In the field of financial and the management accounting, the inherent risks can be given the definition as the likelihood of unfitting or information that is misleading in the statement pertaining to accounting that result from other things apart from controls failure (Kwok et al 2005). For instance, one of the inherent risk is when the accountants are forced to make use of large amounts beyond the normal amount used in judgment and for approximation or where there is involvement of financial instruments that are complex. There are numerous key inherent risk factors that have the possibility of impacting the audit of the CIMB Bank for the year ending on 31st December 2015. To have an in-depth understanding of the inherent risks that CIMB might be faced with, we can first put it within the framework of analysis of the audit risk. Audit risk can be said to be the error of the risk that occurs from carrying out of an audit and can always be broken into three main components. The inherent risk, the control risk and the detection risk. In my paper, I am going to undertake an in-depth analysis of inherent risks that the CIMB Bank might face in the process of its operations in the year that ends on 31st December 2015.
Key Inherent Risk Factors that Could Impact the Audits of the CIMB Bank
During the financial year for the CIMB Bank that ends on the 31st December of 2015, the bank has the possibility of being faced with the following forms of inherent risks:
Unrecorded liabilities-these are the errors that results from the controls that are ineffective and have relationship to the recording of the receipts of the goods and the services being offered by the CIBM Bank. It can also result from the financial reporting that is fraudulent which results from the recognition of the expenses and the liabilities in the proper stipulated period.
The purchase agreement that are non-cancelable- There is a necessity for the CIBM bank to have a recognition of the losses that result from the decline in the market value that is regarded as being permanent.
The next inherent risk is the capitalization of the expenses
The results of the previous audits can also lead to an impact on the audits of the CIMB in the ending financial year. For instance, if there was misstatements in the materials and hence they were realized in the earlier audit, there is a likelihood that the same type of misstatement of materials might have occurred in the just concluding financial year. Lets take for an example that, in the case of material misstatement, in an individual or in a total case, in the inventory regarding pricing had been realized in the earlier audit, the auditors will have the habit of using a higher inherent risk in the audit of the current financial year.
Finally the conduction of the non-routine transactions is also one of the inherent risk factors that have an effect on the CIMB bank. Non-routine or the unusual transactions are the transactions that are related to the losses incurred as a result of fires, the acquisitions of major properties, the write-offs of the assets and the implementation of the new product (Albrecht 2007). When there is a recording of the transactions that may be incurred in an infrequent manner, the client may lack sufficient and the enough experiences of putting them down in a correct way (Cornelisse 2016).
Why I considered the Issues stated above May Create the Risk of Potential Misstatements in the Financial Statements for the CIBM in the year ending on 31st December 2015.
Capitalization of the expenses
The expenses for the CIBM Bank can be expressed in the chronology by which they are being incurred with or there is a possibility that they can be capitalized. A company is said to capitalize the price of purchasing some resource only in the case that the resource will provide the company with a huge amount of benefits in a period exceeding one cycle. In this case, the expenses are seen as the asset for the CIBM bank and hence, the bank records them on the balancing sheet. This therefore shows that the capitalization of the banks expenses have a greater possibility of impacting the balance sheet for the firm, the income statements and the statement concerning the cash flow within the CIBM bank. The capitalization of the expenses in the firm will also lead to a greater effect in the financial ratios for the company. In the case of a wrong entry of the capitalization of the expenses, then means that the balancing sheets for the CIBM Bank will not match. This means that this will lead to a higher risk being incurred hence a potential misstatement in the CIBM banks financial statement for the financial year ending 31st December 2015.
Unrecorded Liabilities by the CIMB Bank
This is the error that normally results from the controls that are ineffective and the ones that are related to the recording of the receipts of the services and the goods for the CIBM bank. This implies that there is a possibility that they will be included in the financial statements of the CIMB bank. This shows that the error will be carried all the way hence a possibility of misstatements of the final financial statement for the CIMB bank. As the bank will only tend to frequently give a report the financial reporting that will result from the expenses and the liabilities of the ending financial year. This is great and a likely potential risk concerning misstatements.
The Non-Cancelable Agreements during Purchase by the CIMB Bank
The auditing of the financial statements for CIMB bank may not take into consideration the risks that may result from the agreements of purchase that cannot be cancelled. These agreements can lead to losses that if not realized at an early stage there can be a serious risk in the potential misstatements in the financial statements for the bank for the financial year that is stipulated to end on 31st December 2015. The losses in this case can arise from the declining market value and numerous other factors that directly or indirectly affect the market under which the CIMB operates (Albrecht & Stice 2011). This can also result to the instance where there is the need for financial transactions that require calculations that are very complex. These types of calculations have the possibility of being inherently being misstated.
Results from the Earlier Audits by the CIMB
In the case when the auditors of the earlier financial year for the CIMB failed to determine the possibility of conducting pervasive changes to the timing, the nature of the extent of the procedures used in auditing, then this effect can always be carried over to the next financial year. This therefore call for the auditors to be very attentive on the financial entries and the valuations of the many significant accounts that are being currently held by the Bank.
The overall assessment of the Inherent Risks for the CIMB Bank in the financial year ending on 31st December 2015
There is always an urgency for the auditors to undertake a determination of risks in the case when they are handling the financial issues of their clients. In this case, I will assess the inherent risks that the CIMB Bank is currently being faced with in the wake of the firm finishing its financial year on 31st December 2015. One thing that I will have to overlook is whether the CIMB bank has proper internal controls that are aimed to moderate the inherent risks that they are currently being faced with. I will also have to evaluate the level at which the CIMB bank is susceptible to the assertions of the financial statements to the material misstatement (Messier et al 2000).
The first one is the assessment of the unrecorded liability. Liability is given the definition of as the obligation of the entity that arise from the previous events of the firm, in this case are the events that arise from the past events of the CIMB banks past. To assess the unrecorded liabilities I will have to conduct a check on all of the audit assertions for the CIMB bank. The valuation assertion will enable me to have a verification of whether the CIMB banks accounts that are payable have a value in accordance with the IFRS (Fischer et al 2008). Presentation assertion will enable me to verify if the liability of the accounts balances are presented properly and even if they are disclosed. I will then list the account payable under the current liability of the CIMB bank. I will also check if the purchases have listings in the cost of calculation with relation to the services that the bank offers. I will also ensure that the transactions that have been done in an unusual manner are disclosed, for example, the transactions of the related parties that have an involvement with the counts payable. Later, I will have to obtain the CIMB management representation letter that has the assertions that relates to the accounts payable and the purchases.
The second assessment that I will carry out is that relating to the Capitalization of the expenses for the CIMB Bank. I will have to ensure that there is some matching principle. The matching principle tends to try to match the expense with the revenues of the CIMB bank. This implies that I will try to match the cost of the services and the items of the bank with relation to the time scale of which it has been used with opposition to when there was incursion of the cost (Albrecht 2007). There are some assets that are long living and will be able to generate revenue in the time when it will remain to be useful. I will then be amortized over some specific period of time. For instance, in the case of a bank setting, the main costs and the expenses that it will have to incur is to pay the salaries of the employees, rents for the building of location and the
To carry out the assessment on the risks that can result from the effects of earlier audits involved, I will have to undertake the following steps. I will have to assess if the CIMB bank has the tradition of carrying out continuous auditing and continuous monitoring of their accounts, their financial structure (Belhocine 2009). For instance, what are the possible misstatements that have arose from the previous audit reports and the possibility of the effect that they can have on the audit report of the just concluded on 31st of December 2015. Because the activities of the continuous audit vary from the ones taking place in the process of traditional audit, there are some audit principles that have proved necessary to be re-conceptualized. This is something that comes as a result of the continuous auditing that is known to happen in the middle of some given transaction (Davis et al 2002). I will have to view the processes that the CIMB uses in the preparation of their audit reports. The chronology and the assessment of the other inherent factors will also be carried out in the same manner as the previous situations and occasions.
Audit Risk Model
Audit Risk (AR) is the risk that the auditor is expected to give him/her opinion about with an opinion that not qualified. In this instance we are going to assess the inherent risk factors that will be able to impact on the evidence mix for the planning of the audit of CIMB Bank. The evidence mix of auditing is referred to as the evidence that is gotten in the process of carrying out the financial audit of a company like the CIMB and is always recorded in the working papers of the audit. There will be a huge impact that how I conduct assessment of the risk factors that the CIMB Bank is currently being faced with. They include:
The Non-Cancelable agreements during purchase- the evidence mix in this case that as an auditor I will be able to give are the percentages showing the percentages in the fluctuati...
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