Risk Assessment Matrix
Falcon Creek Manufacturing • Audit Risk Model • Year Ended December 31, 2024
Audit Risk Assessment Model
| Risk Area | Inherent Risk | Control Risk | Detection Risk | Audit Risk |
|---|---|---|---|---|
| Revenue Recognition | High | Medium | Low | High |
| Accounts Receivable | High | Medium | Low | High |
| Inventory Valuation | High | Medium | Medium | High |
| Purchases & Accounts Payable | Medium | Medium | Low | Medium |
| Payroll | Low | Low | Low | Medium |
| Loan Covenants & Going Concern | Medium | Low | Low | Medium |
Revenue Recognition
Revenue grew 42% YoY with margin compression. New customer concentration (TechCorp 24% of revenue). Requires substantive verification.
Planned Procedures
- →Sample 40 revenue transactions
- →Verify customer contracts
- →Analyze pricing & margins
- →Post-year collections test
Materiality Threshold
$500K
Overall materiality: $500K (1% of revenue). Quantitative and qualitative factors considered.
Accounts Receivable
DSO of 80 days vs 35-day industry average. Concentration risk: TechCorp $1.2M outstanding 92 days. Extended terms approved.
Planned Procedures
- →Aging analysis and collectibility assessment
- →Customer confirmation requests
- →Subsequent collections review
- →Concentration risk analysis
Materiality Threshold
$500K
Overall materiality: $500K (1% of revenue). Quantitative and qualitative factors considered.
Inventory Valuation
Finished goods increased 41% YoY to $4.1M. Q4 delayed shipments staged at warehouse. NRV testing required, slow-moving items evaluated.
Planned Procedures
- →Physical inventory observation
- →NRV analysis for all SKUs with increases
- →Slow-moving & obsolete reserve
- →Post-year sales cutoff
Materiality Threshold
$500K
Overall materiality: $500K (1% of revenue). Quantitative and qualitative factors considered.
Purchases & Accounts Payable
Design weakness: purchases >$50K lack secondary approval before payment. Operating effectively otherwise. Management implementing remediation.
Planned Procedures
- →Controls testing of authorization procedures
- →Sample 25 purchases for authorization
- →Cutoff testing
- →Accrual validation
Materiality Threshold
$500K
Overall materiality: $500K (1% of revenue). Quantitative and qualitative factors considered.
Payroll
Stable headcount, monthly payroll processing. No changes in pay structure or union contracts. Controls operating effectively.
Planned Procedures
- →Review payroll register to GL
- →Sample 10 payroll transactions
- →Verify tax payments
- →Compliance with wage laws
Materiality Threshold
$500K (immaterial < $50K)
Overall materiality: $500K (1% of revenue). Quantitative and qualitative factors considered.
Loan Covenants & Going Concern
$12M credit facility with 2.5x leverage covenant. Current ratio 1.1x. Company expects revenue growth to support covenant compliance.
Planned Procedures
- →Verify covenant calculations
- →Assess going concern
- →Review subsequent facility amendments
- →Management representations
Materiality Threshold
$500K
Overall materiality: $500K (1% of revenue). Quantitative and qualitative factors considered.
Risk Assessment Summary
High-Risk Areas Requiring Substantive Testing
- • Revenue Recognition (42% growth, new customer)
- • Accounts Receivable (80-day DSO, concentration)
- • Inventory Valuation (41% increase, NRV testing)
Control Design Observations
- • Purchases >$50K: secondary approval gap identified
- • Remediation plan: implement dual approval by Q1 2025
- • Payroll & tax: controls operating effectively