolerable misstatement should be calculated based on the materiality level and the level of assurance required.
The audit team should consider the qualitative factors that may affect the materiality assessment, such as the company’s financial condition and the nature of the risks identified.
(d) Risks in the walkthrough of accommodation revenue and receipts cycle, and their associated assertions are:
Risk: Incorrect recording of revenue
Risk: Overstating revenue due to incorrect room rate
Risk: Failure to recognize revenue from cancelled reservations
Risk: Unauthorized discounts given to guests
Risk: Failure to properly record cash receipts
Assertion: Completeness and accuracy
A sample risk and control matrix for the accommodation revenue and receipts process is presented below:
Risk Assertion Control
Incorrect recording of revenue Accuracy Segregation of duties between sales and accounting staff
Overstating revenue due to incorrect room rate Accuracy Review of revenue calculations by a senior member of staff
Failure to recognize revenue from cancelled reservations Completeness Automated system to track cancelled reservations and ensure that revenue is not recognized
Unauthorized discounts given to guests Occurrence Authorization process for discounts and review of discounts by a senior member of staff
Failure to properly record cash receipts Completeness and accuracy Use of pre-numbered receipts and daily reconciliation of cash receipts