Audit Risks & further Actions

Question 1

5 types of inherent risks

Answer 1

1. Complexity
2. Subjectivity
3. Change
4. Uncertainty
5. Susceptability to mgmt bias or fraud

Question 3

How prioritised?

Answer 3

On bass of likelihood and magnitude.

Question 4

Evaluate Risk?

Answer 4

How & where (accounting treatment) will impact on FS arise

Question 5

Commercial aspects

Answer 5

Disclosing a penalty as contingent liability may alert regulator thus making penalty probably.

So may opt not to disclose but if disclosed.
further action:

Reliable estimate can be made w. reference to historical fines or similar issue in market. Provision should be made

Question 6

Assess Materiality

Answer 6

Materialby nature
-covenant breach
- Profit to loss
- related parties
-

Question 7

Implication of mgmt integrity

Answer 7

Increased risk of MM at FS lvl and reduced reliability on mgmt representation.

Question 8

Valuation of inventory

Answer 8

IAS 2 Inventories requires inventory to be valued at the lower of cost and net realisable
value (NRV). [½ mark]

The inventory holding period has increased from 61 to 76 indicating the company is
holding stock for longer. [½ mark]

As demand is falling, and goods are of a perishable nature (e.g. natural fruit juices), it is likely that NRV is lower than cost. [1 mark]
There is a risk that inventory is overstated as a result

Question 9

Foreign exchange

Answer 9

FizzyPop Co is a global company and will therefore have foreign currency transactions
included in its financial statements. [½ mark]
IAS 21 The Effects of Changes in Foreign Exchange Rates requires transactions to be
translated using the spot rate on the transaction date or an average exchange rate if
this is appropriate. Monetary balances, such as year-end receivables, payables and
foreign currency cash balances must be remeasured using the year-end exchange rate.
[1 mark]
There is a risk of misstatement of sales, purchases, payables, receivables and inventory
if an incorrect exchange rate has been used, errors have been made in the calculation
or if foreign currency balances at the year-end have not been retranslated. [1 mark]