Consider the following independent situations, all of which apply to audits of entities for the year ending 30 June 20X8: (i) BWC Limited sells high-end women’s fashion in a highly competitive market. Whilst other similar-sized competitors have recently gone into liquidation, BWC has managed to secure an undisclosed emergency loan from a high-wealth individual, who is close relative of the Chairman of the Board. These funds will be used to implement a new automated inventory management system, which will lead to major staff reductions across the board, particularly in areas the company considers non-essential, such as security management and back to-base alarm systems. (ii) Smartel Pty. Ltd is a new start-up company that has developed an innovative phone application to help students revise for exams. The patent is still pending. The prototype was so successful that a large private equity firm invested $ 50 million in exchange for 40% equity. The current CEO of Smartel Pty. Ltd was formerly a Vice-Chancellor of a prominent University in South Australia, and several major universities are already contracted to use the new platform for the next ten years. Smartel Pty. Ltd has a very low-cost business model with minimal staff, and the Internal Auditors from the private equity firm recently completed a comprehensive review. No control issues were noted. (iii) Oldstar Limited is an importer of antique clocks, vintage collectibles and rare watches. The recent success of smartwatches and other fitness-related timepieces has significantly affected sales. Long-standing retail customers have stopped buying from recent auctions. Furthermore, the lack of sales has seen numerous long-serving employees leave the company, and certain key roles have been vacant for several months, including the Accounts Receivable team and the Assistant Accountant. The new Financial Accountant, Robert Smith is a recent graduate who has only been at Oldstar for three weeks. Required: For each of the above independent situations, describe the individual impact on each component of the Audit Risk Model. Use the following table to structure your answer. Impact on Inherent Risk: Impact on Control Risk: Impact on Detection Risk:
Consider the following independent situations, all of which apply to audits of entities for the year ending 30 June 20X8: (i) BWC Limited sells high-end women’s fashion in a highly competitive market. Whilst other similar-sized competitors have recently gone into liquidation, BWC has managed to secure an undisclosed emergency loan from a high-wealth individual, who is close relative of the Chairman of the Board. These funds will be used to implement a new automated inventory management system, which will lead to major staff reductions across the board, particularly in areas the company considers non-essential, such as security management and back to-base alarm systems. (ii) Smartel Pty. Ltd is a new start-up company that has developed an innovative phone application to help students revise for exams. The patent is still pending. The prototype was so successful that a large private equity firm invested $ 50 million in exchange for 40% equity. The current CEO of Smartel Pty. Ltd was formerly a Vice-Chancellor of a prominent University in South Australia, and several major universities are already contracted to use the new platform for the next ten years. Smartel Pty. Ltd has a very low-cost business model with minimal staff, and the Internal Auditors from the private equity firm recently completed a comprehensive review. No control issues were noted. (iii) Oldstar Limited is an importer of antique clocks, vintage collectibles and rare watches. The recent success of smartwatches and other fitness-related timepieces has significantly affected sales. Long-standing retail customers have stopped buying from recent auctions. Furthermore, the lack of sales has seen numerous long-serving employees leave the company, and certain key roles have been vacant for several months, including the
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Risk is the possibility of negative outcome.
Inherent risk are those risk that are always present in the entity. Internal controls are applied, so as to reduce or eliminate the impact of inherent risks. Inherent risks are most likely to occur in those situations, where the transactions are complex or rare in occurrence.
Control risk are those risk, that if the controls applied fails, then these risk will arise.
Detection risk are those risk that the auditor could not detect a misstatement that are material either individually or when aggregated with other misstatements.
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