AUDITING INHERENT RISK IDENTIFICATION Essay Example

Introduction

Inherent risk is a major form of audit risk. It is known as the most significant of the audit risk components, as inherent risk cannot be avoided as easily through the increased auditor training or created controls in the process of auditing. In order to intuitively get a picture concerning inherent risk, one should place it in the context of audit risk analysis. Audit risk refers to the risk of error when an audit has been performed and it is broken in the traditional manner. This paper looks into the Australian profile of Giant Woolworth’s analyzing the risks that are connected to investment in the group’s activities. It also analysis the effects of the dividends and cash flows to relevant shareholders.

Woolworth was formed as a private company in 1933 and became a public holdings in 1993, and was listed on the stock exchange. The company has been able to gain a name for itself from the local and regional scenes. Most of the investors come from the retail sector though. However, the standard and poor rating of the corporation is due to the fact it has not been able to garner large institutional investors.

Operational risks

Woolworths is a large company that have different and diverse operations where the risk is inherent within the business and corporate workings. Some of the inherent risks include operational adversities. The business transformation and change programs do not deliver on the benefits as expected and there is an inability to fully deliver on changes(Woolworth’s Limited, 2016 p.25).

There is also an inability to manage the inventory in the retail departments which may affect the overall competitive advantage of the company within the market. these may lead to misstatements within the financial statements and thus inherent risk. Woolworths also experiences interruptions at the work place from industrial disputes, accidents and stoppage of work.

Cash Flow

The revenue which has been utilized in investment activities was 1266.7 million dollars, which happens to be a decrease of $67.2 million used in the previous years. During the financial year of 216, the cash proceeds up to $737 million were obtained from property sales, equipment and plant. This is also a decline by 188.4 million dollars from the past year and it includes proceeds from the sales of 54 hotel property assets and proceeds as given from the sale of shares. These declines may tempt misrepresentation of the figures on the financial statements in ways that would unduly pacify investors (Woolworth’s Limited, 2016 p.25).

Dividends Risks

There were no proceeds from the issuing of shares during the year considering the group transitioned to using performance rights and these do not have an exercise price. It is crucial for a company to maintain cash flow over a period to chart trends of success or decline. The firm’s liquidity level has been declining and this is attributed to expansion and inefficient management of the supply chain(Woolworth’s Limited, 2016 p.25). This has been due to expansion though the audit risk is still quite real if it becomes misstated for the shareholder’s benefit.

Market Risks

The company is not able to defend against the increased level of competition from new entrants to the market. This leaves the company vulnerable to attack of its market share. There is also a general weakening of the general economic activity including the retail sector within the local market. This results in an steady reduction of the overall sales. It is not just a reduction of the consumer ability to purchase brand products, it also implies a weakening or dilution to the retail brand and would encourage cases of financial misstatement.

Audit Risk Models and Impact of the Inherent Risks

The audit risk model refers to the risk an auditor may issue an opinion on the nature of the financial statements. An auditing opinion which is not appropriate may refer to issuing an unqualified audit report where qualification is justified with reasonable cause. It may also be failure to emphasize a significant matter concerning the audit report. Audit risk could be considered a product of the different risks come across in the audit performance. When keeping the overall audit risk of engagement below the limit, the auditor tries to assess the levels of risk which concern each part of the audit risks. As such, the inherent risks is connected to different risk formations which are the control and detection risks.

The control risk refers to material misstatement within the financial statements that happen during absence within the operation of controls of the entity while the detection risk is when the auditors do not find the material misstatement within the financial statements (Prasad, 2012). As stated, the inherent risks for Woolworth’s include the cash flow, dividends, market and operational risks. If the problem is stopped at the inherent risk stage, then it does not become an exponentially building problem as such, and this makes for an acceptable level of auditing risk.

The operational risks include the fact that the transitional programs are not providing advantages considering there is an inability in providing change. There is also trouble in management of the inventory concerning the retail departments affecting not only the competition but also the retail operations, which may deal with inventory. There is an inherent risk concerning stating of the transactions accurately especially considering these are current operations which may lead to increase of the control risk and definitely the detection risk. The implication is a high level of auditing risk. When it comes to cash flow, the declines have been noted for the investment activities and capital purchases like property, equipment and plants.

This is a high risk department however, there is a valid reason because of previous investment in the previous years. decreased risk in this department also means a decreased level of risk for the material transaction misstatements evaluated by control risk and the risk of detection. The cash flow department does not entail high overall risk for the audit risk model. The dividends section revealed there was no proceeds shares issued during the year considering the group transitioned to using performance rights. This may be a point of high risk in order to restore confidence within the investors and the shareholders that they are still gaining returns. It may end up being a source of risk considering financial misstatements which snowballs to control and detection risk. As for the market risk, the company is not able to defend against the increased level of competition from other entrants. It bears little consequence to cases of misstatements and as such, will not cause a lot of control and probably negligible detection risks. The overall audit risk for the last factor will be quite minimal.

Reference list

Woolworth’s Limited. 2016 Annual Report. Woolworth’s Group. Retrieved online <

http://www.woolworthslimited.com.au/icms_docs/185841_Annual_Report_2016.pdf>

Prasad, Kali. The Components of Audit Risk. The Hindu Business Line. Feb 19, 2012. Retrieved

online <http://www.thehindubusinessline.com/news/education/the-components-of-audit-

risk/article2910361.ece>