Explain risk

Question 1

new audit client of the firm

Answer 1

unfamiliar with the accounting policies
unfamiliar transactions balances
increased detection risk on the audit
less assurance over opening balances

Question 2

financial accountant was taken ill suddenly

Answer 2

increased risk of errors in the financial statements
not be familiar with the company activities and so
errors/omissions may go unnoticed
Misstatement

Question 3

secure bank finance

Answer 3

increases the risk that the directors may
manipulate the financial statements
Overstating profits / Understating liabilities

Question 4

machine cost of $15,000 has been

capitalized

Answer 4

IAS® 16 PPE
incorrect costs from being capitalized
and therefore profits and property, plant and
equipment will be overstated

Question 5

Inventory delivery time of three weeks

Responsible as soon as dispatched.

Answer 5

Risk that inventory is not recorded on dispatch

inventory and liabilities are understated at the year-end

Question 6

receivables collection period Increased

Answer 6

Risk that some receivables may not
be recoverable and an allowance for
receivables is required 
receivables may be overstated 
allowance for receivables understated.

Question 7

members of staff being made redundant

Answer 7

IAS 37 Provisions, Contingent Assets, and Contingent
Liabilities
require this provision to be recognized in the financial statements.
provision is not recognized
profit overstated
liabilities understated

Question 8

Developing new product lines

Answer 8

IAS 38 states research costs to be expensed to P/L
development costs to be capitalized
Risk of research costs incorrectly classified as development.
Intangible overstated / expenses understated

Question 9

a loss on disposal of $160,000

Answer 9

Significant profits or losses on disposal indication
depreciation policy PPE not appropriate.
depreciation understated
profit and assets overstated.

Question 10

fraudulent transactions

Answer 10

increased control risk which has not yet been identified.
to be written off to the statement of profit or loss
financial statements could include errors resulting in the misstatement of profits.

Question 11

Inventory risk increased

Answer 11

IAS 2 lower of cost NRV
risk of obsolete stock not written down
Inventory overvalued

Question 12

Company price match promise

Answer 12

may be required to refund
anticipated amount should not recognize as revenue
instead, refund liability 
highly subjective area 
risk of overstated revenue

Question 13

Perpetual inventory system

Answer 13

inventory must be counted at least once a year with adjustments made on a timely basis.
inventory could be misstated if not complete.