Audit Assignment Example | Topics and Well Written Essays - 1500 words

Audit - Assignment Example In the course of the financial statements audit, an auditor is subject to the audit risk and he/she commits it if his/her audit opinion is inappropriate. This arises where the financial statements are materially misstated, making them be presented unfairly and fail to conform with the applicable financial reporting framework. To this extent, this paper aims at identifying the possible audit risks as presented in the case of Cupcake Co and the possible actions that the auditor is likely to take in each case. It will also discuss the benefits that accrue from conducting a risk assessment at the planning stage of the audit. According to this paper’s analysis, Cupcake Co is likely to suffer the loss of cash through theft. As presented in the case, the company keeps a sufficiently large amount of cash for the purposes of giving back change. The internal control of Cupcake Co has failed in its control over the cash, making it susceptible to improper diversions, as well as being misused. From the case, there was no separation of duties in cash handling. When such a case subsists such that a single department or individual is entrusted with both asset custody and their record keeping, there is a potential risk of frauds, in that, such assets can be stolen. In addition, accounting records falsifications to hide events can be done. In such a scenario, the management would have difficulties in holding a specific employee accountable in case errors or fraud is detected. To respond to this audit risk, the auditor can ask the management of Cupcake Co to state the internal controls they use to control their cash. The auditor will seek clarification on whether duties are segregated in the handling of cash. The auditor can also perform some analytical procedures such as the prevailing trend in the cash balance relative to the previous year’s balances. There could be an audit risk arising from the