Risk assessment and audit planning for Overlook Video Stores Inc

Overlook Video Stores Inc. (OVS) is a privately-­held chain of DVD rental stores  headquartered in Toronto. The company was incorporated in 1992 and has gone from a  single store in Toronto to over 30 stores throughout Ontario.     Harford & Harford, LLP (H&H), a mid-­sized professional services firm, have been the  auditors for OVS since its inception. You, CA, are the audit senior on the OVS audit for  the year ending December 31, 2005. On December 1, 2005, Alice Harford, the  engagement partner, calls you into her office to explain that the audit will need to begin  in early January 2006, because OVS’s bank is eager to see the audited financial  statements.    “I would like you to prepare the audit planning memo for the OVS audit. OVS has  experienced some changes, and I want to make sure we consider those in our audit  plan. The controller of OVS has faxed us the interim financial statements for the 11  months ended November 30, 2005. Net income before taxes for the 11-­month period is  $5,547,000.These should help you in your audit plan.   “I met with Victor Ziegler, the controlling shareholder of OVS, a few months ago and he  told me about OVS’s new directions. Here are my notes from that meeting (Exhibit I).    “I also met with OVS’s Chief Information Officer, Nick Nightingale. He provided a  description of OVS’s expansion during 2005 into the Internet-­based DVD rental market  through a program called Movies By Mail. Here are my notes from my meeting with Nick  (Exhibit II). Please review them and provide your recommendations for improving the  system. I will pass on your comments to our Information Technology (IT) partner so that  she can include them in a report she is preparing for Victor. Victor has asked our IT  partner to meet with him to discuss the information technology issues related to the  Internet-­based rental system.   Required: The engagement partner asks you to:

A.  Identify risks at the overall F/S level (OFSL). Be sure to state what the risk  is and why it is a risk (what + why).

B.  Based on your risk assessment, consider what type of audit approach  should be taken

C.  Assess materiality for the engagement

D.  Identify the account-­specific risks. Be sure to state what the risk is and why  it is a risk (what + why).

E.  Develop procedures to test each risk. Consider using the VOOP acronym.  F.  Identify the control issues with the new IT system – be sure to identify the  weakness, the implication and then provide a recommendation.

Identified risks at the overall F/S level

Answer to question A:

      The main risks that have been identified Overlook Video Stores Inc, are depicted as follows.
•    Problems in accommodating the refusal of payment, which generates from no late fees payment scheme
•    Problems in detecting individuals, who are yet to return the DVD to an OVS store.
•    Transferring inventory-DVD for rent  to inventory previously viewed DVDs for sales
•    Problems in website and printing wrong shipping report
The identified risk might mainly reduce the efficiency to the company and in turn hamper the overall profitability, which might be generated from online rental and sales. Bondar (2016) stated that identified risk mainly helps companies to reduce the negative impact on its operations and maintain the level of productivity, which might improve its overall profitability. 

Answer to question B:

Overlook Video Stores Inc for addressing the risk assessment identified for the company could use risk assessment interim and financial audit approach. This interim audit process could be used for identifying the operational disparity in the company. The financial audit approach could also be used in addressing the monetary risk of the company.

Answer to question C:

Materiality of Overlook Video Stores Inc needs to be evaluated, which might help in depicting the adequate financial position of the company. In addition, the materiality engagement mainly allows the auditor to prepare material aspect, which could provide viable audit report.

Answer to question D:

The main account specific risk as discussed below.
•    Non-payments of DVD rental and price is mainly depicted as the specific account risk, which might hinder profitability of the company.
•    Risk from three-year subscription plan
The overall identified risk might mainly hamper the overall misstatement of the company, which in turn might hamper the audit report. William, Glover & Prawitt (2016) stated that account specific risk mainly decreases the efficiency of the financial report of the company.

Answer to question E:

With the help of figure 1, the overall procedure for testing the risk could be effectively conducted. In addition, the VOOP acronym procedure mainly allows auditors to conduct test, which might portray intensity of the identified risks. Budescu, Peecher, & Solomon (2012) stated that defined test allows auditors to evaluate the maximum misstating, which might be conducted by company’s accountants.

Answer to question F:

The website developed by Moonwatcher Web Designers has certain flaws, which has been tampering with the operations of OVS. The new IT system used by the company has the following weakness.
•    Increase number of server crashes, which are not controlled by MWD
•    Wrong addresses printing conducted by the software
•    Continuous augmentation of bug, which decreases efficiency of the online platform

The above-depicted weaknesses mainly hamper the operational capability of OVS, which in turn affect its profitability. Furthermore, MWD was mainly paid 8.5 million for the development of website, which always needs tweaking and readjustments. Griffin (2014) mentioned that problems in online presence mainly reduce ability of the company to continue its flow of operational and attract potential customers.