1.  Operating Activities

Wirecard AG was founded in 1999 in Germany and has evolved to be among the most significant companies dealing in the emerging financial technology market, particularly from its bases in electronic payment solutions and credit cards.

• Wirecards facilitate online and offline payments and are directly associated with payment services and providers.
• Wirecard regularly issued physical and virtual cards and acted both as an issuer and an acquirer, thus covering the vast territory of payments.
• Wirecard also entered the field of electronic money, preparing and issuing payments, mobile banking, electronic wallets, and various financial activities on the Internet.

2.  Materiality

a)   Concept of materiality by IFRS and ISAs

As per the IFRS, information is material if failure to include the information or risk of presenting wrong information may have some possibility of affecting the decision-making ability of the primary users of the financial statements. Auditing standards known as International Standards on Auditing (ISA), ISA specifically 320 on Materiality in Planning and Performing an Audit, builds on this idea for auditors by asserting that materiality has to be established over individual items in the financial statements as well as over the overall statements (Avi, 2022).

b)   Explain the relevance of materiality to audit risk.

Audit risk is closely associated with materiality, which is the impact of potential misstatements on the auditor’s strategy and actions. Audit risk can be defined as the risk that an auditor will express an audit opinion on financial statements other than a qualified opinion due to material misstatement of financial statements (De Martinis & Burrowes, 1996).

c)   Calculate materiality using the three taught benchmarks

• Revenue Benchmark: Materiality typically lies between €14million and €28million (0.5%-1%), while the conglomerate has reported Group revenue of €28 billion.
• Profit Before Tax Benchmark: Wirecard’s materiality range is estimated at 5% to 10% €21.9million and €43.8million i.e of its €438 million profit before tax.
• Total Assets Benchmark: For a total of € 5.8 billion in assets, the materiality ranges from € 58 million to € 116 million, that is, 1% to 2%.

d)   Material by size and by nature

• Cash and Cash Equivalents: Cash and cash equivalents was admittedly lofty, at €1.9 billion, but nonetheless, it was barely 12% and thus not a substantial constituent of total assets.
• Trade and Other Receivables: Total receivables, including trade receivables, were €1.3 billion. Receivables are recognized as material because they provide information on Wirecard’s clients’ revenue realization and credit risks (Budescu et al., 2012)..
• Intangible Assets: Wirecard declared intangible assets of £2.5 billion, of which more than half belong to goodwill and purchased software. This is material due to its size and the uncertainty in its valuation, which is especially sensitive to asset impairment and overstatement issues.
• Revenue: Key performance factor related to operations – revenues equal to € 2.8 Billion. Revenue is inherently significant because it characterizes the existent business process in Wirecard. Since Wirecard has been exposed to certain accounting anomalies, auditors would have to work more on identifying the correctness of revenue figures.
• Liabilities and Borrowings: It had €3.1 billion in total obligations and short-term borrowings. Liabilities are material in that they affect the company’s liquidity risk. The discovery of these errors can potentially alter Wirecard’s profitability and liquidity impressions.

3.  Risk & Response

a)   Define inherent risk by the ISAs, giving examples

The ISAs define inherent risk as the risk of material misstatement of the financial statement item absent any controls. ISA 315 (Revised) – Identifying and Assessing the Risks of Material Misstatement through understanding the Entity and Its Environment points out that inherent risk arises from factors such as, but not limited to, integrated transactions, the use of estimates, and vulnerability to fraud (Martinov & Roebuck, 1998). Factors that increase inherent risk include:

• Complex Financial Transactions
• High Degree of Estimation
• Industry-Specific Risks
• Economic and Market Conditions

b)   Items with higher level of inherent risk

Cash and Cash Equivalents: This amount was considered to bear high inherent risk since it was liquid and was alleged to have been deposited in foreign accounts with inadequate control. (Messier & Austen, 2000)

Revenue from Acquisitions and Subsidiaries: Income earned from these foreign entities entails higher risks in terms of dependence on foreign accounts, which were hard to substantiate and were, therefore, likely inflated by bogus transactions.

Goodwill and Intangible Assets: It always involves some risk since it requires professional judgment and estimation techniques of future cash flows and can easily manipulate it, mainly when used in uncertain acquisition tests.

Accounts Receivable from Subsidiaries: Especially those from related parties or foreigners, can be highly risky because they are not easily tractable and may be overstated,

Related Party Transaction. These transactions have very high inherent risk since they are often not done at arm’s length and are very useful in structuring revenue and balance sheet size to give a wrong picture of the state of affairs or performance.

c)   Auditor respond to risk in audit plan

Auditors should use specific substantive tests, including requesting confirmation from the organizations’ banks and trust accounts. Auditors should focus on the money made, mainly from acquisitions and subsidiaries. This includes tracking revenues to external documents and confirming the effectiveness of these transactions. The testing for the recoverable amount of impaired assets should also be conducted, especially for goodwill arising from the newly acquired business.

Auditors can request direct confirmations from the subsidiary entities and follow up on each such receivable with supporting documents. They require confirmation that such transactions are reported and done on an arm’s length basis. This may also mean a physical examination of board minutes, legal documents, and other third-party validation

4.  Corporate Governance

a)   Evaluation of Corporate Governance at Wirecard.

Board Oversight and Independence: It is said that the key members shared a close relationship with the CEO, Markus Braun, which made them unable to objectively review the management’s move (Betz & Kim, 2021).

Audit Committee Deficiencies: The Audit Committee could not probe these suspicious transactions, and issues raised, including 1.9 billion Euros in cash that has gone missing, needed to be addressed appropriately.

Internal Controls and Risk Management: Wirecard had no adequate measures to prevent employee fraud in its subsidiaries, mainly in Asia, where most fake transactions were reported.

Whistle blower Protection and Response to Allegations: After the Financial Times revealed a financial scandal, Wirecard said the revelations were unfounded, and Wirecard launched lawsuits against the reporters.

b)   Company’s governance practices Impact the level of audit risk for the company’s auditor

High Risk of Fraud: The problem of lack of independence on the board, the non-investigation of audits, and red flags in the Audit Committee lead to the possibility of Wirecard executives overriding internal controls and manipulating financial statements. For instance, the €1.9 billion difference in cash accounts highlighted that improper governance leads to fraud (Azim & Sharif, 2021).

Weak Internal Controls Impact on Control Risk: Due to the complicated hierarchical nature and operation in different countries, these sources of weak controls were apt to lead to unearthing unnoticed mistakes or frauds, which raised the difficulty as well as the price of the audit.

High Inherent Risk in Complex Transactions and Related Party Dealings: overdependence on overseas subsidiaries and related parties’ transactions, which the company was actively doing in high-risk areas, augmented the geographical risk for Wirecard. Auditors would have to identify these high-risk areas and make specific plans to test these types of transactions adequately.

5.  Reference

• Avi, M.S. (2022) ‘Materiality and relevance in financial reporting. Interpretation problems and solutions adopted internationally.’, International Journal of Accounting and Finance Studies, 5(2). doi:10.22158/ijafs.v5n2p1.
• Azim, M. and Sharif, J. (2021) ‘Impacts of earnings management on corporate failure: A case study of wirecard’, International Journal of Accounting & Finance Review, pp. 37–49. doi:10.46281/ijafr.v8i1.1411.
• Betz, F. and Kim, M. (2021) ‘Economic regulation and corporate governance: The case of wirecard’, Modern Economy, 12(09), pp. 1386–1423. doi:10.4236/me.2021.129072.
• Budescu, D.V., Peecher, M.E. and Solomon, I. (2012) ‘The joint influence of the extent and nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk’, AUDITING: A Journal of Practice & Theory, 31(2), pp. 19–41. doi:10.2308/ajpt-10239.
• De Martinis, M.R. and Burrowes, A.W. (1996) ‘Materiality and risk judgements: A review of users’ expectations’, Managerial Finance, 22(9), pp. 16–34. doi:10.1108/eb018579.
• Martinov, N. and Roebuck, P. (1998a) ‘The assessment and integration of materiality and inherent risk: An analysis of major firms’ audit practices’, International Journal of Auditing, 2(2), pp. 103–126. doi:10.1111/1099-1123.00034.
• Martinov, N. and Roebuck, P. (1998b) ‘The assessment and integration of materiality and inherent risk: An analysis of major firms’ audit practices’, International Journal of Auditing, 2(2), pp. 103–126. doi:10.1111/1099-1123.00034.

Messier, W.F. and Austen, L.A. (2000) ‘Inherent risk and control risk assessments: Evidence on the effect of pervasive and specific risk factors’, AUDITING: A Journal of Practice & Theory, 19(2), pp. 119–131. doi:10.2308/aud.2000.19.2.119