Inherent Risk, Tests of Controls, and Substantive Procedures

Account payable turnover in days 

Cloud 9’s account payable increased in 2022 to 57 days from 32 days in 2021. An increase in accounts payables infers that it takes more days to receive payments from credit sales. An increase in account payable is bad for the company because it increases credit risks. Therefore, Cloud 9 should find possible techniques to prevent this risk. 

Cost of goods sold average to account payable 

Payable as a percentage of total assets 

Current ratio 

Cloud 9's current ratio reduced from 2.21 in 2021 to1.84 in 2022. A reduction in the current ratio increases the company's liquidity risk because it means that Cloud 9's ability to settle its current liabilities using its current asset decreased in 2022. Consequently, this may affect the company's performance because it may fail to honor all its liabilities when they fall due. 

High-Risk Assertions 

Accounts payable is one of the high-risk assertions to Cloud 9 Inc. The management can easily misappropriate the value of accounts payables to report high profits. The management is constantly under pressure to maximize shareholders' equity. To meet shareholders' expectations, the management may fraudulently under-report end-year account payables to report high profits (Anderson et al., 2020). Consequently, this may increase the company's rate of inherent risks. According to the company's financial statements, the inherent risk of completeness for account payables is high because accounting professionals may not record some liabilities to reduce the company's obligations reported in financial statements. Therefore, auditors should perform a search to identify unrecorded liabilities.  

The cost of goods sold is another item of high inherent assertions in Cloud 9's case. The cost of goods sold directly affects the company's gross profit. Therefore, the management can under record costs of goods sold to report high profits. As a result, this may give a false impression about the company's performance. The management, in some instances, underreports the value of the cost of goods sold to assure shareholders the company is performing well even if the actual performance is poor (Anderson et al., 2020). Thus, auditors need to perform thorough audit research on this account to ascertain whether financial statements reflect a true and value of the firm in relation to the cost of goods sold.  

The Nature and Extent of Test of Control for Cloud 9  

Based on Cloud 9's financial statements, the company has effective internal control systems that enable the management to record and report all transactions correctly. For example, the company prepares all essential financial statements annually as required by the International Financial Accounting Standards. Making annual financial reporting implies that Cloud 9 has internal control systems that it follows to comply with professional guidelines and regulatory directives.  

Cloud 9 also uses a recognized format to prepare its financial statements to comply with professional guidelines. For example, it uses a T-format to prepare a balance sheet to ensure that all essential particulars are captured in the statements. The company also recorded all essential items that directly affect its performance to ensure it reflect a true and fair value of the company (Saadullah & Elsayed, 2020). For example, Cloud 9's financial statements contain assets, liabilities and equity, which are the main components of the balance sheet.  

Furthermore, Cloud 9's trial balance balanced between 2021 and 2022 to test if initial entries were made correctly. A trial is used to identify if entries made in other financial statements such as balance sheets and journal entries were done correctly (Frazer, 2020). In case a trial balance fails to balance, then it means wrong entries were made in some books of original entry. However, Cloud 9's trial balance for the two years balanced, which implies that the company has strong internal control systems that enable the management to make all entries correctly.  

Based on these factors, Cloud 9's can assure users of financial statements that it has a strong and effective internal control system to prevent or detect any material misstatement. For example, Cloud 9's trial balance balanced for 2021 and 2022, which infers that the accounting professionals made correct entries in all other financial statements. 

Nature, Extent, and Timing for Substantive Procedure   

According to Cloud 9's annual report, the company recorded all essential items in financial statements. The completeness of the statements can enable auditors to examine whether the reports reflect a true and fair value of the company (Frazer, 2020). Cloud 9 also timely reports its annual activities; thus, auditors can find all financial statements needed to conduct audit research. Timely preparation and reporting of the company's yearly business performance can help auditors make adequate audit preparations follow substantial audit procedures. Therefore, Cloud9's nature, extent, and timing preparation of financial statements encourages a substantive procedure. 

References 

Anderson, S. B., Hobson, J. L., & Peecher, M. E. (2020). The Joint Effects of Rich Data Visualization and Audit Procedure Categorization on Auditor Judgment.  Available at SSRN 3737234 . 

Frazer, L. (2020). Does Internal Control Improve the Attestation Function and by Extension Assurance Services? A Practical Approach.  Journal of Accounting & Finance (2158-3625) ,  20 (1). 

Saadullah, S. M., & Elsayed, N. (2020). An audit simulation of the substantive procedures in the revenue process–A teaching case incorporating Bloom’s taxonomy.  Journal of Accounting Education ,  52 , 100678.