Audit Risk Areas Flashcards
and procedures
Why is Revenue a audit risk area?
(6)
FETCHR
- Risk of Fraud: KPI
- Estimates / Judgments: returns, discounts, rebates, or variable consideration.
- Timing / Cutoff errors: YE
- Complex recognition standards: revenue from contracts with customers. (5 step rule).
- High volume: harder to detect fraud.
- RPT: not reflect market conditions.
Why is Finance costs an audit risk area?
(5)
CMCNF
- Complex calculations: loan interest rates, discount amortization.
- Misclassification.
- Completeness: Appropriate accruals for PE.
- New loans acquired during the year.
- Fraud risk to meet covenants.
Why is Inventory identified as audit risk area?
(7)
IGNQSTF
Inventory has been under/overstated:
1. Inventory days increase/decrease.
2. GPM should decrease if supplies price increases.
3. New products / updated = older products may become obsolete.
4. Quality issues, new supplier?
5. System used > inaccurate if not updated > reflects costs, labor?
6. Translation errors / FX rates.
7. First-year audit - opening balances
Why is Going concern an audit risk?
(5)
- Rapid expansion
- Seasonal nature: sales are low, liabilities same.
- Difficult trading conditions.
- Non-compliance: Loss of license.
- Loans: Strain on cash flow.
Why is a first-year audit an audit risk?
(2)
- Lack of cumulative knowledge / experience:
Increased risk that APs don’t detect MM in FS. - Lack of assurance over Opening balances.
Why is WIP an audit risk?
- Valuation: misestimating costs + overheads.
- Cutoff issues: Misstate inventory + profit.
- Existence and completeness.
- Revenue recognition on long-term projects.
- Impairment / Obsolesce: may not reflect current market conditions.
Why is it an audit risk when there is manual logging of data into business systems?
Result in errors.
Increased volume of sales > backlog of recording.
What are some examples of Audit Procedures for WIP?
(5)
- Discuss with management reasons for increase compared to PY.
- Evaluate and test controls.
- Ascertain basis for any estimations, consider reasonableness.
- Reperform calculations.
- Inspect ageing of WIP to identify unbilled / irrecoverable WIP.
What are some examples of Audit Procedures for Trade Payables?
- Inspect contracts whether there are shorter credit periods.
- Direct confirmation of balances, investigate differences.
- Aged TP analysis to identify old debts due.
What are Procedures to address Inventory being a risk area?
BOATID
- Discuss with management basis for costing.
- Procedures for Op Balances.
- Attend Inventory counts:
- evaluate / test controls over procedures.
- identify slow moving / obsolete. - Sample + Recalculate translation calculations. Rates used reputable?
- Inspect aged-inventory analysis.
- Defective items W/D, confirmed with WR.
What are Procedures to address Inventory being a risk area?
Inv counts
Aged analysis
Translations
Basis
W/D
Op Bals
What are Procedures to address Finance cost being a risk area?
(5)
VARAS
- Verify the completeness of the accrued FCs.
- Analytical procedures: comparing to PY / Expectations.
- Review loan agreements for terms, rates and compliance.
- Appropriateness of disclosures and classifications.
- Substantive testing: Recalculating interest expenses.
What are procedures for addressing WIP as an audit risk?
PART
- Physical verification: Inspect WIP to verify existence and stage of completion.
- Analyze cutoff:
- Recalculate cost allocation: Test reasonableness.
- Test for impairment.
Why are Trade Receivables an audit risk area?
(4)
- Movement in TR days suggests under/overstatement.
- Outside of Credit period?
- Amount material if refusal to pay.
- Disputes with customers, indicate further disputes.
What are procedures to address Trade Receivables as an audit risk?
CARDBC
- Inspect contracts to ascertain change in credit terms.
- TR aged analysis to identify overdue balances.
- Recalculate Allowances.
- Direct confirmation of balances at YE.
- Discuss with management, basis for Allowances.
- Inspect credit notes raised after YE.
