Case Study 7.18
A discussion on the inherent risks that arise from the audit of Dreamland ltd in regards to several claims made by Ms Monica Fasola. As the change in the payroll system is a technological change in IT (Simnett, R., pg 311), there is an increase in inherent risk within several areas. The change in IT systems may lead to errors that may occur through the conversion of systems, the information from the old system may not be compatible with the new system regardless of how similar the systems may be or the new system may not work as management intended or it may be unreliable. Disregarding the fact that the two systems may be similar, the information given states that the new system has been streamlined which may increase the inherent risk as the performance of the new system is unknown. Furthermore, due to the new change in systems, there is now an issue regarding whether the staff are competent to run the new payroll system which gives rise to another inherent risk for the external audits to consider. The creation of an internal audit division will lower the inherent risk of the organisation as the financial information will be put through significant analysis prior to the external audit. But the inherent risk may also increase during the life of the new internal auditing division due to several factors; members of the auditing division that have stayed in this area for an extended amount of time may have to be questioned on whether their analysis is objective and reliable if the internal auditing team has not been exchanging their auditors. Data from managers used in these internal audit reports may be incorrect prior to the audit which will increase inherent risk. Moreover, there is an increase in inherent risk with the director of finance, Ms. Fayola. The information given states that she has been with the company for nearly 10 years which in itself is an increase in inherent risk as her claims of the organisations finances may be biased...
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