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Accounting ...Auditing - Assignment Example

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The risks that are susceptible to the business despite the controls put into place are referred to as inherent risk (Louwers 36). Auditors have to assess this kind of risk before making their final…
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Accounting ...Auditing assignment
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Download file to see previous pages For A & E cycle, there could be complex transactions expenses that cannot be classified with precision. Similarly, production cycle is faced by the complexities in method to use in valuing stock and goods produced.
Secondly, the inherent risks in all the three cycles would affect both the balance sheet and income statement of the business. R & C cycle may either increase or reduce the receivables and cash and this would at the same time affect the income reported by the business. Inherent risks in A & E cycles affects the expenses reported thus affecting income statement. Likewise, wrong valuing of stock affects the inventory value in the balance sheet and also closing stock which alters the income reported.
In all the three cycles, the inherent risk is increases by the fact that there are external parties’ dealings. These parties include the suppliers, debtors, and creditors. Fraudulent actions of these parties increase the inherent risks.
In as much as there are similarities in the inherent risk in the three cycles, there are also some differences. Inherent risks in these cycles differ because of the differences in the nature of transactions involved. In R &C cycle, the asset involved is cash, A &E also involves majorly cash asset while and production cycle inventory is at risk. The three cycles are also characterized by different accounting standard requirements (Louwers 53). The manner of recognizing receivables is different from that of valuing stock or purchasing materials in the production cycle hence making their inherent risk different.
R $ C cycle is entails the determination of the business debtors and the amount they owe to the business. The relevant department has to identify all the debtors and examine the credit period agreement. They then make the claims for the money and adjust their debtors’ balances. Source documents include sales order, credit ...Download file to see next pagesRead More
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