RISK ASSESSMENT

Risk indicator

Operations in regions or countries with strict regulations /different

1
regulations to SA

Liquidity issues
− Operating losses
− Loss of significant customers or suppliers
− Constraints on availability of capital and credit
2 − Changes or loss of key personnel
− Pending significant litigation
− Operations in regions or countries that are economically unstable
− Operating in a competitive environment
− Dependent on technology

3
Changes in the industry to which management do not want to comply

4 Expanding into new locations/decentralisation of the entity

5 Lack of personnel with appropriate accounting and financial reporting

skills

6 New client
7 Management’s integrity questionable

8 Use of work of third party (component auditor [ISA 600]/ internal auditor
[ISA 610]/expert [ISA620])

9 Management receive bonuses driven by profits

10 Financials to be used to obtain financing from the bank

11 Tight deadline

12 Listed on the JSE Ltd

13 Change of the accounting software

14 History of errors or significant adjustment at year end

15 Managers are the owners of the entity

16
Entity required to produce group financial statements/Different
accounting policies in a group/Different accounting systems/reporting
dates

Obtaining control of another company

Description of risk

The AFS may be materially misstated, as the entity might not comply properly with the relevant laws and regulations,
possibly resulting in material misstatements of unrecorded liabilities, expenses, etc. For instance, JSE regulations,
environmental laws, labours laws, etc.

The AFS may be materially misstated, as the going concern assumption might not be properly accounted for and/or
disclose due to (relevant risk indicator).

The AFS may be materially misstated because of the entity engaging in fraudulent financial reporting to hide a going
concern threat due to (relevant risk indicator).

The AFS may be fraudulently materially misstated, as the entity might not comply with the changes to laws (Companies
Act, King IV, etc.), in the industry within which it operates, indicating lack of integrity by management.

The AFS may be materially misstated, as the control environment in other locations might not be operating effectively
resulting in fraudulent activities or errors.

The AFS may be materially misstated, as errors might be occurring in the preparation of financial records due to
personnel that lack accounting skills.

The AFS may be materially misstated, as material misstatements and errors could go undetected as we are not familiar
with the client.

The AFS may be fraudulently materially misstated by management because the new auditors have limited knowledge of
the entity.
The AFS may be fraudulently materially misstated by management because the new auditors have limited knowledge of
the entity.

Management’s integrity questionable

The AFS may be materially misstated, as the third party might not be competent and appropriately qualified to perform
the work required for audit evidence.

The AFS may be materially misstated, as directors might engage in fraudulent financial reporting, i.e. overstatement of
revenue and understatement of expenses to maximise bonuses.

The AFS may be materially misstated, as directors might engage in fraudulent financial reporting, i.e. overstatement of
assets and profits and under-statement of liabilities and expenses to ensure that financing will be obtained.

The AFS may be materially misstated, as management might not have sufficient time to properly account and disclose
post-balance-sheet events (subsequent events).

There is a risk that the auditor might not have sufficient time to obtain the audit evidence, resulting in material
misstatement going undetected.

The AFS might be materially misstated, as the company might not comply with JSE regulations, resulting in the delisting
of the company and affecting the going concern of the company.

The AFS may be materially misstated, as the financial data might not be properly transferred from the old accounting
system to the new accounting system.
The AFS may be materially misstated due to error, as the current financial statements might include material
misstatements.

The AFS may be materially misstated, as directors might engage in fraudulent financial reporting to present the
performance and position of the entity in a more favourable light.

The AFS may be materially misstated, as errors might occur during consolidation because it involves an intricate process
possibly resulting in material misstatements.

The AFS may be materially misstated, as related party transactions might not be eliminated on consolidation.

The AFS may be materially misstated, as the consolidation might not be properly done in terms of IAS 27.

The AFS may be materially misstated, as IFRS 3/IFRS 10 might not be properly accounted for.
Component of audit risk

Inherent risk