Auditing Essay Example | Topics and Well Written Essays - 1250 words - 5

Auditing - Essay Example Fraud refers to intentional miscalculations in the financial records. An unqualified opinion concludes that the financial reports are of true and fair view of the actual state of the ground. Audit risk is made up of inherent, control and detection risks. Inherent risk is more likely to occur where transactions are of a complex nature or in situations where financial estimates are through judgment. This type of risk is the worst case as all controls have failed. Control risk is the probability of a material misstatement occurs in management assertion about a group of transactions or accounts. The risk of detection entails the severity and the procedures carried out by the auditor will not detect material errors that have occurred in the accounting records. Since the financial statement cannot be as a whole, the auditor has to identify areas of heightened financial risks (Earley and Phillips, 2008). Cash and cash equivalents form a heightened area of risk. Cash at hand can easily be lost in fraud related activities as it is a liquid asset. The material misstatement of cash and cash equivalent increases the amount of assets in the company that would hinder the auditor from giving the actual state of the company. The amount of cash balance is â‚ ¬ 15.2m a decrease from the previous year’s balance of â‚ ¬ 20.5m. The auditor should use analytical tests to determine whether the expenditures attributed to cash are true. Some compliance tests include: the comparison of previous years balances and significant changes in amounts and deviations from the trends. Accounts opened and closed throughout the year should be investigated. Computations of quick current ratio should be taken and compared to other previous years. Lack of consistency in these ratios may indicate a material misstatement in the cash and cash equivalent account