NATURAL SUPPLEMENTS NELSON LIMITED Harvard Case Solution & Analysis

NATURAL SUPPLEMENTS NELSON LIMITED Case Study Solution

Section A

PART A.

• The audit risk in the coming years will be high as the auditors of the company have changed and the new auditors would not have the required knowledge of the business. The lack of knowledge of the business will lead to the auditor’s detection risk being high for the audit. Detection risk is the risk that the auditors will be unable to find some errors or material misstatements and this will lead to the auditor forming an incorrect audit opinion leading to an unmodified audit report which will mislead the economic users of the audit report. The users of the report will rely on the wrong audit report and the audit firm’s reputation will be hit as the users will make the audit firm accountable for the losses they suffered due to the reliance they placed upon the audit report. The auditors might find it hard to detect the inherent and the control risk in the company as they don’t understand the relevant industry procedures and the relevant industry risky areas so the risk is high in the initial years of the audit.
• The risks of material misstatement can be divided into inherent risk and control risk. Inherent risks are risks which are inherent due to the nature of the item. On the other hand, control risks are risks which are due to the lack of adequate or proper control system in the cycles in the organization such as sales cycle or other.

There is a risk that the cash decrease could be due to the cash being stolen from the company as cash has inherent risk and due to its nature of being portable it can easily be stolen. The cash might have decreased due to the theft and this will lead to the company having difficulty in paying its expenses and this will worsen the liquidity position of the company too.

There is a risk that some inventory might have become outdated or the financial statements might not have the correct valuation of the inventory as due to the perpetual inventory system, the inventory is counted at the end of the year.This will increase the risk of the wrong valuation and the inventory being stolen due to the lack of adequate controls and inventory counting process and this will increase the control risk of the company.

There is a risk that the company might be spending more on expenditures than what is required as there are no formal budgets being produced in the company.This will lead to the company spending excessively and the employee can claim amounts which are not being spent on the expenses.The overall control risk can be high as due to less strict controls, the company cannot compare the actual performance with the targets and no formal budget is prepared.

There is a risk that the accounts receivable are not valued at the correct amount and the bad debts might have been included as the accounts receivables which are to be collected by the company. Whereas the accounts receivables to be collected are known to be less than what they are recorded and this gives an increase in the control risk and it mainly occurs due to a weak or no credit control on the accounts receivables collection in the company.

There is a risk that the account payables are understated and they are being paid in advance and this shows that the company has weak control and hence the control risk is high. The reason for this is that the company has failed for the negotiations with account payables to delay the period of payment and this will increase the cash operating cycle of the company.

There is a risk that research expenditure might be capitalized in the intangible assets and this is an incorrect treatment. This will overstate profits, understate costs and this will also overstate the non-current assets of the company. This shows weak control over the reporting and hence this will increase the control risk of the company.

There is a risk that the tax payable cannot be paid on a timely basis and this might result in fines or penalties being imposed by the government on the company.Furthermore, it might lead to litigation charges and court cases and this will hit the reputation of the company too. This will increase the control risk as the controls are weak in place and this is the reason why the income tax might not be paid on a timely basis.

There is a risk that the liabilities of the company are understated because the litigation case of the previous CFO might lead the company pay the penalty or fines to the government as the damages to the CFO.This is due to the inherent risk as the provisions always require judgements leading to wrong valuation and hence an increase in the inherent risk of the company...................

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