Planning and Risk Assessment Section B Rote 2 Flashcards
Audit risk explanation for forecast ratio from FD shows gross profit margin increase and operating profit margin decrease?
Risk that costs have been omitted or included in operating expenses rather than cost of sales. Misclassificaiton of expenses results in udnerstatement of cost of sales and overstatement of operating expenses
Audit risk explanation for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?
Inventory could be under or overstated if perpetual inventory counts are not all completed, such that some inventory lines are not counted in the year
Audit risk explanation for during itnerim audit, it was noted that there were significant exceptions with inventory records being higher than inventory in the warehouse?
As year-end quantities will be based on the records, this likely to result in overstated inventory
Audit risk explanation for a number of assets which had not been fully depreciated were identified as being obsolete?
Indication company’s depreciation policy of NCA may not be appropriate, as depreciation in past appears to be understated. If asset is obsoletem should be written off in SPL. Depreciation is understated and profits and assets overstated
Audit risk explanation for planning to include a current asset of 0.7 which relates to advertising costs incurred
Advertising expenses are not capitalised and should be recognised as operating expenses. Meaning expenses are understated and assets and profit is overstated
Audit risk explanation payroll function was transferred to service organisation
If any errors occurred during the transfer process, could result in wages and salaries being under/over stated
Audit risk explanation for company has spent 0.9 developing new product lines, some of which are in early stages of development
If research costs have been incorrectly classified as development expenditure, there is a risk that intangible assets could be overstated and expenses understated
Audit risk explanation for purchased and installed a new manufacturing line. Cost include purchase price, installation costs and a five-year servicing and maintenance plan?
As servicing and maintenance costs can’t be capitalised and must be prepayment to SPL. PPE and profits are overstated and prepayments are understated
Audit risk explanation for as the level of debt has increased. there should be additional finance costs as the loan has an interest rate of 5%
Risk that this has been omitted from SPL leading to understated finance costs and overstated profit
Audit risk explanation 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
As company may be required to provide a refund, the anticipated refund amount should not be initially recognised as revenue but instead as a refund liability until one-month price promise period has ended
Audit risk explanation for company stopping firther sales of a product and product recall has been initiated for any goods sold since June
Product recall results in company paying refunds to customers. Sales removed from FSs and refund liability recognised. Failing to recognise could overstate revenue and understate liabilities
Audit risk explanation for payables payment period and overdraft increase and current ratio decrease?
Indicators that company could be experiencing a reduction in its cash flow could result in going concern issues.
Audit risk explanation for company planning to undertake the full-year-end inventory counts after year end and then adjust for movements from the year end
If adjustments are not completed accurately, then year-end inventory could be under or overstated
Audit risk explanation for company outsourcing its receivables ledger processing to an external service organisation
A detection risk arises to whether appopriate evidence available to confirm completeness and accuracy of controls over sales and receivables cycle
Audit risk explanation 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
Direct control is being overridden which means there’s an increased risk of errors within trade payables
Audit risk explanation 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
If percentage completion for WIP is not correctly calculated, the inventory valuation may be under or over stated
Audit risk explanation for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4 (inventory)
Increase in inventory may be due to an increased level of pre-year-end orders. May indicate that they are overvalued
Audit risk explanation 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
These deposits should not be recognised as revenue in SPL until performance obligaitons as per the contracts have been satisfied. Therefore overstated revenue and understated current liabilities
Audit risk explanation for an allowance for credit losses/receivables has historically been maintained, but it is anticipated that this will be reduced
Some balances may not be recoverable if adequate allowance for credit losses/receivables is not made. There is a risk that receivables will be overvalued
Audit risk explanation for preliminary analytical review of management accounts shows payables payment period decreased
The forecast profit is higher than last year, indicating an increase in trade, also company’s cash position has continued to deteriorate and therefore it is unusual for payables payment period to have decreased. This means year-end payables may be understated
Audit risk explanation for upgraded its website for 1.1. Costs incurred should be correctly allocated between what’s expensed and what’s capitalised?
Intangible assets and expenses will be misstated if expenditure has been treated correctly
Audit risk explanation for purchasing a warehouse and it is anticipated that legal process will be completed by year end
Only assets which physically exist at year end should be included in PPE. If transaction not completed by year end, assets will be overstated
Audit risk explanation for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares
As preference shares are irredeemable, they should be classified as equity rather than non-current liabilities. Failure to classify shares could result in understated equity and overstated non-current liabilities
Audit risk explanation for finance director has requested that audit completed one week earlier than normal so that results can be reported earlier
A reduction in audit timetable will increase detection risk and place additional pressure on the team in obtaining sufficient and appropriate evidence
Audit risk explanation for company is intending to propose a final dividend once the FSs are finalised. Dividend is announced post-year-end
The dividend should only be disclosed. If dividend is included, results in an overstatement of liabilities and understatement of equity
Audit risk explanation for directors have not disclosed the individual names and payments for each of director’s renumeration?
Director’s renumeration disclosure will not be complete and accurate if names and individual payments are not disclosed with local legislation. So FSs will be misstated as a result of non-compliance
Audit risk explanation for revenue has grown by 19% in the year, however cost of sales has only increased 13%
Could potentially be an overstatement of revenue
Audit risk explanation for level of debt increasing when there should be additional finance costs
Omission will mean finance costs may be understated and profit overstated
Audit risk explanation for land and buildings are to be revalued at year end. It is likely that revaluation surplus/deficit will be material
Revalaution needs to be carried out and recorded in accordance with IAS 16. Non-current assets may be incorrectly valued
Audit risk explanation 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?
Adjustments may not be made accurately or completely. Risk that inventory could be overstated or understated
Audit risk explanation for bank reconciliations for May and June both contain unreconciled amounts and FD believes the overall differences to be immaterial
If differences are not fully reconciled, it could result in bank balances being under or over stated
Audit risk explanation for a director’s bonus cheme was inrroduced which is based on achieving a target profit before tax?
Risk directors might feel under pressure to manipulate results through judgements taken or throughthe use of provisions
Audit risk explanation for FD has requested that audit commence earlier than normal so results can be reported earlier?
Audit may be rushes to complete by the deadline. Reduction in audit timetable will increase detection risk and place additional pressure on the team in obtaining sufficient and appropriate evidence
Audit risk explanation for if previous FD left in December after items discovered that fruad had been committed with regards to expenses claimed?
Risk finance director may have undertaken other fraudulent transactions, these need to be written off in SPL
Audit risk explanation for new FD was appointed in and was previously a financial controller of a bank. Different company to where financial controller was originally at?
Risk that new financial controller is not sufficiently competent to prepare FSs. Leading to FSs containing error
Audit risk explanation for there being a significant number of sales returns made subsequent to year end
As they are pre-year-end sales, thney should be removed from sales. If not, revenue is overstated and inventoryu is understated
Audit risk explanation for company’s year-end inventory count there were movements of goods in and out?
If goods in transit were not carefully controlled, then goods could have been omitted or counted twice. Results in inventory being under or over-stated
Audit risk explanation for company purchases goods from Europe and goods in transit for two weeks
Only goods which have been received into warehouse should be included in inventory balance and a respective payables balance recognised. Purchases and payables may not be accurate at cut-off
Audit risk response for FD undertaking fraudulent transactions?
These would need to be written off in the statement of profit or loss
Audit risk explanation for an intangible asset can only be recognised if all the criteria of IAS 38 Intangible Assets are met
The cost of projects that may not reach the final development stage should be expensed rather than capitalised. Intangible assets and profit could be overstated
Audit risk explanation for Sycamore has borrowed $2.0m from the bank as a 10-year loan.
This loan needs to be correctly split between current and non-current liabilities in order to ensure correct disclosure.
Audit risk explanation for the level of debt has increased, there should be additional finance costs
There is a risk that this has been omitted from the statement of profit or loss, leading to understated finance costs and overstated profit.
Audit risk explanation for if Sycamore does not have sufficient cash for the loan repayment?
There is a risk of profit manipulation to meet any covenants.
Audit risk explanation for there have been a significant number of sales returns made subsequent to the year end?
As these relate to pre-year-end sales, they should be removed from revenue in the draft financial statements and the inventory reinstated
Audit risk explanation for goods in transit were not carefully controlled?
Goods could have been omitted or counted twice. This would result in inventory being under or overstated
Audit risk explanation for significant profits or losses on disposal?
Indication that the depreciation policy of plant and equipment may not be appropriate. Therefore depreciation may be overstated
Audit risk explanation for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares?
As the preference shares are irredeemable, they should be classified as equity rather than non-current liabilities. Failing to correctly classify the shares could result in understated equity and overstated non-current liabilities.
Audit risk explanation for a customer has had difficulties paying their outstanding balance of $1.2m and Hurling Co has agreed to a revised credit period.
If the customer is experiencing difficulties, there is an increased risk that the receivable is not recoverable and, therefore, overstated.
Audit risk explanation 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?
If there are issues with the quality of the Luge product, inventory may be overstated as its net realisable value (NRV) may be less than cost.
Audit risk explanation for the company is intending to propose a final dividend once the financial statements are finalised?
There can be no provision for this in the 20X5 financial statements, as the obligation only arises once the dividend is announced, which is after the year end. Providing for the dividend would result in an overstatement of liabilities and understatement of equity.
Audit risk explanation 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?
There is an increased risk of errors within trade payables and the year-end payables may be understated.
Audit risk explanation for all of this expenditure has been recognised as an intangible asset?
If research costs have been incorrectly capitalised, there is a risk that intangible assets are overstated and expenses understated.
Audit risk explanation intends to obtain a stock exchange listing in the next 12 months?
Therefore, the directors have an incentive to manipulate the financial statements by overstating revenue, profits and assets
Audit risk explanation 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?
Could also be due to an increased risk over recoverability of receivables as they may be overstated and expenses understated.
Audit risk explanation for Darjeeling Co has stopped further sales of one product line and a product recall has been initiated for any goods sold since April?
This product recall will result in refunds to customers. The sales should be removed from the 20X5 financial statements and a refund liability recognised
Audit risk explanation for the company is holding damaged paint products in inventory and overall the inventory holding period has increased from 45 days to 54 days.
The quality of these products is in doubt and management is investigating whether they can be rectified. There is a risk that this inventory may be overstated as its net realisable value may be below cost.
Audit risk explanation for revenue has increased by 16.8% and the gross margin has increased slightly from 36.4% to 37.3%.
This significant increase in revenue, along with the increase in gross margin, may be due to the increased credit period and price promise but could be due to an overstatement of revenue
Audit risk explanation for the payables payment period has increased from 40 to 58 days?
The current ratio has decreased from 3.08 to 1.65. The quick ratio has also decreased from 1.97 to 0.99
Audit risk explanation for external audit team may place reliance on the tests of controls performed by the IA department?
If reliance is placed on irrelevant or poorly performed testing, the external audit team may form an incorrect conclusion on the strength of the system of internal controls
Audit risk explanation for planning to make approximately 60 employees redundant after the year end?
The timing of this announcement has not been confirmed; if announced to staff before the year end, a redundancy provision must be recognised at the year end for the constructive obligation. Failure to provide or to provide an appropriate amount will result in an understatement of provisions and expenses.
Audit risk explanation 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?
Intangible assets and profits are overstated.
Audit risk explanation for the report to management issued after the prior year audit highlighted significant deficiencies relating to the purchases cycle.
If these deficiencies have not been rectified, the controls over purchases and payables may continue to be weak leading to increased control risk and risk of misstatements arising
Audit risk explanation for if the company has not accounted for a bonus issue before?
A risk that an incorrect treatment could result in the under of overstatement of equity
Audit risk 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
If Sycamore does not have sufficient cash for the loan repayment, there could be going concern implications. Also, there is a risk of profit manipulation to meet any covenants.
Audit risk for the finance director has extended the useful lives of fixtures and fittings from three to four years
Risk that this reduction has occurred to inflate profits. If this is the case, fixtures and fittings are overstated and profit overstated.
Audit risk 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
If it is probable that Hurling Co will make a settlement payment, a legal provision is required. If a payment is possible rather than probable, a contingent liability disclosure would be necessary. If Hurling Co has not done this, there is a risk that provisions are understated or the necessary disclosure of contingent liabilities is incomplete.
Audit risk if at the year end, there will be inventory counts in progress at all 11 of the building sites?
Unlikely that Cupid & Co will be able to attend all of the counts, increasing detection risk
Audit risk if during the year, Darjeeling Co spent $0.9m on developing new product lines; some are in the early stages of development.
Research costs must be expensed to profit or loss and only development costs capitalised as an intangible asset
Audit risk for the payroll function was transferred to the service organisation from 1 April 20X5, which is five months before the year end?
If any errors occurred during the transfer process, these could result in under/overstatement of wages and salaries
Audit risk for Tte delivery time of three weeks from the company’s international supplier is likely to result in goods in transit at the year end?
Inventory is not recorded on dispatch; therefore, inventory and liabilities are understated at the year end
Audit risk if directors’ remuneration has been disclosed in compliance with IFRS Accounting Standards but not local legislation?
Where the local legislation is more comprehensive than IFRS Accounting Standards it is likely that the company must comply with local legislation
Audit risk if a sales-related bonus scheme has been introduced in the year for sales stafff
Receivables may be overstated if sales staff set up new accounts with poor credit ratings, leading to irrecoverable receivables
Audit risk 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?
Risk costs incurred to date have not been recognised and therefore costs and liabilities are understated and profit overstated
Audit risk explanation for purchased patent 800 at end of prior year which has useful life of 4 years but carrying amount iss till the same?
Amortisation should have been accounted for, meaning intangible assets are overstated
