Case Indigo Auditing Harvard Case Solution & Analysis

Case  Indigo Auditing Case Solution

Set preliminary audit risk for the IOML financial statement audit engagement and explain your reasoning using four factors. (5 marks)

Audit risk can be set by the auditors through different risk assessment procedures and in the case of the Indigo Coho Manufacturing Limited, there are many audit risks revolving around the company’s financial statements. Audit risk is arisk when the auditor expresses inappropriate opinion at the stage when the financial statements of the company are materially misstated. Material Misstatement relates to the shareholders of the company, which indicates that the material changes the decision of the shareholders as it changes. As the company’s financial performance is increasing more than 4 times, then it could be said that there is an risk regarding how the company can perform better than its industry competitors. It could also be said that an audit risk exists if there is any manipulation in accounting and databases to handle the profitability, which suits the company best. Risk of fraud also arises in the companies which rapidly grow and in the companies that operate in a competitive industry. Both cases suit the company as it is growing fast and operates in a technologically advanced industry where the need of innovative products is essential.

Evaluate inherent risk and explain your reasoning using four factors. (5 marks)

                Audit risk comprises of three risk which are inherent risk, control risk, and detection risk. Inherent risk is not in control of the auditors as it includes natural risk, which takes place in the organization. Some of the inherent risks are discussed in detail below.

  1. Management Overriding Controls: Senior management has the authority in the company and it can override the control that is already in place in the company. Moreover, the management can work in its best interest at the expense of the interest of the company. As a result, the conflict of interest would arise in the company.
  2. Theft of Cash: Cash is easy to carry as compared to a lot of inventory or machinery, which is why the chances of theft of cash are high as compare to others. In the case of Indigo, major transactions are performed in cash and there are less transactions in credit therefore, better control over cash management is necessary for the company.
  3. Complexity of regulations: Particularly in the technological advanced industries, there is a complexity in the regulations and in a situation where the company breaches single compliance, it will turn into a huge penalty for the company. Therefore, the auditor must consider the compliance standard of the company with the prevailing laws and regulation.
  4. Lack of Predictable Income:The company’s management is facing problems regarding the prediction of the future net income as there is not a constant growth rate in earning, in fact there is high volatility in the growth rate of the company....................                                                                         This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
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