Audit Risk issue - Student version PDF

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AUDIT RISKIssue in Q Audit Risk Audit Response 1 Co. may not include inventory quantity from all warehouse into their records. - 10 warehouseIf the co. did not include all inventories in 10 warehouse in their records, then INVENTORY might be understated.Obtain list of all inventory in 10 warehouse a...

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AUDIT RISK 1

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Issue in Q Co. may not include inventory quantity from all warehouse into their records. - 10 warehouse Co. introduced perpetual inventory count where all inventory must be counted at least once during the year. Co. have a lot of old trade debtors, which pay slowly.

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Co. released entire bad debt provision.

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Co. issues shares at premium.

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Co. took long term loan from the bank.

Audit Risk If the co. did not include all inventories in 10 warehouse in their records, then INVENTORY might be understated.

Audit Response Obtain list of all inventory in 10 warehouse and make sure it is included in final inventory listing.

If the co. did not count their inventory once a year, then inventory might be MATERIALLY MISSTATED.

Obtain Inventory count sheet for the inventory count performed during the year.

If the co. did not provide sufficient allowance for DD, Then trade receivable might be overstated.

Ensure physical same as in the system. / no discrepancies. Inspect POST YEAR END PAYMENT RECEIVED from old debtor if any to assess whether old balance is recovered.

If the co. released BD provision while it is not VIRTUALLY CERTAIN, then TRADE RECEIVABLE is overstated. If the co. did not split between SC and SP, then SC will be overstated.

Inspect trade rec. ageing to identify amount of long outstanding debt. Obtain bank statement for any payment received. And obtain correspondence from the debtor. Recalculate SC and SP amount and agree to the FS to verify accuracy.

If the. Co did not split loan amount between CL and NCL,

Recalculate the split between CL and NCL based on the loan agreement and agree to FS.

Then NCL or CL might be overstated. Co. in negotiation process to obtain loan.

The co. might manipulate their FS to be able to get the loan hence FS as a whole could contain MM.

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The loan carried interest rate of 5% per annum.

If the co. wrongly calculate its interest, then interest expense might be materially misstated.

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Employee took legal case on company. If there is probable chance to lose the case.

If the co. did not recognise provision for legal action,

Employee took legal case on company. If there is possible chance to lose the case.

If the co. did not disclose contingent liability for legal action,

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Then PROVISION might be understated

Then FS contain material misstatement.

Apply professional scepticism while auditing the FS. Perform extensive Substantive procedure. Recalculate interest expenses based on loan agreement and agree to the figure in FS. Enquire co’s lawyer on the probability of the legal case and if it is probable, ensure sufficient provision recognise.

Enquire co’s lawyer on the probability of the legal case and if it is possible, ensure sufficient disclosure.

Employee took legal case on company.

If the co. did not recognise provision for legal action WHEN IT IS PROBABLE, Then PROVISION might be understated. If the co. did not recog. sufficient redundancy provision for employees, then provision is understated.

Obtain list of all employees made redundant and recalculate provision for redundancy. Agree the calculation to FS.

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Co. close one of it factory (division/ branch) and made employees redundant.

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Co. obtain IREDEEMABLE PREFERENCE SHARE.

If the co. recognise this as liability instead of equity, then Liability will be overstated.

Obtain the share agreement for the irredeemable pref. share and agree to FS on its classification in equity.

Co. obtain convertible bond.

If the co. did not split between ___ and _____, then E or L might be overstated.

Obtain the agreement for the convertible bond and perform the recalculation of the split. Compare to amt in FS for any difference. Inspect FS on the directors remuneration disclosure to assess if it is as per IAS.

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Co. paid huge director remuneration to directors and it has to be disclosed in FS per IAS.

If the co. did not disclosed as per IAS, then FS might be MM.

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Financial controller / Director left the company during the year and his role shared among finance team.

If FC left the co then no one will review the FS. Therefore, FS as a whole could contain MM.

Apply prof scepticism when auditing FS and perform extensive SP on risky area.

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No supplier statement reconciliations/ bank recon/ receivable recon….were done.

If the co. did not perform SUPPLIER reconciliation then any error will not be detected and corrected.

Ask the co. to perform the ____ reconciliation and ensure any error detected is corrected in FS.

DETECT AND CORRECT ERROR

Then, TRADE PAYABLE could be materially misstated. If the co. did not perform debtor reconciliation then any error will not be detected and corrected. Then, TRADE REC could be materially misstated. If the co. did not perform BANK reconciliation then any error will not be detected and corrected. Then, BANK BALANCE could be materially misstated.

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New finance director joined a manufacturing company, he was previously from banking industry. Client did not do bank reconciliation statements.

New FD might not be able to detect any error in FS due to insufficient experience. Therefore FS as a whole could contain MM.

Apply prof scepticism when auditing FS and perform extensive SP on risky area.

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Client wants audit to finish fast. -tight deadline.

Split the audit into interim and final audit, so datelines can be met.

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Audit firm gets new client.

If there is tight deadline, audit will be performed under time pressure and auditor might not able to detect error. Hence, increase detection risk. Auditor do not have sufficient knowledge abt this new client and might not detect material misstatement. This increase detection risk

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Co. selling goods on credit and delivery to customer takes around 8 months.

If the company recognise sales when the goods not yet received by customer,

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Co made some sales returns or refund.

If the co. did not removed the sales return for the CY, then revenue will be overstated.

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Co recognise potential fines from government in cost of sales.

Potential fine should be recognise under other expense instead of cost of sales therefore COS is overstated.

Ask client to reclass potential fine from COS to Other expenses.

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Spend more time in Planning the audit and allocate more Senior Auditor in that job so more error could be detected.

Obtain GDN signed by customer to verify when goods received by them. Agree this to the date when the respective revenue recognised.

Then revenue will be overstated.

Inspect Credit note issued after year end. If it is for revenue during the year, ensure it has been removed.

FINE = OTHER EXPENSES 22

Sales increase by 30% but cost of sales increase by 5%

If the increase of sales and cost of sales is not in line, then sales could be overstated and cost of sales could be understated.

Perform extensive SP on Revenue and Purchase and ensure all Rev and Purchase transaction has been recorded.

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Co orders goods from supplier but it is still in transit.

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Co received goods but not yet received suppliers invoice. (GR IR)

If the co. record goods as purchase when it has not yet been received, then purchase is overstated. If the co. received goods but not record the purchases, then purchases could understated.

Obtain GRN to verify when goods received. Agree this to the date when the respective purchase recognised. Obtain GRN to verify when goods received. Agree this to the date when the respective purchase recognised.

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Co. made revaluation of property and gain recognised under other income.

If the co. recognise gain on revaluation under other income instead of OCI, then other income will be overstated.

Ask them to reclass this gain on revaluation to OCI.

Gain in revaluation = OTHER COMPREHENSIVE INCOME Co. ordered large no. of non-current assets but not received yet.

If the co. record PPE which is still not yet received, then PPE will be overstated.

Physically inspect the NEW ASSET recognised to ensure existence.

If the co. didn’t review the old asset for impairment, then PPE will be overstated.

Inspect impairment review document done by management to assess if write down is necessary.

Co. holds a lot of old PPE.

Recalculate the gain to ensure accuracy.

RA < CA

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Co had an old asset which was refurbished recently.

If the co. capitalised revenue expenditure during refurbishment, then PPE will be overstated.

Obtain breakdown of refurbishment and inspect the nature of the expenses. Ensure all REV. EX. Expensed off.

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Co had disposed NCA recently.

If the co. didn’t remove the disposed asset from NCA Register, then PPE will be overstated.

Inspect NCA Register to ensure all disposed asset has been removed.

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Co had disposed NCA recently. - Gain or loss on disposal.

If the co. wrongly calculate gain or loss on disposal, then profit will be misstated.

Recalculate the gain or loss on disposal to ensure accuracy.

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Co had done revaluation of property at year end.

If the co. did not revalue the asset within the same class, then PPE might be MM.

Inspect NCA Register to verify if all asset within the same class already being revalued.

= revalue ALL class of asset.

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Co.’s PPE was damaged in flood or natural disaster.

If the co. didn’t review the damaged asset for impairment, then PPE will be overstated.

Inspect impairment review document done by management to assess if write down is necessary.

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Co has too many old inventory.

If the co. didn’t review the old inventory for impairment, then Inventory will be overstated.

Inspect impairment review document done by management to assess if write down is necessary.

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Co incurred development

If the co. capitalised cost that did not meet CAPITALISATION

Obtain breakdown of development cost incurred to assess its

expenditure, to develop new product.

CRITERIA (pirate) as per IAS 38, then IA will be overstated.

NATURE of the cost. Only cost that meet CC should be capitalised.

The company should not capitalised research cost ; which will overstate its intangible asset.

Ask them to removed the research cost from IA and recognise as expenses.

If the co. did not value its inventory to the lower of cost or NRV, then inventory might be overstated. If the standard costing for inventory is not being reviewed regularly, inventory balance may be materially misstated.

Compare cost of inventory against its selling price to assess if write down is necessary.

Ias 38 : intangible asset.

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Co. incurred research expenditure which was capitalised. Ias 38 : intangible asset. RESEARCH = DR EXP CR CASH DEVELOPMENT = DR IA CR CASH

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Co. sold inventories at huge discounts during the year.

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Co use standard cost to value inventory.

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WIP valued using percentage of completion.

If the management overestimate the stage of completion, then inventory is overstated.

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Co introduce new inventory system during the year.

If the transferred figures to the new system is incorrect , the inventory maybe materially misstated.

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Co has many warehouses in which inventory counts is done.

Co may not be able to confirm count is done properly in all location. The inventory maybe materially misstated in terms of quantity or value.

Obtain stock count sheets from all warehouses and inspect the inventory listing to see it has been updated

This shows that the co. facing GC issue.

Perform going concern review on the company by obtaining their forecasted cash flow forecast for the next 5 years.

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When too many indication that the company may facing going concern issue can relate to poor ratio

If the company did not disclose their material uncertainty adequately is FS, then FS contain MM.

Obtain latest standard costing valuation and discuss with management how frequent the std costing being reviewed and updated. Obtain the calculation or report on stage of completion and recalculate the WIP balances based on percentage of completion to confirm accuracy. Enquire management and ascertain how they monitored that inventory transfer process from old to new system

If there is material uncertainty, ensure adequately disclosed in FS....