ISA 315 - Audit Risks from Risk factors

Question 1

Sea View Limited (W2008)

• The Sales have decreased due to depressed economic conditions
• PPE has increased while Sales have decreased in the SOFP

Answer 1

Therefore, there is a risk of overstatement of the valuation of PPE. Impairment might not have been booked as per IAS 36 considering the fall in future sales due to adverse economic conditions.

Question 2

Sea View Limited (W2008)

• PPE has increased in the SOFP
• Intangibles have increased in the SOFP
• Company has introduced a new product replacing the old product. For this substantial cost was incurred on PPE.

[2]

Answer 2

1. Old Product has discontinued. Therefore, there is a risk of overstatement of valuation of PPE used to produce the old product. Impairment might not have been adequately booked for the old PPE as per IAS 36.
2. New PPE was capitalised during the period. Therefore, there is a risk of overstatement of valuation of PPE. Revenue expenditure might have been capitalized with the cost of the PPE of new product, not following IAS 16 recognition criteria.

Question 3

Sea View Limited (W2008)

• Intangibles have increased in the SOFP
• Company has introduced a new product replacing the old product.

Answer 3

Old Product has discontinued. Therefore, there is a risk of overstatement of valuation of Intangibles like development cost pertaining to the old product. Impairment might not have been adequately booked for that intangible as per IAS 36.

Question 4

Sea View Limited (W2008)

• Sales have suffered due to depressed economic conditions of the country
• New product was launched replacing the old product line
• Inventory count had not been carried out on the year end as staff was on leave. This was carried out on January 15, next year.

1 Risk for all, 1 risk for just inventory count

Answer 4

Due to all the reasons together in Q.

• Therefore, there is a risk of overstatement of sales as there might be earning pressure/targets due to launching of a new product. Due to which, there might be a reason that inventory is counted late and all the sales for start of next year might have been booked in the prior year, going against matching concept.

Due to inventory count alone
- Therefore, there is a risk of understatement of inventory at the end of the year as company might have tried to recognize the sales of subsequent year in the current year.

Question 5

• The Sales have decreased due to depressed economic conditions
• Sales have decreased while Receivables have increased in the SOFP

Answer 5

Therefore, there is a risk of overstatement of the valuation of trade receivables.

Trade Receivables might have become credit impaired due to economic conditions and no loss allowance might have been booked as per the IFRS 9.

There would also be risk of overstatement of existence of trade receivables. The sales might have occurred in the next period, while

Question 6

Your firm has been appointed as the auditor of the Company

Answer 6

Since it is the first year audit of best Industries limited therefore there is a risk that opening balances might be materially misstated and are not carried forward correctly or the accounting policy might not be consistently applied.

Question 7

Closure of Plant

[2]

Answer 7

1. Company has decided to close the plant Therefore there is a risk that the criteria for
   - classification of non current assets as held for sale are met and not being classified as held for sale as per IFRS 05; or
   - Criteria met after the reporting period but disclosures in this respect are not made in the financial statements as per IFRS 05.
2. As management has decided to
   close plant B therefore there is a risk that management may not have restructuring provision in accordance with the requirement of IAS 37

Question 7

Ghufran is the CEO and holds, directly and indirectly, majority of the shareholdings in BIL. There are seven other directors on the board who meet four times a year to approve the quarterly financial statements and endorse the decisions taken by Ghufran during the quarter

Answer 7

Since Ghufran holds majority
shareholding directly and indirectly and also the CEO therefore there is a risk of Management Override of
Control

Question 8

Introduction of new incentive package of providing sales comission to our distributors.

Answer 8

Commission paid to distributors are dependent on achieving the annual sales target therefore there is a risk of fraud because there is an incentive / pressure to commit FFR by overstating sales

Question 9

Staff at production and marketing departments are hired at low salaries but they are given high annual bonuses on achieving theirtargets.

Answer 9

Therefore there is a risk of fraud because staff has incentive /pressure to commit FFR.

Question 10

• Decrease in Sales in the SOFP
• Decrease in demand of the product
• Increase in Inventory or inventory turn over days

Answer 10

Since there is a decline in demands of BIL product therefore there is a risk that BIL’s inventory may have
been impaired and no impairment have been recorded by management in accordance with IAS 2.

Question 11

Last year, BIL was selected for tax audit in which the income tax department had disallowed certain business expenditures. BIL filed an application against the order issued by the income tax department. However, it lost the first appeal and has recently filed a second appeal to the relevant income tax authority.

Answer 11

As BIL has been disallowed by tax
authorities some business
expenditure and has lost the first
appeal therefore there is a risk that management may not have recorded provision.

Question 12

Management has decided to:

Launch a customer loyalty program in February 2019 in which customers are awarded loyalty points on each purchase of cosmetic and skin care products from selected retail outlets and online stores. The management believes that this initiative would increase the demand of cosmetic and skin careproducts.

Includes procedures as its a unique risk factor

Answer 12

The Management has launched
customer loyalty program therefore there is a risk that revenue may not have been recorded as per IFRS 15

Procedures:
1. Obtain an understanding of CLP from management
2. Inspect document to assess the terms and condition and evaluate the transaction price and performance obligation
3. Evaluate reasonableness of management assumption regarding the expectation of point redemptions.
4. Ensure that revenue has been recorded as per IFRS 15.

Question 13

Blue Limited (S2009)

One of the investee companies has different year end than the investor company.

Answer 13

There is a risk of understatement of presentation and disclosure of Related Party transactions occuring between the investor and investee’s year end.

Question 14

Blue Limited (S2009)

One of the investee company is a foreign operation

[4]

Answer 14

• Inaccurate foreign translations of receivables/payables as per IAS 21
• Potential expropration of assets?
• Potential lack of reliable information about investee’s operations
• Different basis of accounting of inventor and investee

Question 15

Blue Limited (S2009)

Poor operations of an investee company

Answer 15

There is a risk of overstatement of valuation of Investment in Equity Instrument. A fair value loss might not be adequately booked in PNL/OCI as per IFRS 9.

Question 16

Blue Limited (S2009)

The investor co. (client) has guaranteed the debts of one of the investee company.

[2]

Answer 16

There is a risk of
1. Understatement/inadequacy of presentation and disclosures of guarantees/trx with RP
2. Understatement of rights and obligations of a liability or provision that might be incurred to third party due to the guarantee agreement.

Question 17

Blue Limited (S2009)

The investee’s FS are audited by another audit firm

Answer 17

There is a risk of misstatement in the Investment in Investee as its audited financial statements might not be reliable if its auditor has failed to follow the appropriate standards.