Walmart Hypermarket Co. (WHC or the Entity) owns and operates for offering foods and technology. WHC was formed as a corporation in the 1970s, and all of its outstanding common stock is held by one individual. WHC’s management team consists of the stockholder and his two brothers, each of whom operate one of the Entity’s three branches. WHC’s bookkeeper, who is responsible for financial reporting, is the stockholder’s nephew.
WHC operates in a highly competitive industry with continual price pressure from both suppliers and customers. They also undergo periodic onsite inspections by the local Health Department. Two of the Entity’s three branches are located in buildings owned by WHC (the third branch is leased from an unrelated party). The hypermarkets are all located within a 10-mile radius and have historically been very profitable.
However, a downturn in the local economy has led to population flight, resulting in reduced demand and net losses for the past two years. The leased branch has been a loss leader for WHC, and the stockholder has indicated that the Entity will consider closing that branch if performance does not improve.
WHC has no investment accounts, and their checking and savings accounts have been used to keep the Entity in business for the past two years. While those accounts remain material to the financial statements, WHC has become increasingly reliant on a line of credit (LOC) from their local bank to meet their obligations. The LOC is renewable on an annual basis and renewal is dependent on the Entity maintaining a quick ratio ([Cash + Marketable Securities + Accounts Receivable] / Current Liabilities) of at least 0.5.
The Entity recognizes revenue at the time food is sold to customers and has no accounts receivable. The members of the management team receive bonuses that are tied to the revenue generated by their respective branches.
WHC has no documented controls, and the auditor does not intend to reduce the extent of audit procedures by relying on the operating effectiveness of controls.
The bookkeeper is the only member of the accounting department, and the auditor’s experience in past audits has been that the bookkeeper is competent to properly record routine transactions. The management team establishes an operating budget each year and the stockholder compares it to actual results on a monthly basis. The stockholder regularly communicates the importance of accurate reporting to the bookkeeper and follows up on any discrepancies.
The bookkeeper reconciles all bank accounts each month and provides the bank reconciliations to the stockholder for review. The authority to sign checks is limited to the bookkeeper and the stockholder, and the checks are issued sequentially. The stockholder reviews the monthly payroll, comparing hours to time sheets, and manually signs payroll checks.

The entity has historically engaged the auditor to perform non-attest services by assisting with fixed asset depreciation and financial statement preparation, but starting in the year under audit, these tasks were performed by the bookkeeper.

1 Assume that the controls described in the narrative have been appropriately designed and implemented. Identify the risks that are relevant to the audit and classify them as financial statement- or assertion-level risks.

2 Based on the information provided, assess Inherent Risk (IR), Control Risk (CR) and the Risk of Material Misstatement (RMM) for each class of transaction, account, balance or disclosure.

Answer rating: 100% (QA)

Audit risk refers to the likelihood that a cloth misstatement is present within the financial statements of the corporate while an auditor from an aud... View the full answer