Risk Assessment Process: Critical thinking & analysis Briefly explain how each f

Question

Risk Assessment Process: Critical thinking & analysis Briefly explain how each factor below identified during the auditor's risk assessment process during the audit planning phase may result in assessment of increased risk of material misstatement. Identify specific classes of transactions, account balances or related management assertions the auditor may be concerned about as a result of this risk, and explain specific ways the auditor may respond to this risk during the audit. (a) A significant portion of top management compensation is in the form of incentive compensation tied to the achievement of earnings performance targets. public company's industry has experienced a slowdown of sales volume in the current economy. The company's chief executive officer is known for his aggressive approach to (b) A concerned with meeting analyst's forecasted earnings.

Explanation / Answer

Solution (a): Since, significant portion of top management compensation is in the form of incentive compensation tied to achievement of earning performance target, this might encourage the top management to adopt unfair practices to ensure achievement of earning targets. This affects the accuracy, completeness, occurrence and cut-off assertions for sales account and cost of goods sold account. Audit steps of sample substantive sales testing along with transactional cut-off testing and independent customer balance confirmation could be performed to test and verify the sales and cost of goods sold account balances.

Solution (b): Since, the Company is experiencing slowdown of sales volume and CEO is known for his aggressive approach to financial reporting and is always concerned with meeting analyst's forecasted earnings, this might encourage the CEO to follow sales dumping to ensure achievement of forecasted earnings. This affects the accuracy, completeness, occurrence and cut-off assertions for sales account and cost of goods sold account. Audit steps of sample substantive sales testing along with transactional cut-off testing and independent customer balance confirmation along with subsequent receivables testing could be performed to test and verify the sales and cost of goods sold account balances.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.