Chapter 6 Planning and Risk

Question 1

Describe the auditor’s responsibilities in relation to the prevention and detection of fraud and error?

Answer 1

1. To fulfil this responsibility, the auditor is required to identify and assess the risks of material misstatement of the financial statements due to fraud.
2. The auditor needs to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud through designing and implementing appropriate responses.
3. The auditor must also respond appropriately to fraud or suspected fraud identified during the audit.
4. When obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls, and recognising that audit procedures which are effective in detecting error may not be effective in detecting fraud.

Question 2

Auditors response to a customers increased credit terms?

Answer 2

1. Review and test the controls surrounding how the finance director identifies old and irrecoverable balances to confirm they are operating effectively.
2. Discuss the rationale with management for confirming the increased terms despite the increase in receivable collection period.

Question 3

Auditors response to issued shares during the year?

Answer 3

1. Review the treatment of the rights issue and agree amounts received from the bank statements are recorded correctly in the financial statements.
2. Agree the increase in shares to the share register.

Question 4

Auditors response to a dismissal of an employee and potential IAS 37 provision?

Answer 4

1. The audit team to discuss with management and request confirmation from legal team.
2. Legal team will also need to confirm existence and likelihood of event.

Question 5

Auditors response relating to misstatement of inventory?

Answer 5

1. Discuss with management whether the cost of the affected products needs to be written down.
2. Inspect inventory report and investigate any old or slow moving products.
3. Tests of details should confirm the cost and NRV of the affected products in inventory.

Question 6

Auditors response to incorrectly allocated non-current assets?

Answer 6

1. Discuss the accounting treatment with the finance director and request there is an adjustment for the incorrectly allocated cost.
2. Review adjustments made in the financial statements and the journals made in the ledger.

Question 7

Auditors response to for patent that was purchased during the year?

Answer 7

1. Agree the useful life of the patent to supporting documentation.
2. The amortisation expense should be calculated, and the appropriate journal adjustment discussed with management.

Question 8

Auditors response to potential fraudulent transactions?

Answer 8

1. Discuss with management the details of the fraud that has been carried out by the team.
2. Identify the steps that have been carried out by management in order to identify the fraud.
3. Additional substantive procedures should be carried out over the affected areas.

Question 9

Auditors response to long term consolidation of loans?

Answer 9

1. Review the loan agreements and recalculate the loan splits as per the agreements.
2. These should be split between current and non-current liabilities.
3. Recalculate the revised finance costs and agree the accuracy of the amounts recorded.

Question 10

Auditors response for a possible new audit client?

Answer 10

1. Increased detection risk due to the lack of understanding of the business.
2. There should be correctly experienced audit team in place.
3. There should be sufficient time allowed to gain understanding of the client and also increased audit procedures over opening balances.

Question 11

Auditors response to a stock exchange listing?

Answer 11

1. Possibility that management may try to manipulate figures in order to achieve desired results.
2. Correctly experienced audit team.
3. Maintain professional scepticism and remain alert to manipulating.
4. A review of judgemental decisions and significant one off journal entries should be performed.

Question 12

Auditors response to possible incorrect treatment of sales revenue?

Answer 12

1. The audit team to discuss with the finance director how revenue has been allocated.
2. A sample of service sales contracts should be recalculated to ensure that correct amount has been recognised.
3. Audit team should request that sales not yet satisfied are to be removed from P&L and recognised as deferred income.

Question 13

Auditors response to prices of products dropping and a non-revised inventory balance?

Answer 13

1. Discuss with the finance director whether they are aware of the issue.
2. Select a sample of inventory items and compare the cost shown on the purchase invoice.
3. Also compare with sales prices charged at the year end to confirm the related cost.

Question 14

Auditors response in respect of legal claims or damages?

Answer 14

1. Discuss the justification with management for treating the damages as certain.
2. Audit should obtain written confirmation from the legal team that the claim has been settled.

Question 15

Auditors response if the client wants the audit completed early?

Answer 15

1. The auditor should assign more staff with the correct levels of experience.
2. This will be due to the increased levels of substantive testing due to increased risk of error.

Question 16

Auditors response to purchasing raw materials overseas?

Answer 16

1. Audit team to undertake cut off testing.
2. Sample of shipping documentation before and after the year end relating to goods from overseas suppliers.

Question 17

Placing reliance on internal controls when auditing auditors response?

Answer 17

1. Audit team to review the current internal controls in place.
2. The audit team will need to re-perform some of the week completed by internal audit team to prove its reliance.

Question 18

Warranty claims increase auditors response?

Answer 18

1. Discuss with management their procedures for estimating the provision.
2. Identify the reason for the increase.
3. Review the level of claims received during the year and post year end to assess the provision.