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4.1 Audit risk and revenue |Moderate |LO 1 Ajax Finance Lid. provides small- and medium-sized personal, car, and business loans to clients. It has been operating for more than 10 years and run throughout its life by Bill Schultz. Bil has been the public face of the finance company, appearing in most of its television and radio advertisements. He has developed a reputation as a friend of the "little person" who has been mistreated by the large finance companies and banks. Ajax's major revenue stream is generated by obtaining large amounts on the wholesale money market and lending in small amounts to retail customers. Margins are tight, and the business is run as a "no frills" service. Offices are modestly furnished and the mobile lenders drive small, basic cars when visiting clients. Ajax prides itself on full disclosure to its clients, and all fees and services are explained in writing to clients before loans are finalized. However, although full disclosure is made, clients who do not read the documents closely can be surprised by the high exit charges when they wish to make early repayments or transfer their business elsewhere. Ajax's mobile lenders are paid on a commission basis; they earn more when they write more loans. For example, they are encouraged to sell credit cards to any person seeking a personal loan. Ajax receives a commission payment from the credit card companies when it sells a new card and Ajax also receives a small percentage of the interest charges paid by clients on the credit card. Required What are the inherent and control risks for Ajax's revenue? Explain which assertions are most at risk. 4.2 Audit risk and inventory Basic LO 1 Cheap-as-Chips stocks thousands of items in inventory that range in value from $1 to $100. The inventory on hand represents a material portion of current assets. The merchandise items change according to the season and the promotional theme adopted by the stores' management for the year. Merchandise is ordered up to four months in advance from Chinese and Korean suppliers. These special orders require Cheap-as-Chips to give the suppliers substantial deposits upon placement of the orders. Required What are the inherent risks for Cheap-as-Chips' inventory? Discuss the assertions being made by management about the inventory. Source: Adapted from the Institute of Chartered Accountants Australia's CA Program's Audit and Assurance Exam, December 2010. Provided courtesy of Chartered Accountants Australia and New Zealand. 4.3 Control risk Basic LO 1 Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to sales revenue. A problem with its control system means that the proper allocation of revenue between sales revenue recorded in the profit and loss and the deferred revenue account balance in the balance sheet does not always occur. The auditor is considering conducting additional substantive testing to test whether the sales transactions have been properly classified. Required Describe how the balance sheet and income statement may be at risk of material misstatement if the controls regarding the proper allocation of revenue are not functioning properly. Source: Adapted from the Institute of Chartered Accountants Austre a's CA Program's Audit and Assurance Exam, December 2010. Provided courtesy of Chartered Accountants Australia and New Zealand
