Audit Risk Areas

Question 1

Name 2 audit risk areas and why they have been identified as audit risks

Answer 1

NCA:
Incorrect capitalization of assets? Overstatement? Depreciation from ready for use?
Revenue / COS:
new loan application for another bank loan, have they overstated their revenue to seem more profitable? Management bias.
CASH, increased risk of unrecorded transactions, understatement?

Question 2

Name an audit risk area and why they have been identified as audit risks
(liabilities)

Answer 2

Payables -
FX rates been accounted for properly at YE, necessary adjustments made if unpaid? [business abroad]
Fines / penalties - failure of an license, regulatory compliance

Question 3

Name an audit risk area and why they have been identified as audit risks
(Finance costs)

Answer 3

Finance costs:
Interest on loans being paid properly?
arrears, accrued for last payment?
New loan been acquired during the year?

Question 4

Name an audit risk area and why they have been identified as audit risks
(Inventory)

Answer 4

Inventory:
Perishable nature of inventory > slow-moving. {food}
Purchased from foreign suppliers > translation errors.

Question 5

Name an audit risk area and why they have been identified as audit risks
(GC)

Answer 5

Going concern:
Sig growth > rapid expansion + seasonal nature = cash flow difficulties
(especially in seasons when sales are low but liabilities are the same)
More loans > further debt > strain on cash flow
Compliance e.g. licensing > non-compliant > cease to trade

Question 6

Name an audit risk area and why they have been identified as audit risks
(1st year audit)

Answer 6

First-year audit:
Lack of cumulative knowledge / experience > Increased risk > APs dont detect MM in FS
Opening balances