Auditor's Responses Flashcards
Auditor’s response for new client?
Ensure they have a suitably experienced team. Adequate resources should be allocated to each team member to obtain understanding of company and ROMM
Auditor’s response for company considering stock exchange listing and CEO wants to report rising profit trend?
An experienced audit team that maintains professional scepticism. Review of significant one-off journal entries should be performed
Auditor’s response for price of components steadily increasing when inventory is valued at cost?
Also select a sample of inventory items and compare cost shown on PI with sales price charged at and after year end to confirm that NRV is above cost
Auditor’s response for revalaution of property from 3.4 to 8.4 based on a management revaluation
Agree values on valuation records to NCA register and confirm the revaluation has been recorded correctly
Auditor’s response for period over which plant and equipment is depreciation has been extended from five to eight years?
Compare eight-year useful life should be compared to how often these assets are replaced, as this provides evidence of useful life of assets
Auditor’s response for recognised receivable in respect of damages as lawyer advised action will likely be successful
Audit team should obtain written confirmation from supplier’s lawyer has been settled
Auditor’s response for company’s credit controller absent for four months and receivables collection period increased from 45 to 75 days?
Extended post year‐end cash receipts testing and a review of the aged receivables ledger to assess valuation and need for increased level of allowance for receivables
Auditor’s response for a payroll clerk carried out fraudulent transactions at company and there is a concern additional frauds have taken place?
Additional substantive testing shou ld be conducted over the affected areas of the accounting records, particularly payroll
Auditor’s response for when a client wants the audit to be completed one month before year end?
Auditor should assign more staff to company, as more substantive testing required due to increased risk of error and detection risk
Auditor’s response for when purchases raw materials from overseas suppliers and has responsibility for goods at point of dispatch, with materials in transit for six weeks
Audit team should undertake detailed cut-off testing of purchases of raw materials at year end
Auditor’s response for when company places reliance on controls testing work undertaken by IA department?
Before using work of IA, audit team need to evaluate and perform audit procedures on the entirety of work which they plan to use to determine adequacy for purposes of the audit
Auditor’s response for when finance director doesn’t believe an allowance for receivables is needed?
Test the controls surroinding way finance director identifies irrecoverable receivables and credit control processes to ensure they are operating effectively
Auditor’s response for when company changed one television speaker suppliers to a cheaper alternative, leading to an increase in warranty claims?
Review level of claims received during the year and post-year-end and compare this to provision made at year end to assess adequacy of the provision
Auditor’s response for when directors only disclosed the amount of renumeration payable to each director and doesn’t comply with local legislation
If disclosure is inadequate, then request management to amend the directors’ remuneration disclosures and review for compliance with local legislation
Auditor’s response for when explanation for when company intends to capitalise all costs of an intangible asset
Obtain a breakdown of expenditure capitalised and agree to supporting documentation as to whether costs relate to research or development stage
Auditor’s response for an interest bearing loan obtain and will be repaid in quarterly instalments over four years
Review loan agreement to confirm details and reperform company’s calculation to confirm loan has been correctly split between non-current and current liabilities
Auditor’s response for directors are intending to propose a final dividend once financial statements are finalised?
Discuss with management and confirm dividend not recognised within liabilities in the FSs
Auditors respense for when company spent $1m on refurbhishing stores with this pexenditure is recognised as PPE in SFP
Obtain schedule of costs which have been capitalised as part of refurbishment programme. Review documentation to ensure invoices are capital in nature
Auditor’s response for when daily cash taking reports sent to head show an increasing number of cash shortages when comparing contents of cash registers to reports?
Discuss with directors whether these cash shortages may be indicative of fraud
Auditor’s response for there being an increase in corporate custoemr accounts but no increase for allowance made?
Carry out extended post-year-end cash receipts testing to identify if overdue balances have been properly cleared after reporting date
Auditor’s response for supplier statements indicating a higher balance is owing by company than is shown on list of individual supplier balances
Review supplier statement reconciliations and discuss with payables ledger clerk why they have been included as reconciling items rather than investigated
Auditor’s response for inventory being noted as being damanged due to containing contaminated sole. And inventory holding period increased from 28 days to 54 days
Discuss with finance director whether damaged inventory is written down to its NRV and agree write down to final inventory valuation
Auditor’s response explanation for last year’s management report higlighted a number of significant deficiencies in company’s payroll cycle?
If recommendations haven’t been implemented, adopt a fully substantive approach to address completeness and accuracy of wages and salaries expense
Auditor’s response for company’s operating profit margin decreasing and gross profit margin increasing
Review nature of a sample of operating expenses during the year to identify if any direct costs have been incorrectly classified as overhead expenditure
Auditor’s response for a patent cost
Audit team should obtain a breakdown of total amount capitalised and review costs to ensure they’re allowable under IAS 38
Auditor’s response for a batch of invoices miscoded and not recorded as trade payables. The payables payment period has decreased from 64 days to 39 days
Detailed testing of trade payables balance, including a review of supplier statement reconciliations, should be carried out to ensure liabilities are recorded
Auditor’s response for 1.1 inventory damaged as a result of figure and has not been replaced. Along with 1.9 inventory balance in year end and inventory holding period has increased?
Audit team should discuss with management process for identifying damaged inventory items following the fire and review outcome to agree that items identified have been written off incorrectly
Auditor’s response for including a current asset of 1.1 in respect of an insurance claim relating to the fire and insurance company hasn’t responded to the claim?
If receipt is not virtually certain, auditor should request management remove it from profit and receivables
Auditor’s response for an additional bonus is payable to sales staff which gives an incentive to achieve sales targets in that period
Audit team should extent cut-off testing around year-end
Auditor’s response for trade discounts offered to regular customers been separately accounted for as an expense?
review a breakdown of revenue and cost of sales to agree that discounts have been accounted for correctly
Auditor’s response for being under tax investigation relating to sales tax and is likely that company will be required to pay a penalty of 0.6
The audit team should obtain a copy of letter from tax authorities and discuss matter with the directors
Auditor’s response for a new accounting system was introduced and post-impelementation testing has not been conducted?
Audit team should undertake detailed testing to confirm that all balances have been completely and accurately transferred to the new accounting system
Auditor’s response to the risk that amortisation has not been correctly calculated for the period resulting in misstated amortisation?
Reperform calculations to confirm the amounts are accurate
Auditor’s response for significant staff costs involved in preparation of site for new machinery
Audit team should undertake a review of staff costs expensed and process for allocating staff costs to work undertaken to confirm the amounts that should be capitalised as part of cost of machinery
Auditors response for a a member of finance team fradulently purchased assets for personal use
Audit team should discuss fraud with management tto understand how fraud was detected and corrected. Along with understanding the internal controls
Auditors response for directors not accounted for any costs under new contract for bottles as no amnounts are due to be paid until after year end
Audit team should review terms of contract to understand amounts payable and terms of payment
Auditors response for strict covenants in place regarding the loan?
Review the covenant calculations prepared by the company at the year end and identify whether any defaults have occurred; if so, determine the effect on the company
Auditor’s response for company has a returns policy allowing a customer to return goods within 28 days of purchase if dissatisfied with the product
Compare level of post-year-end returns to refund liability and discuss any significant differences with management
Auditor’s response for central warehouse and all 20 branches will be carrying out an inventory count at year-end date 31 August
Audit team should assess inventory counts they will attend. This must contain count for central warehouse and branches which have most material balances of inventory
Auditor’s response for dismissal of payables supervisor, PIs have yet to be recorded in the individual supplier accounts
Review the unprocessed invoices file at year-end to identify any invoices which relate to supply of pre-year-end goods and ensure properly accrued for year-end FSs and recognised as a liability
Auditor’s response for staff training costs being capitalised for purchasing a non-current asset?
Discuss accounting treatment with finance director and request training costs are written off to SPL to ensure treatment is in accordance with IAS 16. If adjusted, review journal entry for accuracy
Auditor’s response for company breaching terms of overdraft facility and company is dependent on this overdraft facility
Audit team should undertake detailed going concern testing, reviewing impact of a non-renewal of the overdraft facility
Auditor’s response for customers paying a 25% deposit on signing the contract to purchase the playgrounds
During final audit, audit team should undertake increased testing over cut-off of revenue and completeness of deferred income
Auditor’s response for audit team will only attend WIP counts at 5 of the 16 sites
Audit should assess which inventory counts team will attend, most likely to those with most material WIP balances or having the greatest ROMM
Auditor’s response for a rights issue in the year. There is a non-standard transaction and there is increased risk that issue has not been recorded correctly
Recalculate the split of share capital and share premium and agree this to journal entry to record the rights issue
Auditor’s response for a payroll function is outsourced to an external service organisation
Consideration should be given to contacting the auditor of service organsiation to confirm the level of controls in place
Auditor’s response for a temporary accountant being put in?
Audit team should ensure increased substantive procedures are undertaken on material areas of FSs to reduce audit risk
Auditor’s response for FSs to be prepared in order to secure bank finance and management wish to report strong results
Detailed cut-off testing on areas such as revenue, inventory and paaybles should be performed to ensure cut-off correctly applied. Review of significant judgments and estimates
Auditor’s response for a specialised machine was acquired and staff members had to be trained in machine’s use at a cost of 15 which has been capitalised as part of the cost of the machine
Obtain breakdown of capitalised costs and agree to supporting documentation to ensure they meet recoginition criteria in IAS 16. Also discuss accounting treatment with directors
Auditor’s response for directors announed that a brand was being discontinued resulting in four members of staff being made redundant
Obtain calculation of redundancy payments and agree that a provision has been included at a liabiltiy in year-end FSs
Auditor’s response for company’s suppliers have been paid on 1 June 20X5 and payment has been included as an unpresented item in year-end bank reconciliation
Request that bank reconciliation is amended to remove supplier payments at year end as these should be accounted for in 31 May 20X6 FSs
Auditor’s response for finance director is planning on reducing estimated return rate for goods sold on a sale or return basis to wholesale customers from 10% to 5%
Review a period of 60 days to quantify level of return in specified period and compare to assumed rate of 5%
Auditor’s response for surplus plant and machinery was sold during the yer, resulting in a loss on disposal of 160
Discuss depreciation policy for plant and machinery with finance director to assess its reasonableness
Auditor’s response for financial controller dismissed and threatening to sue company for unfair dismissal
Audit team enquire from company’s lawyers of existence and likelihood of success of any claim from former financial controller
Auditor’s response for if production provblems affecting quality of a significant batch of tyres. Therefore inventory holding period has increased from 34 to 41 days
Testing should be undertaken to confirm cost and NRV of affected products in inventory and all inventory on a line-by-line basis is valued correctly
Auditor’s response for a significant customer has been granted a six-month payment break and receivables collection period has increased from 38 to 51 days
Review and test controls surronding how finance director identifies old or potentially irrecoverable receivables balances and credit control to ensure they are operating effectively
Auditor’s response for company wanting to restructure its debt finance. But interest cover decreased and gearing has increased
Significant estimates and judgements should be carefully reviewed in light of the misstatement risk. Adequate time shopuld be allocated for team members to obtain understanding of the company
Auditor’s response for bonus issue and share capital should increase and a reserve should decrease accordingly
Review treatment of bonus issue and agree increase in shares to share register and share certificates
Auditor’s response for a customer has returned $120,000 of faulty goods to the company before the year end but a credit note is yet to be issued?
Inspect a copy of the credit note and confirm an adjustment to revenue
Auditor’s response for the company’s suppliers have been paid on 1 June 20X5 and the payment has been included as an unpresented item in the year-end bank reconciliation?
Request that the bank reconciliation is amended to remove the supplier payments at the year end as these should be recognised in the 31 May 20X6 financial statements.
Auditors response for a payroll clerk was dismissed as they had carried out fraudulent transactions at Lapis Co. Controls have since been implemented to prevent this reoccurring
Additional substantive testing should be conducted over the affected areas of the accounting records, particularly payroll, to establish if there have been any further fraudulent transactions
Auditor’s response for Lapis Co is planning to include a $0.8m receivable relating to a supplier rebate based on purchases for the year?
Review post‐year‐end correspondence with the supplier for evidence of the rebate being applied
Auditor’s response if sales system was installed but it was not felt necessary to run old and new system in parallel?
Perform substantive tests over the opening balances to ensure they have been correctly transferred from the old system.
Auditor’s response if a new accounting system was introduced in March 20X5 and post implementation testing has not been conducted.
The audit team should undertake detailed testing to confirm that all balances have been completely and accurately transferred to the new accounting system
Auditor’s response if Hart Co placed an order for $2.4m of machinery, paying $1 m in advance. The machinery was due to be received in July 20X5 but will now be delivered post year end
Review the non‐current asset register to determine if the $1m paid in advance has been capitalised
Auditor’s response if Hart Co made a rights issue in the year. This is a non‐standard transaction and there is increased risk that the issue has not been recorded correctly?
They should recalculate the split of share capital and share premium and agree this to the journal entry to record the rights issue.
Auditor’s response if Hart Co made a rights issue in the year. This is a non‐standard transaction and there is increased risk that the issue has not been recorded correctly?
Perform substantive testing on the transfer of information from the old to the new system
Auditor’s response if Prancer Construction Co offers its customers a building warranty of five years, which covers any construction defects?
Compare the prior year provision with the actual level of claims in the year, to assess the reasonableness of the judgements made by management.
Auditor’s response if a customer of Hurling Co, has announced that it intends to commence legal action for a loss of information and profits as a result of the Luge product sold to them
Caving & Co should write to the company’s lawyers to enquire of the existence and likelihood of success of any claim from Petanque Co
Auditor’s response if Centipede Co maintains accounting records at four additional sites which were not visited during the interim audit, and the records from these sites are incorporated monthly into the general ledger
Discuss with management the significance and materiality of the records maintained at the four sites
Auditor’s response if operating expenses have increased by 51% compared with an increase in cost of sales of only 13% and revenue of 19%?
Classification of costs between costs of sales and operating expenses and compare to prior years
Auditor’s response if In June, a fire damaged inventory such that it has been written down from $0.9 million to $0.2 million which is its scrap value?
Review whether any of the goods were sold pre or post year end and at what value
Auditor’s response if sales-related bonus scheme has neen introduced in the year?
Increased sales cut‐off testing will be performed along with a review of any post‐year‐end cancellations of contracts as they may indicate cut‐off errors
Auditor’s response if there are production problems which have affected the quality of significant batch of tyres. In addition to inventory holding period has increased from 34 to 41 days?
Testing undertaken to confirm cost and NRV of affected products
Auditor’s response if FSs have been prepared to secure bank finance and management wish to report strong results?
Detailed cut-off testing on areas such as revenue and payables to ensure cut-off is correctly applied
Auditor’s response if company purchases their goods from its main suppleir and has responsibility for goods at the point of dispatch?
Review controls the company ahs in palce to ensure inventory is recorded from point of dispatch
Auditor’s response if company offers its customers a warranty at no extra cost, which guarantees the playgrounds will function as expected for three eyars?
Audit team should compare prior year provision with actual level of claims in the year
Auditor’s response if company raised new finance through issuing 1.2 of shares at a premium?
Audit team should confirm proceeds of 1.2 were received and that split of share capital and share premium is accurately recorded
Auditors response if discovered that a significant teeming and lading fraud had been carried out by 4 members of the sales ledger department?
Review receivables listing to identify any unusual postings to receivables balances as this could indicate further fraud
Is accounting treatment an auditor’s response?
No
Auditor’s response for forecast ratio from FD shows gross profit margin increase and operating profit margin decrease?
Classification of costs between cost of sales and operating expenses should be reviewed in comparison to prior year and inconsistencies investigated
Auditor’s response for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?
The completeness of the perpetual inventory counts should be reviewed and the controls over the counts and adjustments to records should be tested
Auditor’s response for during itnerim audit, it was noted that there were significant exceptions with inventory records being higher than inventory in the warehouse?
Should be discussed with management ASAP as it may not be possible to put reliance on inventory records at year end.
Auditors response for a number of assets which had not been fully depreciated were identified as being obsolete?
Enquire with FD if obsolete assets have been written off. If so, review adjustment for completeness
Auditors response for planning to include a current asset of 0.7 which relates to advertising costs incurred
Request management remove the current asset and instead expense advertising costs in SPL
Auditor’s response for payroll function was transferred to service organisation
Perform substantive testing ont ransfer of info from old to the new system. Discusss with management process undertaken and any controls put in place to ensure accuracy and completeness
Auditor’s response for company has spent 0.9 developing new product lines, some of which are in early stages of development
Obtain a breakdown of expenditure and verify that it relates to development of new products
Auditor’s response for purchased and installed a new manufacturing line. Cost include purchase price, installation costs and a five-year servicing and maintenance plan?
Review purchase documentation for new manufacturing line to confirm the exact cost of the servicing and that it does relate to a five-year period
Auditor’s response for as the level of debt has increased. there should be additional finance costs as the loan has an interest rate of 5%
Finance costs should be recalculated and any increase agreed to loan documentation for confirmation of 5% interest rate
Auditor’s response for company made a “price promise” to match the price of its competitors for similar products. Customers are able to claim difference from the company for one after the date of purchase of goods
Discuss with management the basis of refund liabiltiy of 0.25 and obtain supporting documentation to confirm reasonableness of assumptions and calculations
Auditor’s response for company stopping firther sales of a product and product recall has been initiated for any goods sold since June
Review list of sales of paint product made between June and date of recall, agree that sales have been removed from revenue and inventory included
Auditor’s response for payables payment period and overdraft increase and current ratio decrease?
Detailed going concern testing to be performed during the audit, including review of cash flow forecasts and underlying assumptions
Auditor’s response for company planning to undertake the full-year-end inventory counts after year end and then adjust for movements from the year end
Auditor should attend the inventory count held after year end and note details of goods received and despatched post year end to agree to the reconciliation
Auditor’s response for company outsourcing its receivables ledger processing to an external service organisation
Discuss with management any monitoring of controls undertaken by management over receivables
Auditor’s response for no supplier statement or trade payables account reconciliations are performed until financial accountant is replaced which means no reconciliation will be performed at year end
Audit team should increase their testing on trade payables at year end, including performing statement reconciliations, with a particular focus on completeness of trade payables
Auditor’s response for company likely to have a material level of WIP at year end, being construction WIP as well as ongoing maintenance services, as company has annual contracts for many of the buildings constructed
Auditor should discuss with management the process they udnertake to assess percentage completion for WIP at year end. Process should be reviewed by auditor while attending year-end inventory counts
Auditor’s response for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4 (inventory)
Aged inventory report to be reviewed to assess whether inventory requires write down
Auditor’s response for customer who wish to purchase a property are required to place an order and a 5% non-refundable deposit prior to completion of the building
During final audit, undertake increased testing over cut-off of revenye and completeness of contract liabilities
Auditor’s response for an allowance for credit losses/receivables has historically been maintained, but it is anticipated that this will be reduced
Extend post-year-end cash receipts testing and a review of aged list of individual customer balances to be performed to assess need for an increased allowance for credit losses/receivables
Auditor’s response for for preliminary analytical review of management accounts shows payables payment period decreased
Audit team should increase their testing on trade payables at year end with a particular focus on completeness of payables
Auditor’s response for upgraded its website for 1.1. Costs incurred should be correctly allocated between what’s expensed and what’s capitalised?
Review a breakdown of costs and agree to invoices to assess the nature of the expenditure. If asset expenditure, agree to capitalisation in asset register. If expense, agree to SPL
Auditor’s response for purchasing a warehouse and it is anticipated that legal process will be completed by year end
Discuss with management as to whether the warehouse purchase was completed by the year end. Inspect legal documents of ownerships, such as title deeds ensuring these are dated prior to 1 October 20X5 and are in the company name
Auditor’s response for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares
Disclosures for this share issue should be reviewed in detail to ensure compliance with relevant accounting strandards
Auditor’s response for finance director has requested that audit completed one week earlier than normal so that results can be reported earlier
TImetable should be confirmed with finance director. If it is to be reduced, then consideration should be given to performing an interim audit to reduce the pressure on the final audit
Auditor’s response for company is intending to propose a final dividend once the FSs are finalised. Dividend is announced post-year-end
Discuss with management and confirm that dividend will not be included within liabilities for 20X5 FSs
Auditor’s response for directors have not disclosed the individual names and payments for each of director’s renumeration?
Discuss this matter with management and review requirements of local legislation to determine if disclosure for FSs is appropriate
Auditor’s response for revenue has grown by 19% in the year, however cost of sales has only increased 13%
A detailed breakdown of sales will be obtained, discussed with management and tested to understand the sales increase
Auditor’s response for level of debt increasing when there should be additional finance costs
FInance costs should be recalculated and any increase agreed to loan documentation for confirmation of interest rates
Auditor’s response for land and buildings are to be revalued at year end. It is likely that revaluation surplus/deficit will be material
Discuss with management the process adopted for undertaking the valuation, including whether whole class of assets was revalued. If revaluation done by expert, must be in compliance with IAS 16
Auditor’s response for due to staff availability, company is planning to undertake a full year-end inventory count days before the year end and then adjust movements to the year end?
The auditor should attend the inventory count held after the year end and note details of goods received and despatched post year end to agree to reconciliation
Auditor’s response for bank reconciliations for May and June both contain unreconciled amounts and FD believes the overall differences to be immaterial
Discuss issue with FD and request that September reconciliation is fully reconciled. The reconciling items should be tested in detail and agreed to supporting documentation
Auditor’s response for a director’s bonus cheme was inrroduced which is based on achieving a target profit before tax?
Detailed review and testing on judgemental decisions, including treatment of provisions, and compare treatment against prior years.
Auditor’s response for FD has requested that audit commence earlier than normal so results can be reported earlier?
Timetable should be confirmed with FD. If it is to be reduced, consideration should be given to performing an intermin audit to reduce pressure on the final audit
Auditor’s response for if previous FD left in December after items discovered that fruad had been committed with regards to expenses claimed?
Discuss with new FD what procedures have been adopted to identify any further frauds by the previous FD
Auditors response for new FD was appointed in and was previously a financial controller of a bank. Different company to where financial controller was originally at?
During audit, careful attention should be applied to any changes in accounting policies and in particular any key judgemental decisions made by finance director
Auditors response for there being a significant number of sales returns made subsequent to year end
Review sample of post-year-end sales returns and confirm if they relate to pre-year-end sales, that revenue has been reversed and inventory included in year-end ledgers
Auditor’s response for company’s year-end inventory count there were movements of goods in and out?
During final audit, GRN and GDN received during inventory count should be reviewed and followed through into inventory count records as correctly included or not
Auditor’s response for company purchases goods from Europe and goods in transit for two weeks
Audit team should undertake detailed cut-off testing of goods in transit from suppliers in Europe to ensure cut-off is complete and accurate
Auditor’s response for FD undertaking fraudulent transactions?
Discuss with the new finance director what procedures have been adopted to identify any further frauds by the previous finance director
Auditor’s response for an intangible asset can only be recognised if all the criteria of IAS 38 Intangible Assets are met
Breakdown of the development expenditure should be reviewed and tested in detail to ensure that only projects which meet the capitalisation criteria are included as an intangible asset, with the balance being expensed
Auditor’s response for Sycamore has borrowed $2.0m from the bank as a 10-year loan.
The split between current and non-current liabilities and disclosures should be reviewed in detail to ensure compliance with relevant accounting standards.
Auditor’s response for the level of debt has increased, there should be additional finance costs
The finance costs should be recalculated and any increase agreed to the loan documentation for confirmation of interest rates and cashbook and bank statements to confirm the amount was paid and is not, therefore, a year-end payable.
Auditor’s response for if Sycamore does not have sufficient cash for the loan repayment?
Review cash flow forecasts and enquire of management how they will deal with any need to make the loan repayment.
Auditor’s response for there have been a significant number of sales returns made subsequent to the year end?
Review a sample of the post-year-end sales returns and confirm that if they relate to pre-year-end sales. Remove from revenue and include in inventory
Auditor’s response for goods in transit were not carefully controlled?
The GRN and GDN received during the inventory count should be reviewed and followed through into the inventory count records as correctly included or not.
Auditor’s response for significant profits or losses on disposal?
Recalculate the loss on disposal calculations and agree all items to supporting documentation.
Auditor’s response for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares?
Review share issue documentation to confirm that the preference shares are irredeemable
Auditor’s response for a customer has had difficulties paying their outstanding balance of $1.2m and Hurling Co has agreed to a revised credit period.
Review the revised credit terms and identify if any cash receipts after the reporting date for this customer.
Auditor’s response for Hurling Co has halted further sales of its new product Luge and a product recall has been initiated for any goods sold in the last four months?
Perform tests of details to confirm cost and NRV of the Luge products in inventory by NRV being above cost
Auditor’s response for the company is intending to propose a final dividend once the financial statements are finalised?
Discuss the issue with management and confirm that the dividend will not be provided for in the 20X5 financial statements.
Auditor’s response for the forecast profit is higher than last year, indicating an increase in trade, and PCC’s cash position has continued to deteriorate/ Therefore unusual for payment period to have decreased?
The audit team should increase their testing on trade payables at the year end, with a particular focus on completeness of payables.
Auditor’s response for all of this expenditure has been recognised as an intangible asset?
Obtain a breakdown of the expenditure and verify that it relates to the development of the new products.
Auditor’s response intends to obtain a stock exchange listing in the next 12 months?
Significant estimates and judgements should be carefully reviewed in light of the misstatement risk
Auditor’s response for receivables collection period has increased from 38 to 51 days and management has extended the credit terms given to customers on the condition that sales order quantities were increased?
Extended post-year-end cash receipts testing and a review of the aged receivables listing to be performed to assess valuation
Auditor’s response for Darjeeling Co has stopped further sales of one product line and a product recall has been initiated for any goods sold since April?
Review the list of sales of the paint product between April and the date of the recall, agree that the sales have been removed from revenue and the inventory included
Auditor’s response for the company is holding damaged paint products in inventory and overall the inventory holding period has increased from 45 days to 54 days.
Discuss with the finance director whether the cost of the product will be written down and what, if any, modifications will be required to rectify the quality of the product.
Auditor’s response for revenue has increased by 16.8% and the gross margin has increased slightly from 36.4% to 37.3%.
Increased cut-off testing to verify that revenue is recorded in the right period and not overstated
Auditor’s response for the payables payment period has increased from 40 to 58 days?
Detailed going concern testing to be performed during the audit, including the review of cash flow forecasts and the underlying assumptions
Auditor’s response for external audit team may place reliance on the tests of controls performed by the IA department?
The external audit team should meet with IA staff, read their reports to ascertain the nature of the work performed
Auditor’s response for planning to make approximately 60 employees redundant after the year end?
Discuss with management the status of the redundancy announcement; if before the year end, review supporting documentation to confirm the timing
Auditor’s response for the patent should be amortised over its four-year life (IAS® 38 Intangible Assets). It appears that management has not yet accounted for amortisation?
The amortisation expense should be calculated to confirm the accuracy of the expense and that the intangible is correctly valued at the year end
Auditor’s response for the report to management issued after the prior year audit highlighted significant deficiencies relating to the purchases cycle.
If the controls are not in place or operating efficiently, adopt a fully substantive approach for confirming the completeness and accuracy of cost of sales and other expenses and trade payables.
Auditor’s response for if the company has not accounted for a bonus issue before?
Review board minutes for authorisation and terms of the bonus issue and review if the transaction has been conducted in line with this approval
Auditor’s response if the loan has a minimum profit target covenant. If this is breached, the loan would be instantly repayable and would be classified as a current liability
Review the covenant calculations prepared by Sycamore and identify whether any defaults have occurred; if so, determine the effect on the company
Auditor’s response for the finance director has extended the useful lives of fixtures and fittings from three to four years
Four-year life should be compared to how often these assets are replaced, to assess the useful life of assets
Auditor’s repsonse for Petanque Co, a customer, has announced its intention to commence legal action for a loss of information and profits in respect of the Luge product sold to them
Caving & Co should write to the company’s lawyers to enquire about the existence and likelihood of success of any claim from Petanque
Auditor’s responsibility if at the year end, there will be inventory counts in progress at all 11 of the building sites?
The auditor should assess for which of the building sites they will attend the counts, with decision based on materiality of each site
Auditor’s response if during the year, Darjeeling Co spent $0.9m on developing new product lines; some are in the early stages of development.
Obtain a breakdown of the expenditure and verify that it relates to the development of the new products. Review expenditure documentation to determine whether the costs relate to the research or development stage
Auditor’s response for the payroll function was transferred to the service organisation from 1 April 20X5, which is five months before the year end?
Test controls to confirm the effectiveness of the transfer controls. In addition, perform substantive procedures on the transfer of information
Auditor’s response for the delivery time of three weeks from the company’s international supplier is likely to result in goods in transit at the year end?
Extend cut-off testing by reviewing pre- and post-year-end GRNs and GDNs to verify that inventory is recorded at the correct point
Auditor’s response if directors’ remuneration has been disclosed in compliance with IFRS Accounting Standards but not local legislation?
Review the requirements of local legislation to determine if the disclosure in the financial statements is included appropriately
Auditor’s repsonse if a sales-related bonus scheme has been introduced in the year for sales staff?
Perform increased after-date cash receipts testing for new customer account receivables
Auditor’s response if directors have not accounted for any costs under the new contract for bottles as no amounts are due to be paid until after the year end?
Audit team should review the terms of the contract to understand the amounts payable and terms of payment
Auditor’s response for purchased patent 800 at end of prior year which has useful life of 4 years but carrying amount iss till the same?
Agree useful life of the patent is four years to supporting documentation. Amortisation charge should be calculated and appropriate journal adjustment discussed with management
