Auditing Harvard Case Solution & Analysis

Auditing Case Solution 

Answer to Q3: (AUDIT RISK)


In the given scenario of Celina Limited with the decreasing sales revenue as well as thein creased cost, it is evident that the company is not in a stable financial position which is also reflected in the recent press report. The bankers still expect that the company would be able to grow in the future which is not appropriate. In the given scenario, the audit risk is the detection risk. The company, by using the inappropriate procedures, is not showing the appropriate results and the auditor has failed to detect this material misstatement. The companies usually do this in an attempt to show higher revenues to attract more investors to invest in the company and to reduce theircost to show they are managing effectively thereby increasing its profit. The auditor in this scenario fails to detect the entire values relating to the revenues, costs as well as the profits that are generated by the company which would result in the overall increased in the Audit risk of the company. The current position of the company is showing the severe impact on the going concern of the company and there is a strong chance that the company would be shut down in the upcoming years.


In the given scenario, as the company is engaged in the foreign transactions, there is a strong inherent risk caused by the clients’ unique internal and external operating environment as it is planning to contract an independent computer service bureau to carry out all its data processing relating to payroll transaction in each capital city. There is a strong risk that the outsider might misrepresent the information provided in the financial statement which affects the true and fair picture of the organization.

Moreover, it is mentioned that the outsourcer is independent however,this should be checked by the auditor that whether outsourcer is independent from Office World Ltd or not. If the outsourcer is not independent, then there will be misstatements in the payroll transactions as they will be pressurized by the Office World Ltd to misstate accounts. If the Outsourcer is not independent, then this will increase theAudit Risk as the inherent risk of misstatements is high.


In this scenario, the company is trying to misstate its cost in order to compete effectively with the cheaper uniforms manufactured overseas. There are two risks in the Unity Pty Limited; one is the detection risk due to the failure of detecting the true cost whereas, the other risk is the inherent risk that is caused due to the company dealing in foreign transaction which is minimal. However,the overall risk increases as the result of the two risks.


The company strongly represents the control risk as the company’s control has failed to reduce its cost as it is increasing. The warranty claims are increasing from 0.5% to 3.5% of its overall sales revenue, which shows that customer reputation of company might be decreased in this best-selling product. Due to loss of reputation, it is also possible that sales of this best-selling product TM3 might also be decreased. Therefore, there is audit risk that the company’s sales might be misstated and company might be hiding its actual sales. The auditor needs to be skeptical in order reduce this risk. Moreover,the average cost of repair has risen to 280 per claim. There is a risk that the repair cost is recorded on average basis in the Financial Statement, however this should not be done. The repair cost should be recorded on actual basis otherwise the chances of errors are high. As a result the Audit Risk will increase as we might be unable to identify this risk....................

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