audit risk and related substantive procedures Flashcards
Information given in
question
1 Increase in receivables /turnover ratio
2 Dispute with debtors.
RISK(WHAT) AND EXPLANATION(WHY)?
Valuation of debtors:
**Indicates the existence **of slow moving and doubtful debts, which may require provision. It also Indicates that company has poor credit controls.
Information given in
question
1 Increase in receivables /turnover ratio
2 Dispute with debtors.
KEY AUDIT PROCEDURES( HOW)?
Valuation and Allocation:
(Procedures to ensure appropriate Provision for bad debts)
1.** Review adequacy for provisions, and assumptions** used for calculation of provision for bad debts.
- Obtain aging report of receivables and test its accuracy. Compare aging with credit period of company and identify long outstanding debtors. Ensure they are provided for.
3.** Inquire about disputed receivables**, Inspect customer communication and board minutes for evidence of disputes and expected recovery.
- Examine cash recovery from debtors after the year end. Also examine write-offs of debts after the year (normally an adjusting event).
5.** Assessed historical accuracy of provision for bad debts**
Information given in
question
Decrease in creditors (or creditors turnover ratio)
RISK(WHAT) AND EXPLANATION(WHY)?
Completeness of creditors:
Decrease Indicates understatement of creditors.
Information given in
question
Decrease in creditors (or creditors turnover ratio)
KEY AUDIT PROCEDURES( HOW)?
Procedures to ensure Completeness of Trade Payables:
- Perform cut off test on purchases.
- Inspect pending GRNs (Le goods received but suppliers’ invoices not received) and ensure they are recorded at balance sheet date.
3.** Compare account statements** sent by suppliers with their respective ledger accounts.
4.** Review significant payments** made after the year to identify if any liability relates to current year.
- Review the list of creditors and **compare with previous year to identify **major suppliers which have been omitted, or have declined significantly. Inquire reasons.
Information given in
question
1Warranty.
2 Increase in warranty period/complains of customers
RISK(WHAT) AND EXPLANATION(WHY)?.
Provision for warranty:
Estimated expense for provision of warranty may not be reasonable considering warranty period, level of sales, or complains by customers.
Information given in
question
1Warranty.
2 Increase in warranty period/complains of customers.
KEY AUDIT PROCEDURES( HOW)?
1 Review warranty claims after the year.
2 Review client’s working for warranty provision and check appropriateness of assumptions in the current situations.
3 Consider need to engage an expert to calculate warranty provision.
Information given in
question
Closure of a factory..
Non CA HELD FOR SALE?
RISK(WHAT) AND EXPLANATION(WHY)?.
Non-current assets held for sale:
Assets may not have been appropriately classified and measured.
Information given in
question
Closure of a factory..
Non CA HELD FOR SALE?
KEY AUDIT PROCEDURES( HOW)?
1 Read minutes of board meeting to check approval to sell assets.
2 Review steps taken by management to sell the New assets e.g. any correspondence or agreement with prospective buyer.
3 Check whether non-current assets held for sale are
a Measured at fair value.
b Presented separately in balance sheet under Current Assets.
c No more depreciated.
4 Obtain valuation report of expert to confirm fair value of assets.
5 Check that discontinued operations are separately presented, and disclosed.
Information given in
question
Closure of a factory..
Provision for restructuring/staff termination
RISK(WHAT) AND EXPLANATION(WHY)?.
Provision for restructuring/staff termination:
Restructuring provision may not be appropriately recorded.
Information given in
question
Closure of a factory..
Provision for restructuring/staff termination
KEY AUDIT PROCEDURES( HOW)?.
1 Obtain working papers prepared by client for restructuring provision.
2 Obtain list of redundant employees and ensure all of them are included in calculation.
3 Inquire from terminated employees regarding agreed remuneration.
4 Read minutes of board meeting to identify final settlement with labour union etc.
Information given in
question Devlopment COST recognized
RISK(WHAT) AND EXPLANATION(WHY)?.
Devlopment Cost There may be misclassification between Research and Development costs. Further, development cost may not have met recognition criteria
Information given in
question Devlopment COST recognized
KEY AUDIT PROCEDURES( HOW)?.
Development Cost:
- Ensure that development cost is recognized only if criteria is met as required by AFRF. If **criteria is not met, **it should be expensed out.
- .Discuss the project/product with management to
assess the feasibility of the project/product
a ) review projections and forecast for reasonableness,
b) assess production and marketing plans and whether a market (or use) actually exists
c) consider funding requirements to completion.
d) representation from management regarding intention to complete the project, and either to use or sell it.
3.** For a sample of costs, inspect supporting documents **eg, development contracts, biling timesheets and patents registration.
4 Review development cost to verify that **cost is appropriately classified **and does not Include research expenses.
5 Discuss with management and review for** possibility of impairment subsequent to recognition.**
Information given in
question
1 Decline in Sales.
2 Legal action by other parties on infringements of copyrights
RISK(WHAT) AND EXPLANATION(WHY)?.
Valuation of patents and development costs
Value in use of patent/development cost may have decreased because of which is an indication of impairment.
Information given in
question
1 Decline in Sales.
2 Legal action by other parties on infringements of copyrights
KEY AUDIT PROCEDURES( HOW)?.
1 Inquire the client about calculation of value in use of intangible asset, and check reasonableness of the basis of calculations.
2 Obtain confirmation from legal advisor regarding possible outcome of any litigation.
