Summary of Audit Risk Past Year Question PDF

Preview

Summary

Warning: TT: undefined function: 32 Warning: TT: undefined function: 32 Summary of Audit risk (MJ19 – J14) [repeated issues highlighted ---]ISSUE CONTENT Management bias Raise finance[D14] Stock exchange listing [D15,D18, MJ18, S18] Bonus scheme [J14] Sales of share to an institutional investor [MJ1...

Description

Summary of Audit risk (MJ19 – J14) [repeated issues highlighted ---] ISSUE Management bias

1. -

Raise finance[D14] Stock exchange listing [D15,D18, MJ18, S18] Bonus scheme [J14] Sales of share to an institutional investor [MJ16] Majority of shares owned by family [MJ19]

• •

• •

•

• • 2.

Intangible asset : recognition and amortisation

S = IAS 38 Intangible Assets -

-

3.

Research and development costs [D14, MJ17, MJ18, MJ19, S18] Patents [D14] Brand name [J14, MJ17] Publication rights [MJ18] Software [MJ19] Licence [SD18, SD17] Right to use [SD16]

Provision and contingent liabilities

S = IAS 37 Provisions, Contingent Liabilities and Contingent Assets -

Court case & legal claim [D14, MJ17, SD17] Returned goods [D15] Grant repayment [D18] Ongoing tax investigation [MJ16] Lapidation cost [MJ16] Damaged factory [MJ19]

CONTENT Significant pressure to present strong financial results Risk of using creative accounting, earning management techniques, manipulation & inappropriate accounting treatment (e.g. early recognition of revenue, capitalising expenses, unreasonable estimates, reversal of provision) Inherent ROMM at the FS level Estimates use in FS subject to higher risk (ISA 540 auditing accounting estimates, including fair value accounting estimates and related disclosure) E.g. - dividend payment made each year, expectation from family member that co will make sufficient profit to pay these dividends [MJ19] R = overstate revenue, understate expenses to maximise profit R = operating income overstated

1. Recognition • Inappropriate classification • Risk that may not distinguish properly between research cost and development cost. • E.g. - If it is only at stage of testing prototypes – it appears not yet demonstrable evidence that it is technically feasible [MJ19] • E.g. - Whether co has control over the development if it has been outsourced. [MJ19] • R = asset overstated, expenses understated, profit overstated • E.g. - not all intangible amount spent on development costs has been capitalised [MJ17] intangible asset could be understated 2. Amortisation • E.g. = competitor introduce rival product, reducing period over which co’s product will generate economic benefit – should be reflected in period over which product is amortised – increase amortisation charge [D14] • Risk that amortisation period has not been appropriately assessed • Risk that amortisation did not commence at the right point • R = asset overstated, operating expenses understated 1. Provision should recognised • E.g. - co replace fault products free of charge [D15] • E.g. - co should evaluate whether grant terms are likely to met, whether it would be appropriate to recognise a provision or disclose a contingent liability for repayment of grant [D18] • Risk that necessary provision is not recognised • R = understating liabilities and operating expenses // contingent liabilities is not appropriately disclosed 2. • • • •

Provision should not be recognised E.g. - Provision for repairing factory and buy new machine There does not seem to be a present obligation Risk that provision should not be recognised R = liability overstated

4.

Goodwill [J14, MJ16, MJ18, S18]

S = IAS 38 intangible assets, IFRS 3 Business Combinations

5.

Segmental reporting disclosure [D14, MJ18, SD16]

S = IFRS 8 Operating Segments

6.

Forex transactions and subsidiary [D15, MJ18, S18, SD17]

S = IAS 21 The Effects of changes in foreign exchange rates -

7.

Purchase from foreign supplier [D15] Foreign subsidiary [MJ18, S18] Held cash in foreign currencies [SD17]

Revenue recognition

S = IFRS 15 Revenue from contracts with customers payment in advance [D15] Deposit [SD17] Annual membership [D18] Multiple revenue stream [D18] v. Disclosure [SD16] vi. Multiple-element contract [SD16] i. ii. iii. iv.

8.

Deferred tax recognition

1. draft CSOFP does not recognise goodwill • Goodwill may not arose on the acquisition, or has been fully written off • R = understatement of intangible assets at Group level 2. Goodwill has not been impaired • Necessary impairment has not been recognised • S = IAS 38 intangible assets, IFRS 3 Business Combinations • Goodwill should tested annually for impairment regardless of whether indicators of potential impairment exists. • R = Goodwill and operating profit overstated • R = non disclosure or incomplete disclosure of the necessary information • R = disclosure is inaccurate & may not reflect the way information on financial performance is monitored internally by chief operating decision maker (CODM) • Allocation of revenue, expenses and assets between segments could be subjected to manipulation if there is management bias • [SD16] - there is unusual trends in the segmental revenue figure - risk that revenue has been misallocated between segment 1. Retranslation • Risk that incorrect exchange rate used for translation and retranslation or retranslation does not happen at the year end • Calculation is complex, risk of not calculating correctly or some elements are omitted. • Risk of incorrect classification of gain on retranslation • R = trade payable & profit – over or understated depends on the rate 2. • • •

Hedging E.g. - co may entered into hedging arrangement [D15] S = IFRS 9 Financial Instruments R = Incomplete recognition of derivative financial assets or liabilities and associated gains or losses

1. Recognition • E.g. - co receive payment in advance [D15] or deposit [SD17] - Recognised as revenue instead of deferred income • Revenue should only be recognised when the performance obligation is satisfied. • Risk that timing of revenue recognition is not appropriate • For multi-element contract, whether co accounts for the elements of the contract separately • R = revenue & profit overstated, deferred revenue & current liabilities understated 2. Disclosure [SD16] • IFRS 15 contains significant disclosure requirements • R = co fails to provide sufficient disclosure on a range of matters relevant to its contracts with customers, including the significant judgements made in applying IFRS 15 to those contracts and sufficient disaggregation of the necessary disclosures. 1. Deferred tax liabilities

• S = IAS 12 Income taxes -

Deferred tax liability [D15, MJ17] Deferred tax asset [MJ16]

•

E.g. - FD suggest no deferred tax need to recognise because no plan for disposal of investment property - R = liabilities understated (no impact on profit, recognised in equity – relating to revaluation) Risk of incorrect calculation of deferred tax - R = liability may be over/under stated

2. Deferred tax asset • e.g. - some of deferred tax has been utilised this year, if no longer recoverable, would need to be written off • R = deferred tax asset overstated 9.

Revaluation -

10.

PPE [D15] Intangible assets (IA)) [MJ 18]

Impairment

S = IAS 36 impairment of assets

-

11.

CGU [MJ18] Factory [MJ19] Licence [SD16 ] NCA due to political & regulatory issues

Government grant recognition [D15, D18]

S = IAS 20 Accounting for government grants and disclosure of government assistance 12.

Inventory valuation [D15, J14, MJ17]

1. PPE [D15] • S = IAS 16 Property, Plant, Equipment • R1 = involve establish current market price or FV – subjective – valuation may not be appropriate – inherent risk • R2 = all assets in the same class to be revalued , if any not revalued – amount recognised will not be correct • R3 = depreciation not been recalculated on the new value – NCA overstated, operating expenses understated • R4 = significant disclosure in relation to policy of revaluation is required – risk that necessary disclosures are incomplete • Implication on depreciation 2. • • • • • •

Intangible asset [MJ18] S = IAS 38 Intangible Asset E.g. - revaluation of software in the absence of active market Risk that fair value could be inappropriate Risk that unlikely the revaluation should be recognised at all R = asset overstated Implications for subsequent amortisation charges – which could be overstated too

•

Reduction in revenue, reduced customer demands. damage to factory triggered impairment review Risk that recoverable amount has not been correctly determine Value in use should reflect asset current condition – expenditure to improve or enhance should not anticipated. Risk that FV less cost to sell is overestimated – (e.g. factory is damaged, machinery needs to be replaced) R = impairment loss understated, carrying value of asset overstated. Due to political issue, assets may never generate the value in use which is anticipated, FV may fallen below cost - Management should conduct impairment - R = asset overstated E.g. - grant has been recognised as other operating income Risk of recognition on an inappropriate basis R = over/understated profit Other risk - if the terms of grant have been breached – may require complete or partial repayment – associated provision for repayment is not recognised – understating liabilities

• • • • •

• • • •

1. Different customers WIP are ongoing at the year end

• S = IAS 2 Inventory • •

Each WIP will have different stage of completion and cost base at year end Valuation of WIP likely to be complex Risk of incorrect valuation

2. Customer returns goods • NRV likely to be less than cost – may indicate write off is necessary 3. Inventory in multiple location [J14] • Hard to ensure that all locations are subject to robust inventory accounting procedures • Controls may not sufficiently strong in respect of the movement of inventory and continuing procedures at year end. • Control risk • R = under or overstatement of inventory and costs of sales. 4. Faulty product [MJ17] • Included in inventory need to be written off to lower of cost or NRV – presumably NRV would be zero. • R = inventory overstated 13.

Inter-company transaction [J14, MJ18]

• •

S = IFRS 10 Consolidated Financial Statements

•

14.

•

Capital expenditure and maintenance costs [D18, MJ16]

•

S = IAS 16 Property, Plant and Equipment

• •

15.

•

New system - Data management system [D18] - Inventory control system [J14]

• • •

16.

Prepayment - Endorsement for 2 years [D18] - Royalty in advance [MJ8] - Prepayment for repair [MJ19]

• • • • • •

E.g. = management charges imposed on subsidiary At Group level, inter-company balances should be eliminated on consolidation - R = liabilities and receivable overstated If inventory transferred at a profit or loss, which then not realised by the Group at year end required elimination of unrealised profit.[J14] - R = group inventory figure and operating profit over or under stated E.g. - co has high levels of both capital expenditure and maintenance costs Risk that capital expenditure and operating expenditure have not been appropriately separated for accounting purposes. Maintenance cost could be incorrectly capitalised into NCA R = assets overstated, operating expenses understated Risk that errors could have been made in the transfer of data from the old to the new system Not all staff may yet have been trained in operating system Controls may not yet have been fully implemented – controls may take time to develop or be properly understood R = high risk of error, control risk E.g. - fee paid to celebrity athlete for 2 years [D18] E.g. - author royalty paid in advances [MJ18] Should deferring the cost, treat as prepayment Period of releasing the cost should be justify if it is not reasonable R = all expenses recognise in this year – profit and assets are understated [MJ19] prepayment should not be recognised for expense which has not yet been incurred

17.

New audit client [J14, MJ18]

• • • • •

18.

Corporate governance [D18]

• • •

• 19.

Cash-settled share-based payment scheme [D15]

• •

S = IFRS 2 share-based payment

•

20.

• •

Bank loan [D18]

S = IFRS 9 Financial Instruments • 21.

Related party transaction [D18]

S = IAS 24 Related Party Disclosure

22.

Listed companies disclosure [D15]

• • • •

R = asset overstated

No previous experience with client, first year firm audit Audit team lack of cumulative audit knowledge and experience (CAKE) R1 = detection risk R2 = comparative information and opening balances may not correct (ISA 510 Initial Audit Engagement – opening balances) Can mitigate risk if thorough planning procedures focusing on obtaining detailed knowledge and understanding of the Group E.g. - only 2 NEDs appointed, none with recent and relevant financial experience [D18] Risk that no NEDs to oversight the FS – financial reporting may be unreliable E.g. - co lack audit committee, small IA team operating independently [D18] - IA team does not have sufficient resources for thorough monitoring and reporting - Control deficiencies and recommendations may not be actioned or ignored R = increase control risk Risk of inappropriate accounting treatment The liability in respect of the plan should be measured at fair value at the year end. R = Understated liabilities, overstated profit // disclosure of the plan may not be sufficient E.g. = loan issued at deep discount Risk that FC may not be accounted for appropriately and not accrued in financial year R = FC and NCL understated E.g. = loan to managing director [D18] May not be material in monetary terms but it is material by nature R1 = necessary disclosures incomplete R2 = interest may not be accrued on loan – may not be material in monetary terms but audit judgement may conclude it is material given related party nature on the transaction.

• •

E.g. = first set of FS produced since became listed [D15] R = incomplete or inaccurate disclosures in respect of these standards and in respect of any listing rules in the jurisdiction in which the company is listed E.g. - new executive directors an new finance director recruited E.g. - lack of financial reporting expert Increase the risk that incorrect accounting treatment will occur R = control risk

S = IAS 33 Earnings per share, IFRS 8 Operating Income 23.

Lack of experience and expert [D15]

• • • •

24.

Acquired new associates [J14]

1. New investment in associate • S = IAS 28 Investment in Associates and Joint Ventures

• •

R1 = inherent risk - group lacks accounting knowledge on the appropriate accounting treatment R2 = equity method has not been properly applied

2. Investment recognised increased in value • Presumably due to inclusion of the Group’s share of associate profit • Risk that may not be calculate correctly (e.g. not based on correct share of profit) • R = investment may be over or understated 3. Possible impairment of the investment • R = Investment overstated in both individual and group FS 4. Disclosure issue • S = IAS 1 presentation of financial statements • Group’s share of post -investment profit should be recognised in profit • Risk that Co may not show income from the associate as a separate line – may have been omitted or netted against operating expenses • R = inappropriate presentation of income from associate 5. Investment may not have been classified as an associate • If the shares do not convey voting rights, it should be classified as an investment rather than an associate. • R = inappropriate classification, recognition and measurement of investment 25.

Investment properties [J14]

S = IAS 40 Investment property

1. • • •

Measurement method Can use either the FV model or cost model Risk that gain not presented in accordance with IAS 40 When FV used – gain recognised in SOPL

2. Adjustment to property value • E.g. = Increase in value does not equal to gain recognised • R = gain may be understated and part of gain may be classified elsewhere in P&L.

26.

Customer cancel ongoing contract [D15]

S = IAS 2 Inventories 27.

Component auditor [J14]

28.

Change in estimated useful life [MJ17]

3. Comparative information • Possible error is also relevant to comparative information, which may also be materially misstated. • R = other balances and transactions in the prior years have been incorrectly accounted for • E.g. = customer cancel a contract part way through its completion [D15] • Risk that bespoke WIP may be worthless and need to be written off • R = overstated WIP • Introduce audit risk that Group’s firm will be relying to some extent on their work. • Result in profit increased • Risk of management bias • R = NCA may be over/understated • change in accounting estimate is permitted

• •

29.

NCA used in production in health issues product [MJ17]

•

30.

Even after reporting period [MJ17]

• •

audit team should be sceptical and carefully consider whether the change is justified. If the change were found to be inappropriate it would need to be corrected, May need to be measured and disclose in accordance with IAS 36 Impairment of Assets and or IFRS 5 Assets Held for Sale and Discontinued Operations. E.g. - Acquisition of co take place after year end R = necessary disclosures are not made

S = IAS 10 events after reporting period , IFRS 3 business combination 31.

Borrowing cost [MJ16]

•

S = IAS 23 Borrowing costs

•

32.

• • •

Disposal of share [MJ16]

S = IFRS 10 consolidated financial statements, IFRS 12 Disclosure of interest in other entities

•

• • •

33.

CFO block access to audit committee [MJ18]

• • • • •

34.

Online sales [MJ19]

• •

35.

Discount and offer to customer [MJ19]

• •

•

36.

Agricultural assets [MJ19]

S = IAS 41 Agriculture

• • • • •

E.g. = finance costs in respect of debenture taken to finance modernisation programme Shall capitalised of modernisation met definition of qualifying assets Risk of inappropriate treatment of borrowing cost R = NCA may be over or understated E.g. profit made on the disposal of shares has been separately disclosed as part of profit It is not correct to recognise profit on disposal in the statement of profit or loss if the disposal does not result in the parent losing control over the subsidiary Should be recognise directly in the equity attributed to parents R = profit before tax overstated R = tax charge may be overstated if calculated based on profit including gain made on the share disposal R = disclosure requirement are not followed ISA 260 communication with those charged with governance – require communication Indicate CFO has something to hide Control environment not strong ISA 210 Agreeing the terms of audit engagements – provide unrestricted access R = create audit risk Can bring ROMM, e.g. cut off and timing of revenue recognition can be problematical If discount change frequently Co should ensure internal controls operating effectively so that the accounting system is updated whenever the level and...