Planning and Conducting an Audit of Historical Financial Information

Question 1

Question Format

Question 2

Answer Format

Answer 2

1. Introduction
2. Materiality
3. Justification
4. Business Risk Evaluation
5. Risk of Material Misstatement

Question 3

1.Mercurio

Answer 3

• Business Risk Evaluation:
  
  • Animal Welfare
    
    • Risk of breaching animal welfare standards
    • Potential reputation damage from bad publicity
    • Risk extends to supply chain
  • Veterinary Services
    
    • Risk of employing unqualified vets
    • Financial risk from unprofitable pet healthcare plans
  • Training of Staff
    
    • Risk of inadequate training leading to accidents or legal consequences
    • Risk of incorrect advice leading to reputational damage
  • Store Expansion
    
    • Liquidity pressure from store acquisition and refurbishment costs
    • Risk of delays impacting revenues
  • Mercurio Brand
    
    • Risks associated with international trade, quality, and return on investment
  • Poor Quality Financial Reporting
    
    • Risks from ineffective business systems, payroll issues, and potential fraud
• Risks of Material Misstatement:
  
  • Classification and Measurement of Acquired Properties
    
    • Risk of misclassification affecting valuation
  • Revenue Recognition
    
    • Risk of premature revenue recognition from pet healthcare plans
  • Holiday Pay Obligation
    
    • Risk of overestimation due to management bias and inadequate controls
  • Lost Shipment
    
    • Risk of overstated profit and inventory due to incorrect accounting treatment
• Impact of Outsourcing Credit Control Function:
  
  • Understanding the nature and significance of Fairbank Co’s services
  • Reviewing contracts and reports to assess effectiveness
  • Documenting interface between Fairbank Co and Mercurio Co systems
  • Conducting further procedures if necessary to assess risk of material misstatement

- Discuss method used for estimating holiday pay obligation with management.

• • Confirm compliance with IAS 19 for estimation techniques.
• Assess controls over calculation and approval of accrual.
• Verify source of information used for estimation (e.g., manual records).
• Validate pay rise and staffing changes with HR records.
• Reconcile staff numbers from payroll to holiday accrual schedule.
• Develop point estimate or range based on:
  
  • HR department’s policy on holiday pay accumulation.
  • Review of employee contracts for entitlements.
  • Manual records of holiday leave taken.
  • Estimate of remaining untaken holiday leave.
• Obtain written representations from management on assumptions.
• Review prior year accrual outcome for effectiveness in estimation.