Target AR & DR

Our Target AR is in between 0-5%

Target AR calculations for Sale and Collections processes of SDE

AR = (IR x CR) x DR

IR Inherent Risk Factors

1. Nature of client's business and industry: stable or mature -low risk
2. Integrity of management: dubious(especially if there is a prior record of accounting manipulation) -moderate risk
3. Client ownership and/or management motivations: unknown
4. Results of prior year audits: Frequent errors found in prior year engagements (have cleaned up) -moderate risk
5. Tenure of auditor: Initial audit engagement with new client and little client-specific knowledge - moderate risk
6. Existence of related parties: few related party transactions -low risk
7. Frequency of transactions: frequent transactions whose handling is automated and electronic on a regular basis -low risk
8. Subjectivity of transaction values: easily determined exchange price for transactions -low risk
9. Susceptibility to defalcation: assets cannot be easily moved or misappropriated -low risk
10. Size of balance: moderate sized transactions -moderate risk 

Out of these 10 factors we have 0 high risk, 4 moderate and 5 low. Weighing these scores giving high risk a score of .8, moderate a score of .5 and low a risk of .05 we have the value of .5(4) + .05(5) /(9) = .25

IR =.25

Control Risk (CR) - the likelihood that internal control will not prevent or detect a misstatement in a management assertion.

Control Risk Assessment - We have seen that from interviews of the managers and workers of the subdivisions of Sales and Collections that they are honest and upfront about the weaknesses of their internal controls, ready to point out flaws, and inaccuracies that occurs in their credit approval process and communication lines between warehouse and shipping. We will give the control risk a factor of .5 moderate. The control risks already in place may not prevent or detect a material misstatement in a management assertion.

CR = .5

Detection Risk (DR) - the risk that the auditor will not detect a material misstatement that exists in the financial statements or more specifically in a financial statement assertion. Detection risk factors are as follows.

1. Inadequate planning: An auditor may not plan or perform the audit procedures necessary to detect an existing misstatement. Palm Springs audit team has thoroughly conducted audit procedures to detect material misstatements, ranging from management interviews, checklists, financial statement analysis, business environment analysis, procedural analysis and etc. Risk is low.
2. Sampling missions: Auditors cannot look at every transaction; thus an existing misstatement may not be discovered because it is not among the sample of transactions that are examined. We are able to access every transaction due to SDE's transaction record being digitally recorded. With ACL, we bring this risk to non existent.
3. Procedural errors: An auditor may not apply a procedure correctly or may not recognize an error even when an erroneous transaction is selected for testing. This problem may result from poor supervision and review of work of junior auditors, but can occur at any level in the audit firm. We have an extremely experienced Auditor and professor who will be able to detect any errors made by the audit team. We bring this risk to non existent.
4. Improper corrective actions: Even when an auditor identifies an erroneous transaction, there is a possibility that the auditor's response will be inappropriate (intentionally or unintentionally) and not result in the removal of the misstatement. Our team is trustworthy, and cannot be bribed out. This risk is nonexistent.

Detection Risk score weighted. .05+0+0+0/4 = .0125

Audit Risk Calculations

AR = (.25 x .5) x .0125 = .01

Target AR is met. We are near complete certainty that financial statements do not contain material misstatements. We are in the green.

Likelihood

Description	Scale	Definition
An estimate of the probability of the threat occurring.	1. Rare	This event may occur only in exceptional circumstances. It will occur less than 5% of the time.
	2. Unlikely	This event could occur at some time. It will occur between 5% and 20% of the time
	3. Moderate	This event should occur at some time. It will occur between 21% and 59% of the time.
	4. Likely	This event will probably occur in most circumstance. Will occur from 60% to 94% of the time.
	5. Almost Certain	This event is expected to occur in most circumstances. Will occur 95% of the time.

Table 5 Attribute Criteria - Likelihood

Description	Scale	Definition
A subjective rating of the current residual risk related to a specific threat or risk after considering the current mitigation estimats	Green	Low Risk: no action required
	Amber	Moderate Risk: monitor closely
	Red	High Risk: Action required

References:

• Initial IRM Implementation Guidelines                                                                             http://www.dfo-mpo.gc.ca/ae-ve/irm-gir/guide-eng.htm#n2
• Auditing Assurance & Risk; by Knechel, Salterio and Ballou