Audit risk & procedures questions Flashcards
How should you approach the risk and procedure questions
Risks
- Identify the information in the question which gives rise to the risk
- State the correct accounting treatment
- State how the client could be getting this wrong
- State what this would mean for the balance in the financial statements (under/over stated)
- Use any data to help justify your risk.
- Keep an eye out for any estimates which will are risky by their very nature!
Procedures
- Include enough detail so an audit junior would know what they were doing!
- Below are some commonly examined areas and audit procedures. Not all the procedures will be relevant for every question as it will depend on the specific risks in the question. Key is to apply your knowledge and think about what procedure would address the risk
What are the issues with revenue
Usually deferred revenue where payment is received up front or;
Accrued revenue which is an estimate or;
Revenue where there is a risk it has been recognised before they’ve despatched the goods or;
Revenue where there have been complaints/items are expected to be returned and therefore a provision is required
What are the risks for revenue?
Revenue is paid in advance/up front (1/2)
The up-front payments may not be correctly deferred (1/2)
Sales may have been recorded that are not yet despatched (1/2)
Complaints (1/2) will lead to credit notes (1/2) and there is a risk these have not been removed from revenue correctly (1/2)
What are the procedures for revenue?
Evaluate and test controls over the recording of revenue (1)
Discuss with management the reason for the movement (1/2) – then suggest a couple of possible reasons
Review post year end management accounts for evidence of under/overstated revenue indicating an overstatement/understatement of pre year end revenue (1)
Review post year end credit notes (1) for evidence of reversal of revenue recorded pre year end (1)
Then think sensibly – you need to check they have deferred the revenue correctly, or only recorded sales where good have been despatched, how will you do that?
Agree amounts recorded to invoice/contract/bank (1)
Obtain management calculations and recalculate (1/2) the deferred/accrued amount
Agree sales to goods despatch notes to ensure recorded in correct period (1)
• PPE (can adapt for intangibles)
The NCA asset balance consists of two balances netted – cost less accumulated depreciation (or cost less accumulated amortisation) so auditor needs comfort over both of these.
Evaluate and test controls over the recording of revenue (1)
Discuss with management the reason for the movement (1/2) – then suggest a couple of possible reasons
Review post year end management accounts for evidence of under/overstated revenue indicating an overstatement/understatement of pre year end revenue (1)
Review post year end credit notes (1) for evidence of reversal of revenue recorded pre year end (1)
Then think sensibly – you need to check they have deferred the revenue correctly, or only recorded sales where good have been despatched, how will you do that?
Agree amounts recorded to invoice/contract/bank (1)
Obtain management calculations and recalculate (1/2) the deferred/accrued amount
Agree sales to goods despatch notes to ensure recorded in correct period (1)
What are the issues with PPE
The NCA asset balance consists of two balances netted – cost less accumulated depreciation (or cost less accumulated amortisation) so auditor needs comfort over both of these.
What are the procedures for PPE?
Agree cost to purchase invoice (1), check description to ensure were able to capitalise (no repair costs!) (1)
Review client depreciation policy for reasonableness/discuss with them (1)
Recalculate depreciation charge for a sample of assets (1/2)
Acquired/ constructed assets ensure depreciated from date ready for use (1)
For revalued assets check reasonableness of revaluations with reference to surveyors reports/use our own auditors expert to value/ look at other similar assets values (1)
For assets disposed of review sales invoice/proceeds to bank statement (1)
Recalculate profit/loss on disposal (1/2)
Select a sample on NCA from NCA register and physically verify (existence) , select a sample of assets seen and check on register (completeness) (1)
Check condition of assets for any indication of impairment, to help test valuation (1)
Check sample of assets to documentation for R&O’s i.e land registry, log books (1)
Review repairs and renewals account and check nothing expensed that should have been capitalised (completeness) (1)
What is the risk surrounding inventory/WIP?
Need to obtain comfort over both the quantity of inventory and the valuation
What are the procedures for inventory/WIP?
Quantity – Attend stock count to ascertain whether this control works (1)
(Can mention things you would expect to see at the stock count i.e. clear instructions, counting staff know what they are counting, counting staff not usual custodians of inventory, procedures to prevent double counting, procedures around shipping inventory out and in for cut off)
At the stock count we would also obtain a full inventory listing and perform our own test counts (select a sample of inventory from the listing and check existence, select a sample from warehouse and check is on the listing (completeness) (1)
Inspect condition of the inventory to assess value/any required write down (1)
Enquire with staff around any slow moving or obsolete inventory (1)
Valuation – Inventory should be valued at the lower of cost and NRV.
Check material costs to purchase invoice (1)
Check labour costs to timesheets and payroll records (1)
Overheads can be checked to management calc ulations (1), recalculated (1/2) and check that assumptions are reasonable (1)
Inspect post year end selling prices/sales for NRV (1)
Review aged inventory listing for any slow-moving items which may be obsolete (1)
Discuss how management decide which inventory needs writing down and assess if reasonable (1)
Recalculate any inventory write down (1/2)
Confirm any inventory held at third party sites with the third party (1)
What is the risk surrounding provisions?
Provisions are estimates so are inherently risky
What are the procedures surrounding procedures?
Discuss basis for provision with the directors (1)
Assess if provision assumptions reasonable (1)
Recalculate provision based on management assumptions (1/2)
Review post year end to see how accurate provision was (is possible)/prior year provision vs actual (1)
Examine correspondence with third party who have information on provision i.e lawyers (1)
Review the financial statements for appropriate disclosure of provision (1)
Obtain a written representation regarding the reasonableness of the assumptions made (1)
Review the board minutes for evidence of discussions of provision (1)
What is the risk with trade receivables?
Mainly worried on overstatement/whether the balance is recoverable
What are the procedures to test trade receivables?
Obtain aged receivables list and review for any overdue debts and discuss with management (1)
Enquire with management as to methodology behind bad debt provision and assess reasonableness (1)
Recalculate provision (1/2)
Perform after date cash testing to assess recoverability/valuation (1)
Review post year end credit notes relating to year end receivables to text existence and valuation (1)
Review board mins/enquire with management on any irrecoverable receivables (1)
Review correspondence with customers for evidence of likelihood payment will be received (1)
Ascertain and test credit control procedures (1)
Compare ageing of receivables with prior year (1)
Test existence and completeness by trade receivables confirmations sent to a sample of customers (1)
What are the procedures to check going concern?
Examine profit and cash flow forecasts for at least 12 months from year end (1):
• Consider the reasonableness of the assumptions upon which the forecasts are base (1)
• The results of sensitivity analysis on key components of the forecast/perform sensitivity analysis on key components of the forecast (1)
• Company’s ability to meet debts as they fall due (1)
Review post year end management accounts to assess the company’s performance/if can still continue (1)
Inspect borrowing agreements/covenants/correspondence with bank for deteriorating relationship (1)
Obtain written management representations on the feasibility of future plans (1)
Enquire of the company’s legal advisors/assess impact of fines/regulator correspondence (1)
What are the general risk and procedure for forex?
Risk : Sales/purchases made in local currency (1/2) which could give rise to translation errors (1/2)
Procedure: For a sample of transactions, agree the exchange rate used to a reliable third party source (1) and reperform/recalculate the calculation (1/2)
What is the general risk if the client is new?
Risk: X is a new audit client. The firm has a lack of cumulative audit knowledge and experience which increases detection risk (1/2), and there will be limited comfort over opening balances (1/2).
Procedure: Obtain the previous auditor’s working papers and assess the reliability of opening balances. (1)
Ensure sufficient time is spent on understanding the client, and assign more experienced staff. (1)
(agree py, see previous audit papers)
