Seneca College

GBD 2

Part A
Risk Factor Explanaton
Few Internal Control Increase Risk – More errors can potentally exist in accountng
system
Debt Covenants Almost at Limit Increase Risk – Management may be motvated to manipulate
results to avoid breaching the covenant
Bonus Paid Based on Net Income Increase Risk – Management may be motvated to manipulate
results for beter compensaton
New Controller Increase Risk – New staff may not be familiar to business
processes and high probability of errors being entered into
accountng system
High Competton Increase Risk – High probability of business failure in achieving
results
No Inter Audit Department Increase Risk – Errors are not detected and informaton not
verifed before entered into accountng system
Owner Selling Shares Increase Risk – Owner may manipulate results for increase
personal gain
Previous Auditor’s Resignaton Increase Risk – High probability of disagreements and
unresolved maters with management or fnancial statements
Private Company Decrease Risk – Small number of fnancial statement users (less
conflictng goals)
Conclusion:
The material statement risk is deemed high due to the factors stated above.
Part B
There is insufcient tme to provide an audited fnancial statement because the tmeline to deliver an
appropriate audit report was extremely tght. The auditor had only one month untl bank requires the
statements for banking covenant purposes.
The accounts receivable and inventory accounts are also another issue as they’re important factors of
CHI for being used as collateral for bank loan. The inventory is dispersed in fve locatons and two
countries, and there would be difculty in performing both immediate and accurate inventory counts in
hasty mater. Currently with two months past year-end, rollback procedures must be performed
signifcantly to determine balance at year end. The nature and locaton of inventory and tming of the
audit will require signifcant staff resources to complete.
Currently, we need to determine whether CHI engagement should be done in combined or substantve
approach. Control testng is not possible due to tme constraint to determine operaton effectveness.
Because there is no internal audit department, we would not be able to rely on control for subsequent
audits without signifcant internal changes at CHI