Question

Risk, Assertions, Materiality & Audit Strategy

Blue Cow is a long-established soft drink organisation, manufacturing a popular product for major supermarket chains. The audit of the company has been straightforward in the past, and the company has reliable suppliers and loyal customers. In addition, the directors and senior management are highly respected for their abilities and the strong ethical culture they inspire, as well as the excellent internal controls they demand. The company only sells one product – a 300ml can, which has historically been priced at a 331/3 % markup on cost, yielding a gross profit percentage (GP%) of 25%. In the past any variations on the GP% have never been outside the range of 24% to 26%.

Required:

a) Identify the three components of audit risk and explain what your assessment of risk is for each component, based on the above information (use only ‘high’, ‘medium’ or ‘low’).

b) Explain how your risk assessments in (a) above would impact on planned substantive procedures.

Answer 1

Three components of audit risk is Control Risk, Detection risk and Inherent risk

Control risk is low as here no separation of duties required as it is just simple sales where gross profit and all dependent on sales,

Detection risk is also low here as there is no chance that it can be hidden from auditor the sale price and purhcase price,

Inherent risk is also low, This risk occurs when transaction is complex but in this case transaction is also very simple and hence inherent risk is on very low