Accounting, Finance, SPSS Coursework: Inherent Risk, Tests of Controls, and Substantive Procedures

Inherent Risks, Tests Of Controls, And Substantive Procedures
Name Strayer UniversityInstructor Date
1. Ratios for 2021 and 2022
2. High inherent risk
Inherent risks reflects risks of the features of the internal control system (ICS) and the susceptibility of the balance of an account or transactions to a misstatement including material misstatements assuming there are no related internal controls (Johnson, 2019). The accounts payable by $7,575,081 from 31st October 2021 to 31st October 2022, but there were no big differences on 31st January 2021 and 2022.
The accounts payable is a high inherent risk and a focus on the completeness assertion ought to be investigated for the account balance on 31st October 2021 and 2022. Fraud and error on accounts payable accounts is one area that often leads to misstatement on accounts with frequent cash use (Fambrough, 2019). Scrutiny of large payable, unrecorded liabilities, duplicate payment and the possibility of expense fraud can provide insights on the strength of control procedures for account payable and expenses. Obtaining accounts payable confirmation, examining the supporting documents for accounts payable and related accounts and reconciling the supplier’s statements may be necessary.
The payable as a percentage of total assets is another inherent risk as there has been a change on 31st October 2022 when compared to the other periods. A higher ratio would indicate increased payables or decreased in total asset. The lower the payable as a percentage of total assets, the better it is. Yet still, there is a need to investigate the case for the decrease in the ratio.
3. The tests of controls
Tests of controls are one of the audit procedures that test the effectiveness of internal controls to prevent material misstatements or detect them. The auditor relies on client’s strong ICS. Testing that the financial statements are properly prepared and there is an approval of payment and purchases as well as documents on fixed assets and inventories. There is a high risk of misappropriating the inventory and cash, and there is a need to focus on the existence and valuation of the cash and inventory accounts. Cash and some inventory are easily portable and retailer sells some fast-moving goods and there is increased risk of theft. Misappropriation of inventory also affects the cost of goods sold and ensuring that complete and accurate accounting records will verify the existence and accuracy of the inventory.