Revenue
Outline why account is as significant risk
The revenue earned from the sale of cochlear as well as acoustic implants and the related processors and accessories of sound is based on the contracted sales price. The company recognizes revenue at the point where the customer gains control with the exact timing depending on the agreed terms of sale for every contract. As well, the clients for the company include recipients of implants, governments and medical practitioners. The contracts of the company are mostly short-term and the company recognizes them over multiple years. As such, the revenue earned from such contracts faces the possible hedging risks due to the forecasting of sales transactions (Gomez, 2012).
Key assertion at risk
- As an auditor, one must confirm if the reported revenue actually exists in the company.
- The auditor must confirm if the company has reported the revenue in the correct period during which it was earned.
- The auditor has to ascertain that Cochlear Limited has reported the correct amount of revenue during the period which it was earned and recognized (Kan, 2013).
Describe a relevant practical substantive audit procedure that would address the specific risk and assertion identified
The auditor must check the company’s invoices to confirm if they actually took place or not. The ending balances of cash should also be tested. As well, the auditor must contact the clients of the business to ascertain specific transactions as well as sales.
Cash and Cash Equivalents
Outline why account is as significant risk
This account is at a significant risk since it consists of cash balances as well as call deposits that have an original maturity of three months or less. Cochlear Limited also repays bank overdrafts on demand and, therefore, there is possible uncertainty regarding the amount of cash and cash equivalents at any given point in time.
Key assertion at risk
Existence is the key assertion at risk since the auditor must check if the cash and cash equivalents actually exist in the company’s bank account or the designated places (Gomez, 2012).
Describe a relevant practical substantive audit procedure that would address the specific risk and assertion identified
The auditor must confirm cash balances by vouching reconciling items to the bank statement of the subsequent month. He or she should also enquire if the company has included all the bank accounts in its general ledger (Kumar & Sharma, 2015).
Inventories
Outline why account is as significant risk
Cochlear Limited measures its inventories at the lower of cost or net realizable value. It uses FIFO method to value its inventory at the end of the accounting period. Since the company deals with manufacturing, it constantly has work-in progress items that need to be worked on before being sold. As such, there is a possibility of materially misstating the ending inventory (Bagshaw, 2013).
Key assertion at risk
The key assertion risk regarding inventory is accuracy since there is a likelihood of the company to misstate the amount of the ending inventory in its books of accounts (Gomez, 2012).
Describe a relevant practical substantive audit procedure that would address the specific risk and assertion identified
The auditor must observe the physical count of inventory to ensure they correspond with the amounts recorded in the general ledger. High value items must also be tested. The auditor must also review item costs as well as freight costs (Bagshaw, 2013).
References
Bagshaw, K. (2013). Audit and Assurance Essentials: For Professional Accountancy Exams. Hoboken, NJ: John Wiley & Sons.
Gomez, C. (2012). Auditing and Assurance: Theory and Practice. New Delhi, Delhi: PHI Learning Pvt.
Kan, D. E. (2013). Audit and Assurance – Principles and Practices in Singapore (3rd Edition). CCH Asia Pte.
Kumar, R., & Sharma, V. (2015). Auditing: Principles and Practice. New Delhi, Delhi: PHI Learning Pvt.
