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Financial Statement Risks



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Financial Statement Risks:

Financial Accounting/Reporting Risk

Audit Risk (auditor’s concern)

Related Accounts and Assertions

Potential
Effect on the Audit Plan

1. Inventory turnover is much lower than the industry

Overstatement of inventory due to obsolescence. Is inventory properly valued at the lower of cost or market?

Inventory:
Valuation
Existence

Inventory: Examine ratios and trends to understand inventory cost/obsolescence concern. Increase testing during our year-end physical inventory observation (existence) as well as our testing related to inventory pricing/cost.

2. Value of intangible assets and goodwill


Goodwill stated on the financial statement actually may be lower or don`t even exist

Goodwill:
Impairment test for goodwill



The audit assertion of existence relies on ensuring that the goodwill figures mentioned on the financial statement actually exist by the company. Even though goodwill is an intangible asset, it is essential to ensure that the goodwill declared on the financial statement is actually justifiable through proper logic and rationale.

3. Current Ratio is much lower than the industry


Experience of the management or the experts involved by the management to perform the valuation could also affect the risk of auditing this account.

Current assets Current liabilities:

Usually, Other Current Assets should be rather straightforward and the risk is often low. However, depending on the nature of the Other Current Assets, there might still be a certain risk in terms of adherence to the relevant account policies and the valuation of the Other Current Assets.



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