Analytical review of current financials against prior year 2016 2015 % Change $’
ID: 2557468 • Letter: A
Question
Analytical review of current financials against prior year
2016
2015
% Change
$’000
$’000
INCOME / (EXPENSES)
Premiums
5,771,000
5,858,000
?
Operating Expenses
(2,323,000)
(2,397,000)
?
Claims Expenses
(3,710,000)
(3,843,000)
?
Payroll Costs
(880,000)
(680,000)
?
Investment Income
856,000
851,000
?
Net Income
2,088,000
940,000
?
ASSETS/ (LIABILITIES)
Fixed Assets
941,000
1,064,000
?
Investments
11,383.000
10,577,000
?
Outstanding Claim Settlement
(8,483,000)
(8,795,000)
?
Shareholders’ Equity
(6,088,000)
(4,993,000)
?
RATIOS
Net Margin
?
?
?
Return on Investment
?
?
?
On the social scene it was the talk that the Managing Director had deposited funds on a property in a high-scale community and that he was awaiting profit-share to pay off the outstanding amount.
Tom is a bit concerned that the level of audit work required will far exceed the cost for the audit. He has to be thinking of ways and means by which he can cut down the work. He hoped that the test of controls will allow him to reduce the level of testing.
Required:
1. Identify at least five (5) significant risk factors in the scenario above
2.State the type of risk for each risk noted in (1) above
3. Using your judgement, assign an appropriate risk rating for
Inherent Risk
Control Risk
Provide a brief justification for your risk rating. Use the table below as a guide to assign ratings
Risk Level
Risk Rating
High
80 – 100%
Medium
50% - 79%
Low
0% - 49%
4. Assuming that the Audit Risk is set to 10%, determine the rating for Detection Risk using the Audit Risk Model 5. If Detection Risk based on preliminary audit procedures is estimated as 15%; what should be done to achieve the desired level of audit risk. How will this impact on the concern expressed for a curtailment in audit costs? 6.Complete the table above for changes in the items noted
Make an appropriate comment against the change computed, indicating how the change will impact the audit risk assessment and the audit work to be done on that area
7.Compute the following ratios:
Net Margin
Return on Investments
Make an appropriate comment against the change computed indicating how the change will impact the risk assessment and audit work to be done on that area
2016
2015
% Change
$’000
$’000
INCOME / (EXPENSES)
Premiums
5,771,000
5,858,000
?
Operating Expenses
(2,323,000)
(2,397,000)
?
Claims Expenses
(3,710,000)
(3,843,000)
?
Payroll Costs
(880,000)
(680,000)
?
Investment Income
856,000
851,000
?
Net Income
2,088,000
940,000
?
ASSETS/ (LIABILITIES)
Fixed Assets
941,000
1,064,000
?
Investments
11,383.000
10,577,000
?
Outstanding Claim Settlement
(8,483,000)
(8,795,000)
?
Shareholders’ Equity
(6,088,000)
(4,993,000)
?
RATIOS
Net Margin
?
?
?
Return on Investment
?
?
?
Explanation / Answer
1 & 2
a) Risk of non receipt from managing director. - Conrol risk
b) Risk of improper valuation of investments. - Control risk
c) Risk in increased employee cost. - Conrol risk
d) Risk of improper valuation of outstanding claims. - Inherent risk
e) Risk of inflated income. - Inherent risk
3. Control risk = Medium 50%
Inherent risk = Medium 60%
4. AR = IR*CR*DR
AR = 50*60*10 = 30%
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