Question

Manhattan is a thriving technology company that has had success producing smartphone games with in-app purchases. Manhattan has recently acquired two other companies to expand its game offerings and increase its workforce. The Founder and CEO started the company a few years ago and is an app developer himself. He does not have any training or experience in accounting or finance but has decided it is important to surround himself with the best people possible. He has hired several accountants with professional designations to help with the financial reporting.

The company’s accounting relies heavily on estimates because most of the company’s assets relate to work in progress as new games are always being developed. Once a game has been released it can generate significant revenue, but consumers tend to tire of games quickly and the long-term value of the product is never certain. As a result, assets are hard to value and complex accounting methods must be used.

The CFO is a designated accountant and a former partner at an audit firm. She has used the company’s technology skills to ensure that the IT controls around accounting information are strong. She has placed a real emphasis on segregation of duties and accounting staff take turns checking each other’s work as a means of detecting mistakes and learning from each other.

Required:

As an auditor how would you assess the control risk, high or low? Provide two reasons to support your assessment.

Answer 1

Control Risk is the probability of material misstatement in the financial statements post of the company because of non existence of sufficient internal controls in the operations of the comapny or when the controls are present but are not able to detect , prevent and correct errors that are occured.

In the above mentioned case , as an auditor I would suggest the control risk to be low as more emphasis is placed on segregation of duties and accounting staff take turns checking each other’s work as a means of detecting mistakes and learning from each other. The first reason would be the segregation of duties among the manangement and the second reason would be assurance of the IT controls of the comapnty being strong so as to provide a sufficient reason for the opperating effectiveness of the internal controls of the company.