Inherent Risks, Tests Of Controls, And Substantive Procedures

Inherent Risks, Tests Of Controls, And Substantive Procedures
Name Course Instructor Date
1. Calculate the required ratios for all given years.

Jan 2022

Jan 2021

Accounts payable turnover



365/ (COS/ Average accounts payable)

33.82

36.73


Jan 2022

Jan 2021

Cost of goods sold to average accounts payable



COGS/ Average accounts payable

10.79

9.94


Jan 2022

Jan 2021

Payables as a percentage of total assets



Accounts payable/ Total assets

9.21%

9.28%


Jan 2022

Jan 2021

Current Ratio



Current assets/ Current liabilities

2.21

1.84

2. Identify and explain high inherent risk assertions.
Inherent risks are inherent to the Internal Control System (ICS) characteristics. They reflect 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 on 31 October 2021 was $22,561,538 but decreased to $ 14,986,457 on 31 October 2022, but there were no big differences on 31 January 2021 and 2022.
The completeness assertion for accounts payable is a high inherent risk that needs to be investigated go-en the difference in the account balance on 31 October 2021 and 2022. Fraud and error on accounts payable accounts is one area that often leads to misstatement on specific accounts with frequent cash use (Fambrough, 2019). Scrutiny of large payables, unrecorded liabilities, duplicate payment, and the possibility of expense fraud can provide insights on the strength of the 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 31 October 2022 compared to the other periods. A higher ratio would indicate increased payables or decreased asset sales. 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. Analyze and conclude the nature and extent of tests of controls.
Tests of controls are one of the audit procedures that test internal controls' effectiveness to prevent material misstatements or detect them. When the internal control sys...