Inherent Risk
Inherent Risk
i) expanded into a national manufacturer of high technology sustainable energy products brings with it a range of uncertainties, including compliance requirements and logistical problems increased potential for misstatement due to the judgements required requiring more judgement such as research and development (valuation), intangible assets (valuation), inventory (valuation) and property plant and equipment (valuation).
ii) assets include “intellectual property rights” potential for misstatement when valuing advanced technology and intangible assets because of their nature Intellectual property rights (valuation).
iii) Nature of the client’s business - a high technology industry highly susceptible to change in technology makes valuation of inventory and property plant and equipment more difficult misstatements Inventory (valuation); intangible assets (e.g. intellectual property rights) (valuation); property plant and equipment (valuation).
iv) new management team, no experience in the high technology industries difficult to exercise appropriate judgement misstatement Sales (occurrence); accounts receivable/ provision for doubtful debts (valuation);inventory (valuation); intellectual property rights (valuation).
v) Management remuneration is based on bonuses paid on reported profit engage in earnings management. For example, sales may be recognised earlier than they should, or provisions, such as for doubtful debts, may be underestimated Sales (occurrence/cut off); accounts receivable/ provision for doubtful debts (valuation); research and development (valuation)
vi) New information system Risk of losing data in changeover. Also, staff will not be familiar with the new system, therefore susceptible to more errors Any significant account when changing over to the new system. Completeness due to loss of data; occurrence due to double inputting; accuracy due to human error.
ANSWER Internal control
i) expanded into a national manufacturer of high technology sustainable energy products brings with it a range of uncertainties, including compliance requirements and logistical problems increased potential for misstatement due to the judgements required requiring more judgement such as research and development (valuation), intangible assets (valuation), inventory (valuation) and property plant and equipment (valuation).
ii) assets include “intellectual property rights” potential for misstatement when valuing advanced technology and intangible assets because of their nature Intellectual property rights (valuation).
iii) Nature of the client’s business - a high technology industry highly susceptible to change in technology makes valuation of inventory and property plant and equipment more difficult misstatements Inventory (valuation); intangible assets (e.g. intellectual property rights) (valuation); property plant and equipment (valuation).
iv) new management team, no experience in the high technology industries difficult to exercise appropriate judgement misstatement Sales (occurrence); accounts receivable/ provision for doubtful debts (valuation);inventory (valuation); intellectual property rights (valuation).
v) Management remuneration is based on bonuses paid on reported profit engage in earnings management. For example, sales may be recognised earlier than they should, or provisions, such as for doubtful debts, may be underestimated Sales (occurrence/cut off); accounts receivable/ provision for doubtful debts (valuation); research and development (valuation)
vi) New information system Risk of losing data in changeover. Also, staff will not be familiar with the new system, therefore susceptible to more errors Any significant account when changing over to the new system. Completeness due to loss of data; occurrence due to double inputting; accuracy due to human error.
ANSWER Internal control