Case Study Report – TNO Limited
Introduction
Auditor’s major objective is to assess and identify risks that may present material misstatements
that may facilitate errors or lead to fraud on the financial statement or assertion levels. Through
understanding the company’s entity together with its environment and internal control systems,
suitable responses to risks can be designed to limit material misstatements. Significant risks are
the assessed risks in material misstatement that have been identified by the auditor that may
require special consideration during the audit exercise (International Standards on Auditing 315,
2009).
The risks on financial statements are associated with the accounting records and the supporting
information or documents that accompany the financial statements as evidence of transaction or
earnings receipt (Bernanke, 2010). The process of correcting errors and how the correct
information is transferred to the general ledger makes the process susceptible to assessable risks.
The method used by the information system to capture transactions and events is very significant
to the accuracy of the financial statements. The reporting process and the system of financial
Case Study Report – TNO Limited 2
statement’s preparation including all the estimates, assumptions and disclosures together with the
journal entries are exposed to risks of completeness and inaccuracy (International Standards on
Auditing 315, 2009).
The other risks on the classes of specific accounts stem from the communication between
management and the governance team. External communication between the company and the
industry regulators also exposes the company to risks of miscommunication and common errors.
The significant risks that can be related to financial statements are;
a) Businesses in countries that are economically unstable or countries that have experienced
huge currency devaluation.
b) Components of internal controls
c) Complex alliance and businesses that are likely to be sold predisposes the company to
assessable risks.
d) Lack of clear policies on valuation of some assets
e) New accounting applications and rules
Risks associated with specific account levels are;
a) Accounts that have specific litigation that are pending in court or other contingent
liability.
b) Past misstatements and accounts that have a history of errors.
c) Intercompany transactions and development of new products and research activities.
Case Study Report – TNO Limited 3
d) Huge differences between past accounting records without any logical reasons for
instance the wide differences in revenues between the audited and unaudited in TNO’s
accounts for 2013 and 2014 respectively.
e) Other current assets and the increase in secured bank loans.
f) Net income and the decrease in rental income
g) Decrease in provision and the increase deferred development expenditure.
The above risks have been identified as a result of careful evaluation and thorough scrutiny of
the financial statements that have been presented in line with the auditing standards and
guidelines (Cooper, 2005).
Supporting documents confirms the authenticity of the transactions involved and they also
provide evidence that the allege transaction took place at a particular date and the cost or
earnings have been entered correctly in the financial books (International Standards on Auditing
315, 2009).
The policies on valuation of noncurrent assets present a big risk on the management’s reliance on
the director’s valuation expertise as there no documentary evidence or policy guideline on the
valuation exercise and investments policies (European Commission, 2009).
The operating environment is also not stated but assuming its operating in the US, the economic
risks must be considered and its investment options must also be weighed. The collapse of giant
financial institutions in the year 2008/09 brought a lot of companies to near bankruptcies
predicament because of the loss suffered during the economic crisis during that period (D’Arcy,
2009).
Case Study Report – TNO Limited 4
The sudden increase in debts poses another risk to the business as it’s not clear why the funds were
required (Lang & Jagtiani, 2010). These have been revealed by the ratios. For example, the ratio of
debts to total assets is almost 50% and the current ratios are slightly below the average of 2:1. The current
ratios are 1.91 and 1.54 for the years 2013 and 2014 respectively.
The major audit materiality would be largely based on the governance of the financial statements and the
effectiveness of the internal control system which should take about 50% of the main audit work as the
director’s management system is not very transparent and the control structures seem to be weak as per
the notes presented in the case sturdy.
Case Study Report – TNO Limited 5
References
Bernanke, B. (2010) Lessons from the failure of Lehman Brothers,
Cooper, J. (2005). Financial Statement Fraud: Corporate Crime of the 21st Century.
D’Arcy, C. (2009). Why Lehman Brothers collapsed,
