Real Good Food Plc - Audit Risk - Case Study Example

Real Good Food Plc" Contents Question 3 Types of Risk 3 Question 2 6 References 9 Question Audit risk arises when the auditor of the company unknowingly fails to rectify the misstatement or error in the financial statement and therefore the auditor is required to consider the audit risk. The auditor of the company can reduce the audit risk on the basis of the risk assessment procedures that assess or determine the misstatement in the financial statement. The auditor is required to determine the audit risk at the individual account balance, disclosure value or the class of transaction. Audit risk is required to be identified and measured quantitatively by evaluating and measuring it in terms of percentage. The auditor is required to perform the auditing function in such a way that it measures the materiality in the financial statements of the company. The auditor is required to evaluate the financial statement and analyze it whether it is free from errors and omissions. Audit Risk = Control Risk * Inherent Risk * Detection Risk Types of Risk The three broad types of risk that is faced by the company are Detection Risk Inherent Risk Control Risk Real Good Plc is a company that is engaged in the diversified food business and the group is considered as the main distributor of UK. The auditors of the group have focused on the health and safety of the people and therefore the auditor has focused on the different types of audit risk. Detection risk is considered as the risk in which the auditor is not able to identify the misstatement that exists in the financial statement. The detection risk of the company cannot be reduced to zero since the auditor is not able to determine or evaluate 100% of the risk. In consideration with Real Group plc it can be evaluated that the raw materials of the company are mainly subjected to the fluctuation in price. But the auditors of the group are unable to detect the risk since this risk can be mitigated or managed through the assignment of proper personnel in the team, adequate planning and supervision. The production of Sugar has decreased last year but this risk has not been detected since it is related to material misstatement. The greater is the risk of material misstatement, the less will be the detection risk which is accepted from the auditor of the group. Since maintenance of integrity of the group is the responsibility of the auditor of the company therefore the auditor is not involved in consideration or the changes and modifications done on the balance sheet of the company that is published or presented in the company’s website. This has increased the audit risk since the auditors have not revealed all the misstatements in the company accounts or in the balance sheet of the company which is required to be disclosed by the auditor. The auditor is expected to perform the procedures that are relevant and related to the account classes, disclosures and also material classes of transactions. Inherent risk arises due to the material misstatement in the financial statement of the company that has resulted from the errors and omissions. The inherent risk prevails when it is subjected to complex calculations of the data and figures in the financial statement of the company. The calculation of cash of the company may lead to the misstatement or error. Real Group plc can encounter the inherent risk if the auditors fail to detect the appropriate amount of inventory and this risk is considered as the risk of material misstatement. The environmental auditor of the group is responsible for monitoring and evaluating the progress and the performance of the group in all related areas and it has revealed that it will work towards achievement of 14001 accreditation. This information might include error if the auditor has misstated the statement (Gupta, 2004). The inherent risk is encountered by all companies and this risk is more likely encountered by the manufacturing concern since Real group plc is engaged in manufacturing wide variety of ingredients such as sweet bakery products, jams etc therefore the misstatement or the error in the calculation of inventory of the company will provide misleading information and result in misstatement of data and figures (Griffiths, 2012). Control risk arises when the auditor do not have adequate internal control in detecting and preventing the error or fraud in the financial reporting or financial statement. Considering the financial statement of the Real Group plc it can be analyzed that if the control risk and inherent risk of the group is 65% each then the detection risk of the group has to be around 25% for preventing the audit risk from exceeding 10% Since Audit Risk = Control Risk * Inherent Risk * Detection Risk = 0.10 = 0.65* 0.65* Detection Risk 0.10 / 0.4225 = Detection risk 0.23 = Detection risk = 23 % Question 2 The extent of detection risk is directly related to the substantive procedures of the auditor. The assessment of control risk by the auditor together with the assessment of the inherent risk affects the timing, nature and the degree of substantive procedures that is required to be performed in order to reduce or decrease the extent of detection risk and thereby reducing the audit risk considerably to a lower level. Some amount of detection risk always exists if the auditors are required to verify and maintain cent percent of its account balance and its class of transactions. since real group plc is a manufacturing company therefore it is more subjected to face the detection risk that may arise due to the shortfall of inventory and the errors and the omissions in the calculation of its cash transactions may not be detected properly and adequately therefore the auditors are required to reduce the detection risk (Roy and Edwards, 2014). The characteristic of substantive procedures are directly related to the independent parties rather than the parties associated within the entity. The timing for performing the substantive audit procedures should be at the end of the period rather than considering them at an earlier date (Sharma, 2011). The substantive procedures are required to be conducted by applying a sample size that is larger in number. The assessment of the various components or elements of audit risk might change or vary during the period of audit. The auditor can gather more information and also gain attention through the performance of substantive procedures that varies from the information on the basis of which the auditor has assessed the control and inherent risk. In such type of circumstances or situation the auditor is required to modify or rectify the substantive procedures that are planned on the basis of revision of the assessed degree of control and inherent risk. Real group plc is engaged in manufacturing wide variety of products and therefore the information that is detected or revealed in the financial statement of the company may be overstated or understated due the misleading information gathered by the auditors therefore the substantive procedures will facilitate the auditor in gaining more and appropriate information (Sherer and Turley, 1997). The higher is the assessment of risk, the more number of audit evidence is required by the auditor to obtain from performing of the substantive procedures and the auditors are required to consider and determine whether the substantive procedures are able to provide viable and significant audit evidence that will facilitate in the reduction or minimization of risk and when the auditor takes the responsibility in determining the detection risk in relation to the financial statement of the company resulting from the account balance and the class of transaction that cannot be decreased or minimized to an acceptable level or extent , the auditor of the company or the group is required or expected to provide a suitable and most preferable opinion or option. Since in real group plc the chances of detection risk is more therefore the auditors of the company are required to evaluate the procedures The control and the substantive procedures adopted by the auditors help or assist in the detection of risk by the auditors. The misstatement that is revealed or observed while conducting the substantive procedures may result in modifying the assessment of the detection risk that is faced by the auditor in evaluating the financial statement of the company (Tritschler, 2013). The auditor is not responsible for any value that is published in the website of the company since it is the responsibility of the management of the company and therefore in case of the Real group plc it is a large manufacturing company or group and it is the duty or responsibility of its auditors to inform the management of the group about the weakness in the material accounting as well as in the internal control system of the group. The auditors are required to conduct the test and visit the company in advance at the end of the period since the auditor cannot fully rely and depend on the information that is provided to the auditor. Therefore in order to reduce the detection risk the auditor is required to practically verify all related information. References Griffiths, P. 2012. Risk-Based Auditing. Burlington: Gower Publishing, Ltd Gupta, K. 2004. Contemporary Auditing. New Delhi: Tata McGraw-Hill Education. Roy A.C. and Edwards, J.R., 2014. Recurring issues in auditing: Professional debate. London: Routledge. Sharma, A., 2011. Auditing. New Delhi: FK Publications. Sherer, M. and Turley, S., 1997. Current issues in auditing. London: SAGE. Tritschler, J., 2013. Audit quality: Association between published reporting errors and audit firm characteristics. New York: Springer Science & Business Media. Read More