Question 1: (10 marks) The Artisan Ltd is an online retailer of a broad range of

Question

Question 1: (10 marks)
The Artisan Ltd is an online retailer of a broad range of art and craft products. You are an audit
senior at the firm Peter Parker & Co and are planning the financial report audit for the year
ended 30 June 2015. The Artisan is a new client to your firm and this is the first year end since
you were appointed. The following information was obtained from a meeting with the CEO,
Katrina Wool.
The company has managed to ride a wave of renewed interest by younger people in arts and
crafts and the revenue for 2015 is approximately $3.2 million. This continues a trend that has
seen revenue increase by between 20% and 30% consistently for the six years since the
company was started by Katrina and her tennis partner Jade Garrard who is the COO. Profits in
2015 are $0.2 million and have not increased significantly in four years despite the increased
turnover. In 2016 there are plans to broaden the range of products sold to include bedding,
curtains and household furnishings.
Rapid expansion has put pressure on the company’s various systems, not least of which is the
online sales order system. The Artisan do not have their own in-house IT function relying on
Katrina’s sister Kristine who is responsible for accounting, IT, HR, payroll and general office
management.
You are aware that in previous years errors had been detected at the audit stage, partly due to IT
system errors and partly due to Kristine’s inexperience as an accountant. Katrina and Kristine
are confident that any errors in the financial report will be immaterial and not worth
investigating given how busy they are with the growing business.
As part of the growth of the business the company is looking to raise additional bank
borrowings to fund more warehouse space and invest in improvements to the IT systems.
Katrina has indicated that she needs the audit report signed before 15 September which is when
she will be meeting the bank to discuss the details of the loan.

Required:
Identify the issues that give rise to risks for the financial report audit you are about to
commence.

Explanation / Answer

Audit risk is a risk of giving a false opinion on the financial sttements by the auditory, it is completely relating to auditor,whreas business risk is a risk of underreporting or overreporting of the business resources. Audit risk includes any factors that may cause material misstatements or ommission in the financial statements. In the given case, profits are consistently decresing even thout increase in turnover. Even though Business risk and audit risk are dissimilar in nature, idnetifaction of business risk leads to control of audit risk and then reduce in audit risk.

From the above case, we can identify the following aufit risks for the year 2015

1. Company's turnover may be underreported

2. Expenditure may be overreported

3. Closing inventory may be under-reprorted

4. Material mistatements may happen regarding reporting of income and expenditure.  

5. IT system errors have to be idnetified and also has to check the accounting practices of Artisan Ltd.

6. Different ratios are to be checked and compared with the previous years figures

                  In the above said matters, auditor has to concentrate and material mistatements if any, are to be brought to the notice of Management. And the auditor has to adopt extensive audit procedures to detect errors and frauds.

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