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Planning and Risk AssessmentCorporate GovernanceAudit RiskControl EnvironmentSyllabus Area B

ACCA · Question 03 · Planning and Risk Assessment

SECTION A - CASE 1: NEUROCLOUD ANALYTICS CO

NeuroCloud Analytics Co is a fast-growing tech startup providing AI-driven data analytics to the healthcare sector. You are an audit manager at Turing & Co, planning the audit for the year ended 31 December 20X5. NeuroCloud is not a public interest entity (PIE).

During the planning phase, you note the following:

  1. The projected audit fee from NeuroCloud represents 18% of Turing & Co's total fee income for the year.
  2. NeuroCloud has requested Turing & Co to design and implement a new IT system for their financial reporting.
  3. NeuroCloud's CEO also acts as the Chairman of the Board.
  4. An audit junior overheard confidential discussions about a revolutionary unreleased AI model and subsequently purchased shares in NeuroCloud.

Question:
NeuroCloud's CEO also acting as the Chairman of the Board represents a deficiency in corporate governance. Which of the following best describes the audit risk associated with this deficiency?

Answer options:

A.

It increases inherent risk because the company operates in a fast-paced technology sector.

B.

It increases control risk due to a concentration of power and an increased risk of management override of controls.

C.

It increases detection risk because the auditor will have to perform more substantive testing.

D.

It has no impact on audit risk as corporate governance only applies to listed companies.

How to approach this question

Consider the components of Audit Risk (Inherent, Control, Detection). Governance issues relate to the control environment. A dominant individual increases the risk that controls are bypassed.

Full Answer

B.It increases control risk due to a concentration of power and an increased risk of management override of controls.✓ Correct
Good corporate governance requires a division of responsibilities at the head of the company. When the CEO and Chairman are the same person, there is a concentration of power. This weakens the control environment, increasing control risk, specifically the risk of management override.

Common mistakes

Confusing control risk with inherent risk, or assuming governance principles don't matter for non-listed entities in an audit context.
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