WOW ELECTRICAL LTD AUDIT Harvard Case Solution & Analysis

WOW ELECTRICAL LTD AUDIT Case Study Solution

Assess acceptable audit risk for audit of Wow Electrical ltd

The acceptable audit risk of the company refers to the materiality level being set up by the company in the planning stage.Those risks which are less than the materiality level will be considered as immaterial whereas those above the materiality level will be considered as material. As this is the second year of audit, so the overall risk will be low as the auditors have the required knowledge of business whereas if the auditors did not have the required level of knowledge then this would have increased the detection risk leading to an increase in the audit risk of audit.

Q2.For the completeness assertion of the purchase account

a)   Assess Inherent Risk

  • There is a risk that some purchase invoices are not included in the accounts and this understates cost of sales and hence will overstate profits.
  • There is a risk that those units purchased during the year are not completely included in the purchases account and hence purchases are understated.
  • There is a risk that the suppliers invoice might be more than the purchase invoice and this would lead to purchases being overstated.
  • There is a risk that for some purchases there might not have been any invoice or documentation and this would understate profits and will overstate the cost of sales.
  • There is a risk that the purchases might not be correctly valued in the accounts and hence the profit would be overstated and the cost of sales would be understated.
  • Overall there are many factors which influence the company’s inherent risk of purchase hence the inherent risk is high.

b)   Assess Control Risk

  • There is a risk that there might have been fictitious vendors being set up as anyone in the company can use the purchase orders as the finance department trusts everyone and they pay for the invoice. This will overstate costs and understate profits.
  • There is a risk that some purchase invoices might be missing as the purchase invoices are not checked for being pre-numbered.
  • There is a risk that some fictitious goods received notes that might have been made by the employees and this would increase the purchases of the company and will reduce the overall profit.
  • There is a risk that those goods not required for the company might have been purchased by the employees as no one authorizes the purchases being made.
  • There is a risk that purchases are not recorded on timely basis as no one authorizes to record the purchases on timely basis.
  • There is a risk that some suppliers might not be paid at all as the purchase invoices are not checked for being pre-numbered and this might lead to suppliers stop supplying the company.
  • There is a risk that the staff might collude to record purchases which might have not occurred. This will increase the costs of goods sold and understate the profit.
  • There is a risk of that there is huge amount of purchases of the same goods which are already in the inventory as due to no authorization process. This will overstate profits and understate cost of goods sold.
  • There is a risk that there might be purchases at different times in the year which will increase costs of the company due to no economies of scale being achieved. This will lead to a reduction in the profit.
  • There is a risk that the purchases might not be valued correctly in the supplier’s account and purchases and this will increase the cost of sales and will reduce the overall profit.
  • Overall the company has a lot of factors and hence the company has high control risk..................

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