Inherent Risk

Topics: Generally Accepted Accounting Principles, Management, Risk Pages: 5 (786 words) Published: August 24, 2010
Inherent risk

Computerizing risk
Non-routine transactions (Beasley 2010, p268)
‘Transactions that are unusual for the client are more likely than routine transactions to be incorrectly recorded, because of the client often lacks experience in recording them.’

Why it is risk:
Santos use a series of computerizing or IT technology to support their business for increase market competition. IT technology has been used for trade ordering systems between customs and Santos. Customers can order or purchase goods online. Therefore, non-routine transactions might occur if customers not familiar with the computerizing system. What’s more, Computerizing system would always make the same mistake, if the system has not designed properly. Thus, It might also contain some misstatement of transactions or increase opportunities that the transaction record incorrectly, such as , some of sales transactions might record in ‘other income’ due to computerizing system design mistake.

Misstatement of sales account would lead to estimate wrong actual profit at the end of financial year, thus it contain risks to estimate wrong also affect the

Make sure that the computerizing system had been designed properly; review the computerizing system to identify whether there are some mistakes. Investigate sales account and other income account, identify whether every transaction has been recorded correctly.

Management risk
Factors related to fraudulent financial reporting and misappropriation of assets (ASA 240 incentives/pressures) Adverse relationship between the entity and employees with access to cash or other assets susceptible to the theft may motivate those employees to misappropriate those assets, for example: promotions, compensation, or other rewards inconsistent with expectations.

Management and weaknesses in internal control may be present when misstatement due to either fraudulent financial reporting or misappropriation.

Why it is risk (ASA240 )
Asset misstatement or been record incorrectly due to motivation that theft could benefit from it. Weak management of internal environment would lead to fraud or misstatement happened by personal motivation. The opportunities that the misstatement or fraud might happened in Santos when: • Large amount of cash on hand or processed

• Inadequate segregation of duties or independent checks • Inadequate physical safeguards over cash, investments, inventory, or fixed assets. Manager’s disregard for the need for monitoring or reducing risks would relate to misappropriations of assets.

Identify the management weakness,
Investigate account receivables, sales revenue, assets, fair value of assets, Check cash flow, annual profit

differences of Policy and law risk
Factors related to fraudulent financial reporting and misappropriation of assets (ASA240) Ineffective monitoring of management and weaknesses in internal control may be present when misstatements due to either fraudulent financial reporting or misappropriation of assets exist.

Why it is risk
Santos not only trade domestic, it also has international business or cooperating with other company in other countries, such as Asia. However, government policy and law, or even accounting system might different from Australia. This would lead to increase risk of misstatement, or it might possible that fraud had covered by ‘common understand’. For instance,misstatement of tax payable account ( most of countries tax law are different) , misstatement or fraud of inventory, sales revenue account.

Investigate all doubtful account, such as, sales account, inventory account or profit, Identify any different policy or law between cooperate companies and Australia; investigate accounts due to affect by differentiations.

Question 2

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