Inherent Risk

Justification

Assertion and Ledger Accounts Impacted

Audit Procedure

1)Handling derivative instruments and carrying derivative valuation adjustments of CBA involves inherent risk

As per annual report of FY 2017, CBI’s trading income is registered to be $1149 million that is due to desirable derivative valuation adjustments. Complex transactions in the financial service segment with exposure in derivative instruments bears inherent risk (William Jr et al. 2016).

Assertions regarding transaction classes are:

-Occurrence-Firm’s transactions as well as events that have been registered have occurred and pertain to the company. This risk also affects this assertion (William Jr et al.  2016). 

-Completeness-Completeness refers recording of transaction amounts and other data that needs to be registered. In this case this might get affected in this case

-Accuracy- level of accuracy refers to recording of transactions as well as events correctly. In this case, managing derivative instruments and adjusting the same might affect the level of accuracy.

Cut off- It is also important that transactions have been registered at the correct period of accounting.

Accounts that might get affected include the assets and liabilities

The assessor might require particular knowledge for planning as well as performing audit procedures for specific assertions.

-In this case, the assessor might consider obtaining thorough understanding regarding the information system for particularly derivatives as well as securities of the entity.

-It is important to recognize controls positioned by service corporations that delivers service and are a part of the information system for mainly derivatives as well as securities

– Comprehending application of the accounting principles for specific assertions regarding derivatives that again might require auditor to have knowledge owing to intricacy of principles

-Understanding the precise process of determination of particularly fair value of the derivatives counting the suitability of various models of valuation.

-Examining both inherent as well as control risk for specific assertions regarding the derivatives utilized in hedging activities.

2) Inherent risk is involved in use of estimates from management

Estimation techniques of Fair value (for hedging and IFRS volatility, treasury shares valuation, interest bearing liabilities and many others) that is used by management of CBA poses inherent risk as this accounting estimates using fair value are difficult in nature

In order to understand the reasonableness of the accounting estimates that are used by the management, it is important to identify the data source as well as factors used in estimations and assumptions, and thereafter consider whether the factors are relevant, consistent, reliable as well as sufficient for the purpose (William Jr et al.  2016). Therefore,  the relevant assertions that are related to the estimate

Accounts: Assets estimated at fair value through the statement of income, liabilities at fair value.

Auditors might examine and interview the decision makers of the corporation regarding the use of estimation techniques to lessen error (William Jr et al. 2016). The critical steps/procedures in this regard comprise of formal along with documented evaluation of how the items that are subject to estimation are recognized. Also, the assessor has the need to see the way the client recognizes and examines uncertainty of estimation, susceptibility of particularly accounting estimates. Further, the auditor might consider the way the company has recognized various new items that are necessarily subject to particular estimates. In addition to this, the assessor might consider examination of the source data that is utilized and based upon which estimate is based.

3) CBA has a business relationship with the auditors PricewaterhouseCoopers (PwC) for audit and non-audit services, and there are repeated engagements with the assessors that can create inherent risk.

The repeated engagement with the auditor might lead to inherent risk as repeated engagement might cause overconfidence owing to personal associations.

Assertions that might get affected include:

-Completeness: Assets/liabilities that were supposed to be registered have been identified

-Classification: This calls for proper classification and fair presentation of transactions in the financial statements. Repeated engagements might hamper that as well.

-Accuracy- in this case the accuracy that refers to accurate recording of transactions in the financial statements might get affected due to overconfidence of the assessor

Revenue and expenditure accounts, different accounts of assets and liabilities

Auditors essentially develop knowledge as well as experience after engaging and working with their client for several number of years. Auditors might utilize this knowledge to lower the level of risk

 (Waldron 2016). 

Inherent Risk

Justification

Assertion and Ledger Accounts Impacted

Audit Procedure

The retailer faces inherent risk of increase in competition

The company is operating in a crowded space operating in the home appliance areas. The market in which the business concern operates mainly remain competitive and any enhanced competition from new as well as existing competitors might lead to decline in sales as well as profitability of the firm. The volatile market in the current period poses inherent threat of declines in sales. In addition to this, competition is also faced by the firm from different online platforms although the company enhanced online presence by around 35%.

Revenue and sales account

Assertions Impacted:

-Occurrence: Transactions identified in the financial statements have the need to actually occur. The risk of competition might lead to overstatement of earnings and might affect the assertion of occurrence (Ge et al. 2016).

Completeness: Similarly completeness that requires that the assets/liabilities that were thought to be registered have been identified in the financial statements (Ge et al. 2016).

-The auditor might consider the level of completion faced by the company in that specific industry, size of the client in comparison to that of the competitors

-The assessor might also evaluate the reputation of the client among all their peers and the support of the government for the company functioning in that industry.

-Another important consideration is the analysis of the demand level of the products and for products/services delivered by the company and diverse facets that exert impact on the demand.

-In this case audit procedure also includes consideration of the influence of the government support. This issue is important when the company faces considerable global competition.

-Evaluation also needs to be carried out regarding the influence of the regulations of the government on the company along with the industry in which the company functions (Fu et al.  2015).

-The audit procedure might include proper monitoring of pricing and market share data, monitoring of complaints, customer service and engagement analytics (Waldron 2016).

The retailer faces worry regarding damage of reputation.

There exists business risk of loss or else erosion of reputation although business of JB hi-fi enjoys both loyalty as well as trust with clients (Arens et al. 2016). Essentially, a decrease in high level of loyalty as well as trust can compromise the overall market leading position of specifically businesses of JB hi-fi  and affect the operating along with financial performance of the entire group. As per annual report, this can happen owing to information security breach of IT system, violation  of the regulatory or legislator necessities and many others

Profit and loss accounts, sales account

Assertions Impacted:

-Occurrence as well as rights and obligations: This assertion refers to divulged events as well as transactions that have actually occurred and at the same pertain to the specific entity. The loss of reputation might affect this specific assertion (Fu et al.  2015).

-Completeness: This refers to different disclosures that should have been counted in the financial pronouncement have been included (Ge et al. 2016). This specific risk might therefore affect this assertion.

–

It is important to monitor the overall reputational risk in which social media might have profound influence. Different types of risk divisions that appear to be a logical fit or can permit business units to generate to risk management schemes. Essentially, reputation risk audit have the need to analyse internal as well as external reputation risk. This includes development of comprehensive action plan that include formulation of strategies as well as strategies for prioritized risks, timeline as well as execution, proper monitoring along with measurement. Thereafter, audit procedure also includes scenario planning that includes planning session as per crisis scenario (Arens et al. 2016).

Digital Risk Structure (ecommerce, particular social media presence of the company and online risks)

JB hi-fi has different digital assets across different channels namely e-commerce sites, mobile apps as well as IT infrastructure that is owned and at the same time controlled by the corporation (Knechel and Salterio 2016). Opinions of individuals regarding the company’s digital assets are necessarily outside the purview of the direct control of the firm.

Assertions affected include the following:

– Occurrence: This assertion refers to recording of both transactions as well as events. This digital risk might affect this assertion (Fu et al.  2015).

Revenue account, profit and loss accounts

Audit procedure might include analysis of the capability of the firm to properly apprehend and at the same time respond to specific digital risks of the retailer.

Effectual management of digital risk calls for potential in different areas, counting new competencies namely data analytics along with risk sensing (Knechel and Salterio 2016).

Thus, the mitigating this digital risk can be considered to be very difficult. So, in this regard support technology can also help in implementation of an effectual strategy. Utilizing this strategy can help in creating a second defence layer mainly during the time of audit. Assessors might in this case consider scrutinizing internal control of the company.

-Cross functional communication might also help auditor in addressing particular risk management objectives of the firm and identify the assets that are very critical to protect (Fu et al.  2015)

-Also, auditor might also take into account the cyber insurance and coverage of the firm