Your audit client is "Care for the People" (CftP), a for-profit organisation. CftP's main business is to make short-term loans to socially aware businesses, with terms ranging from 1-3 years. The finance director of CftP is very passionate and explains that because each social business is different, the terms and structure of each loan must be different. As the social businesses provide services (rather than goods) the loans are unsecured.

1/ From your assessment of the business risk of CftP, provide:

a) Your initial assessment of Inherent Risk in relation to the accuracy, valuation and allocation of loans receivable (i.e. high, medium, or low);

b) the reason for your assessment; and

c) one example of additional information that would help you to finalise your assessment of the Inherent Risk for the accuracy, valuation and allocation of loans receivable.

2/ CftP's chief accountant tells you that they review the valuation of loans at the end of each month.

a) State whether this is a preventative or detective control and explain your answer; and

b) Provide one example of a step this control should include and state how you would test this control

3/ Based on your preliminary understanding of the business of CftP (i.e. before conducting any testing), you have assessed inherent risk (IR) as high and control risk (CR) as low in relation to the accuracy, valuation, and allocation of accounts payable. Discuss the appropriate determination of detection risk (DR) and the consequent nature, timing, and extent of audit procedures. 

4/ After meeting the finance director of CftP you notice that they seem to be very irritated by the time it takes to answer your questions. You mention this to your audit manager, who replies "It is silly of executives to be angry with us auditors. After all, we're here to help executives achieve their goals". Briefly explain whether this statement is correct with reference to Agency Theory. 

Answer rating: 100% (QA)

Q1 a Low b As the loans are shortterm and are carefully examined per inquiry there is a low risk that they may be misstated c Financial business model Q2 a Detective control b The review should includ... View the full answer