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Process 1: Long-term Model Preparation

This process involves preparing the financial model that includes assumptions on sales forecasts, WACC rates, operational expenses, and other key inputs that impact impairment calculation.

Problems:

1. Step 1 (Production Department Assessment):

Subjectivity in Value-In-Use Assessment: The production department may rely heavily on subjective estimates for the net present value of future cash flows. Assumptions about sales forecasts, prices, and customer demand may be overly optimistic or incorrect.

Lack of Real-Time Data: Annual updates to the model may not reflect real-time changes in market conditions or customer demand, which could lead to inaccurate impairment calculations.

2. Step 2 (Separate Departmental Inputs):

Data Discrepancies: Different departments may use varying assumptions and inputs, leading to inconsistencies in the model. For example, sales forecasts may not align with production capacity.

Human Error: Manual data entry into the “Alpha” system increases the risk of errors or omissions.

Inadequate Reconciliation: If the senior specialist in the planning department doesn't thoroughly reconcile data, critical inconsistencies may go unnoticed.

3. Step 3 (Review by CFO):

Lack of Segregation of Duties: Skipping the review by the senior specialist and having only the CFO review the model increases the risk of errors or manipulation going unnoticed.

Over-Reliance on Management’s Assumptions: The CFO may rely too heavily on management’s assumptions, particularly given the current challenges with AI projects and customer demand issues.

Process 2: Client Onboarding

This process involves creating contracts with new customers, performing compliance checks, and negotiating sales terms.

Problems:

1. Step 1 (Contract Template Creation):

Outdated or Incomplete Terms: Contract templates may not be regularly updated to reflect current legal requirements or business needs, potentially leading to legal or operational issues.

No Approval Process: If there's no formal approval or review of the contract template, errors or outdated clauses could remain unnoticed.

2. Step 2 (Compliance Checks by Ethics Team):

Lack of Automation: Compliance checks might be manual, leading to human error, delays, or miscommunication between departments.

No System for Tracking Violations: If the system doesn't track compliance violations effectively, blocked customers could still engage with the company or unqualified customers might get through the process.

3. Step 3 (Sales Department Negotiation):

Unrealistic Sales Forecasts: Sales forecasts might not align with actual production capacity or customer demand, particularly in light of current market challenges.

No Formal Review of Feasibility: There may not be a robust system for reviewing whether production can meet sales targets, leading to overpromising to customers.

4. Step 4 (Approval of Contract and Execution):

Time Constraints or Gaps in Information: Tight deadlines or incomplete information may lead to rushed approvals, increasing the risk of entering into contracts with unfavorable terms or incorrect pricing.

Inadequate Documentation: If the manual creation of the application chain in the “Alpha” system is not adequately documented, errors may arise in dispatching the equipment.

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Step 1: complexity of impairment testing (Inherit risk), the absence of robust checks on the assumptions (contol risk), Insufficient documentation(detection risk)

Step 2: miscommunication, the final cash flow projections may be misaligned (inherent risk), reconciliation (Control risk), the “Alpha” system lacks built-in validation checks to catch discrepancies across departmental inputs (detection risk)

Step 3: manual reviews (inherent risks), the bypass of senior specialist review (control risk), missing material misstatements (detection risk)

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1. Inaccurate Forecasting: The reliance on management's assumptions and external data sources (like World Bank and Bloomberg) can lead to inaccuracies in sales projections, affecting cash flow estimates.

2. Market Volatility: Changes in market conditions or economic downturns can impact demand, leading to lower revenues than anticipated.

3. Operational Risks: Errors in data entry or assumptions during the preparation of the financial model can lead to incorrect valuations and financial decisions.

4. Dependency on External Data: Relying on third-party data (e.g., inflation rates, beta values) may introduce risks if that data is flawed or not representative of the current market.

5. Regulatory Risks: Changes in tax laws or regulations could affect the accuracy of tax calculations and overall financial projections.

6. Liquidity Risk: If cash flow forecasts are overly optimistic, the company may face liquidity issues when actual cash inflows fall short.

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Step 1: Outdated or incomplete terms (inherent risk), no approval process (control risk), non inspecting whether the legal review process

Step 2: Revenue from this client may later be disputed or reversed (inherent risk), no automated system (control risk), don't test the compliance check process (detection risk)

Step 3: Unrealistic sales forecasts, non aligned production plan (inherent risk), no formal review process (contol risk), audit don't evaluate the assumptions and data sources (detection risk)

Step 4: Time constraints or information gaps (inherent risk), no clear criteria for what the General Director should review (control risk), audit don't test the authorization and documentation controls

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Stakeholder Misalignment: If there is a lack of communication or alignment between departments (production, planning, and finance), it can lead to conflicting assumptions and projections.

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1. Robust Review Processes: Reinstate the review by the senior specialist in the planning department to ensure multiple levels of oversight before final approval by the CFO.

2. Scenario Analysis: Implement scenario planning to assess how changes in key assumptions (like demand fluctuations or cost increases) could impact financial outcomes.

3. Continuous Monitoring: Regularly monitor market conditions and adjust forecasts accordingly. This includes tracking actual performance against forecasts to identify variances early.

4. Diversification of Data Sources: Use multiple sources for key inputs (e.g., economic indicators, market trends) to reduce dependency on a single source and enhance accuracy.

5. Training and Development: Provide ongoing training for staff involved in financial modeling to ensure they understand best practices and the importance of accuracy in data entry and assumptions.

6. Implement Technology Solutions: Utilize advanced analytics and financial modeling software that can automate data input and calculations, reducing human error.

7. Establish Clear Communication Channels: Foster collaboration between departments to ensure that all parties are aligned on assumptions and understand the rationale behind forecasts.

8. Regular Updates to Models: Ensure that the long-term model is updated regularly to reflect new information, changes in market conditions, and operational adjustments.

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Substantial procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the matters of ABC Co’s impairment 

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Substantial procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the matters of ABC Co’s impairment 

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​

To obtain sufficient and appropriate audit evidence regarding the impairment of ABC Co., the auditor should perform the following substantive procedures:

1. Review of Impairment Indicators

Assessment of Management Analysis: Ev

Market Conditions:

2. Examination of Cash Flow Forecasts

Understanding Assumptions: Revi

Historical Accuracy:

3. Testing of Cash Flow Models

Model Accuracy: Verify the mathematical accuracy of the provided cash flow models.

Scenario Analysis: Conduct sensitivity analysis to see how changes in key assumptions (e.g., sales volume, price changes) affect cash flows.

4. Comparison with Industry Standards

Benchmarking: Compare ABC Co.'s cash flow forecasts and performance indicators with industry averages to identify discrepancies or unrealistic assumptions.

5. Review of Financial Statements

Consistency Assessment: Check for consistency in financial statements and impairment disclosures over various periods.

Adequacy of Disclosures: Ensure that disclosures related to impairment and risks comply with accounting standards.

6. Management Representations

Obtaining Written Representations: Request representations from management regarding the assumptions used in impairment calculations and their completeness.

7. Risk and Control Evaluation

Review of Internal Controls: Assess the effectiveness of ABC Co.'s internal controls related to financial reporting and impairment evaluation.

Identification of Deficiencies: Document any weaknesses or defects that could impact the impairment assessment.

8. Substantive Testing of Related Transactions

Assessment of New Client Onboarding Processes: Examine documentation related to the onboarding of new clients to assess the viability of revenue forecasts.

Testing Transactions: Conduct substantive tests on significant transactions related to impairment evaluation to ensure accuracy, if necessary.

9. Consultations with Experts

Valuation Expert Consultations: Engage a valuation expert if needed to review cash flow forecasts and discount rates, particularly if the estimates are complex.

10. Review of Subsequent Events

Evaluation of Changes: Consider any events that occurred after the reporting period that could affect the impairment assessment or future cash flows.

11. Documentation

Thorough Documentation: Maintain complete documentation of all procedures performed, evidence collected, and conclusions reached regarding the impairment assessment.

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1. Laura Saduakassova

2. Zhansaya Sadvakassova

3. Serirbolova Tomiris

4. Salieva Dilnoza

5. Idanov Dias

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Process 2

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Step 1: Legal department issues a contract template and sends it to the sales department.

Risks:

Outdated or incomplete contract templates may lead to legal exposure.

Failure to customize the template to specific client needs could result in contract disputes.

Proposed Controls:

Regularly update contract templates to ensure compliance with current laws and regulations.

Implement a review and approval process for customizing contracts to individual client situations.

Sales department specialist fills out the form.

Risks:

Inaccurate data entry by the sales specialist could result in errors in the final contract.

Lack of supervision during form filling may lead to incomplete contracts.

Proposed Controls:

Implement automated form validation checks to ensure required fields are completed correctly.

Require a second-level review by a senior sales specialist before finalizing the form.

Step 2: Ethics team checks counterparty compliance with local laws.

Risks:

Failure to detect non-compliance with local laws or regulatory violations may expose the company to legal risks.

Ethics team might overlook key compliance factors due to lack of information or resources.

Proposed Controls:

Use a third-party compliance software or service to conduct thorough background checks on counterparties.

Establish clear compliance criteria and protocols for the ethics team to follow.

Step 3: Sales department negotiates terms with the customer and General Director reviews the contract.

Risks:

Sales team might agree to terms that are unfavorable to the company in negotiations.

General Director’s review may be rushed or incomplete due to time constraints.

Proposed Controls:

Implement a formal negotiation strategy to guide the sales team in discussions.

Use a checklist for the General Director’s review to ensure key points are addressed before signing.

Establish a process for post-negotiation reviews to ensure terms align with company goals.

Step 4: Sales department manually creates the dispatch chain in the "Alpha" system.

Risks:

Manual errors during the creation of the dispatch chain could lead to delivery delays or incorrect shipments.

Lack of oversight in the dispatch process could cause inefficiencies or lost sales.

Proposed Controls:

Automate the dispatch process within the "Alpha" system to minimize manual entry errors.

Set up an exception reporting system to flag issues in the dispatch chain for management review.

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The 3rd course student of Narxoz University

BBA in Audit and Accounting (GPA 3.83)

Graduation from the "Umay" Children's Art School

Participation in the "Miras" Children's Charity Fund

Participation in the Model United Nations "MUN 2023" at Narxoz University

Participation in student events at Narxoz University

Participation in Top Talents championship from AIESEC

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1. In a situation where Deloitte employees are actively involved in the operational or strategic decisions of ABC Co., there may be a violation of the principles of professional ethics such as honesty, confidentiality and professional conduct.

2. Auditors are required to maintain independence and objectivity when performing an audit. The involvement of Deloitte specialists in management processes may weaken their ability to objectively assess the financial condition of the company and make decisions based on facts, rather than on personal involvement.

3. If Deloitte employees occupy key management positions at ABC Co., this may create a conflict of interest. They may find themselves in situations where their role as independent auditors intersects with management or consulting responsibilities for ABC Co. This may affect the objectivity of their assessment and decision making.

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Inherent Risk: Definition, Examples, and 3 Types of Audit Risks

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Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of control.

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Artificial Intelligence (AI) has yet to deliver on its full potential of driving cost efficiencies and improving the customer experience for regulated financial services firms. In this report, we discuss some of the key barriers to AI adoption and the pivotal role that effective risk management can play in enabling regulated firms to harness the power of AI with confidence.