Areas of Heightened Audit Risk - Assignment Example

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This paper "Areas of Heightened Audit Risk" focuses on the account balances that add to an entity’s liability. There is an inherent risk that an entity’s management is more likely to understate liabilities. As stated by McGraw-Hill Higher Education (2006), liabilities are understated with a view to exaggerating the financial strength of an entity just as assets are overstated. …
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Areas of Heightened Audit Risk
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Download file to see previous pages In itself, this reduction of trade payables by £7,352,000 seems material and as such, an area of heightened audit risk.
This understatement could be associated with either a complete omission of some liabilities from the financial statements and/or recorded at a lower amount. This act would portray that Havelock Europa Company as healthier and less risky since the omission of some expenses that are not yet paid lowers the debt and leads to an overstatement of incomes. From the financial statements of the Havelock Europa Company, the understatement could have been caused by the omission of contingent liability because, according to its policy, it considers contingent liabilities only when it becomes probable that it will have to make payments under the guarantee (Havelock Europa Plc., 2013, p. 93). The next probable cause for this fall could be the omission of unearned revenues that arise from prepayments from customers for services and goods not provided. Finally, the understatement could be as a result of Havelock Europa Company’s fraudulent financial reporting scheme.
The Public Company Accounting Oversight Board (2014) states that related party transactions, including those between a company and its executives, is a critical area as it has historically been characterised by increased risk of material misstatement. Therefore, this report also considers the transactions between Havelock Europa Company and its executives and related parties risky. These transactions are prone to manipulations and are used to understate liabilities or overstate assets. This report is concerned with the decrease in the amount from transactions with the management and group companies to £877,000 in 2013 from £914,000 in 2012 and £1,377,000 in 2013 from £2,045,000 in 2012 respectively (Havelock Europa Plc, 2013, p. 94). As noted by Colby (2010), these related party transactions could be improper and arise due to sale and purchase transactions between undisclosed affiliates.   ...Download file to see next pagesRead More
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