Planning and Risk Assessment Section B Rote 2

Question 1

Audit risk explanation for forecast ratio from FD shows gross profit margin increase and operating profit margin decrease?

Answer 1

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

Question 2

Auditor’s response for forecast ratio from FD shows gross profit margin increase and operating profit margin decrease?

Answer 2

Classification of costs between cost of sales and operating expenses should be reviewed in comparison to prior year and inconsistencies investigated

Question 3

Audit risk explanation for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?

Answer 3

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

Question 4

Auditor’s response for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?

Answer 4

Timetable of perpetual inventory counts should be reviewed and controls over the counts and adjustments to records should be tested

Question 5

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?

Answer 5

As year-end quantities will be based on the records, this likely to result in overstated inventory

Question 6

Auditor’s response for during itnerim audit, it was noted that there were significant exceptions with inventory records being higher than inventory in the warehouse?

Answer 6

Level of adjustments made to inventory should be considered to assess their significance. Should be discussed with management ASAP as it may not be possible to put reliance on inventory records at year end. Could result in the neede for a full year-end inventory count

Question 7

Audit risk explanation for a number of assets which had not been fully depreciated were identified as being obsolete?

Answer 7

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

Question 8

Auditors response for a number of assets which had not been fully depreciated were identified as being obsolete?

Answer 8

Enquire with FD if obsolete assets have been written off. If so, review adjustment for completeness

Question 9

Audit risk explanation for planning to include a current asset of 0.7 which relates to advertising costs incurred

Answer 9

Advertising expenses are not capitalised and should be recognised as operating expenses. Meaning expenses are understated and assets and profit is overstated

Question 10

Auditors response for planning to include a current asset of 0.7 which relates to advertising costs incurred

Answer 10

Discuss with management reasonableness for including advertising as a current asset. Request evidence to support the assessment of probable future cash flows, and review for reasonableness

Question 11

Audit risk explanation payroll function was transferred to service organisation

Answer 11

If any errors occurred during the transfer process, could result in wages and salaries being under/over stated

Question 12

Auditor’s response for payroll function was transferred to service organisation

Answer 12

Perform substantive testing ont ransfer of info from old to the new system. Discusss with management process undertaken and any controls put in place to ensure accuracy and completeness

Question 13

Audit risk explanation for company has spent 0.9 developing new product lines, some of which are in early stages of development

Answer 13

If research costs have been incorrectly classified as development expenditure, there is a risk that intangible assets could be overstated and expenses understated

Question 14

Auditor’s response for company has spent 0.9 developing new product lines, some of which are in early stages of development

Answer 14

Obtain a breakdown of expenditure and verify that it relates to development of new products

Question 15

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?

Answer 15

As servicing and maintenance costs can’t be capitalised and must be prepayment to SPL. PPE and profits are overstated and prepayments are understated

Question 16

Auditor’s response for purchased and installed a new manufacturing line. Cost include purchase price, installation costs and a five-year servicing and maintenance plan?

Answer 16

Review purchase documentation for new manufacturing line to confirm the exact cost of the servicing and that it does relate to a five-year period

Question 17

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%

Answer 17

Risk that this has been omitted from SPL leading to understated finance costs and overstated profit

Question 18

Auditor’s response for as the level of debt has increased. there should be additional finance costs as the loan has an interest rate of 5%

Answer 18

Finance costs should be recalculated and any increase agreed to loan documentation for confirmation of 5% interest rate

Question 19

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

Answer 19

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

Question 20

Auditor’s response 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

Answer 20

Discuss with management the basis of refund liabiltiy of 0.25 and obtain supporting documentation to confirm reasonableness of assumptions and calculations

Question 21

Audit risk explanation for company stopping firther sales of a product and product recall has been initiated for any goods sold since June

Answer 21

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

Question 22

Auditor’s response for company stopping firther sales of a product and product recall has been initiated for any goods sold since June

Answer 22

Review list of sales of paint product made between June and date of recall, agree that sales have been removed from revenue and inventory included

Question 23

Audit risk explanation for payables payment period and overdraft increase and current ratio decrease?

Answer 23

Indicators that company could be experiencing a reduction in its cash flow could result in going concern issues.

Question 24

Auditor’s response for payables payment period and overdraft increase and current ratio decrease?

Answer 24

Detailed going concern testing to be performed during the audit, including review of cash flow forecasts and underlying assumptions

Question 25

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

Answer 25

If adjustments are not completed accurately, then year-end inventory could be under or overstated

Question 26

Auditor’s response for company planning to undertake the full-year-end inventory counts after year end and then adjust for movements from the year end

Answer 26

Auditor should attend the inventory count held after year end and note details of goods received and despatched post year end to agree to the reconciliation

Question 27

Audit risk explanation for company outsourcing its receivables ledger processing to an external service organisation

Answer 27

A detection risk arises to whether appopriate evidence available to confirm completeness and accuracy of controls over sales and receivables cycle

Question 28

Auditor’s response for company outsourcing its receivables ledger processing to an external service organisation

Answer 28

Discuss with management the extent of records maintained at company for period since receivables ledger was outsourced and any monitoring of controls undertaken by management over sales and receivables

Question 29

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

Answer 29

Direct control is being overridden which means there’s an increased risk of errors within trade payables

Question 30

Auditor’s response 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

Answer 30

Audit team should increase their testing on trade payables at year end, including performing statement reconciliations, with a particular focus on completeness of trade payables

Question 31

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

Answer 31

If percentage completion for WIP is not correctly calculated, the inventory valuation may be under or over stated

Question 32

Auditor’s response 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

Answer 32

Auditor should discuss with management the process they udnertake to assess percentage completion for WIP at year end. Process should be reviewed by auditor while attending year-end inventory counts

Question 33

Audit risk explanation for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4

Answer 33

Increase in inventory may be due to an increased level of pre-year-end orders. May indicate that they are overvalued

Question 34

Auditor’s response for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4

Answer 34

Detailed cost and NRV testing to be performed at year end and aged inventory report to be reviewed to assess whether inventory requires write down

Question 35

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

Answer 35

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

Question 36

Auditor’s response 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

Answer 36

During final audit, undertake increased testing over cut-off of revenye and completeness of contract liabilities

Question 37

Audit risk explanation for an allowance for credit losses/receivables has historically been maintained, but it is anticipated that this will be reduced

Answer 37

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

Question 38

Auditor’s response for an allowance for credit losses/receivables has historically been maintained, but it is anticipated that this will be reduced

Answer 38

Extend post-year-end cash receipts testing and a review of aged list of individual customer balances to be performed to assess valuation and need for an increased allowance for credit losses/receivables

Question 39

Audit risk explanation for preliminary analytical review of management accounts shows payables payment period decreased

Answer 39

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

Question 40

Auditor’s response for for preliminary analytical review of management accounts shows payables payment period decreased

Answer 40

Audit team should increase their testing on trade payables at year end with a particular focus on completeness of payables

Question 41

Audit risk explanation for upgraded its website for 1.1. Costs incurred should be correctly allocated between what’s expensed and what’s capitalised?

Answer 41

Intangible assets and expenses will be misstated if expenditure has been treated correctly

Question 42

Auditor’s response for upgraded its website for 1.1. Costs incurred should be correctly allocated between what’s expensed and what’s capitalised?

Answer 42

Review a breakdown of costs and agree to invoices to assess the nature of the expenditure. If asset expenditure, agree to capitalisation in asset register. If expense, agree to SPL

Question 43

Audit risk explanation for purchasing a warehouse and it is anticipated that legal process will be completed by year end

Answer 43

Only assets which physically exist at year end should be included in PPE. If transaction not completed by year end, assets will be overstated

Question 44

Auditor’s response for purchasing a warehouse and it is anticipated that legal process will be completed by year end

Answer 44

Inspect legal documents of ownerships, such as title deeds ensuring these are dated prior to 1 October 20X5 and are in the company name

Question 45

Audit risk explanation for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares

Answer 45

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

Question 46

Auditor’s response for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares

Answer 46

Disclosures for this share issue should be reviewed in detail to ensure compliance with relevant accounting strandards

Question 47

Audit risk explanation for finance director has requested that audit completed one week earlier than normal so that results can be reported earlier

Answer 47

A reduction in audit timetable will increase detection risk and place additional pressure on the team in obtaining sufficient and appropriate evidence

Question 48

Auditor’s response for finance director has requested that audit completed one week earlier than normal so that results can be reported earlier

Answer 48

TImetable should be confirmed with finance director. If it is to be reduced, then consideration should be given to performing an interim audit to reduce the pressure on the final audit

Question 49

Audit risk explanation for company is intending to propose a final dividend once the FSs are finalised. Dividend is announced post-year-end

Answer 49

The dividend should only be disclosed. If dividend is included, results in an overstatement of liabilities and understatement of equity

Question 50

Auditor’s response for company is intending to propose a final dividend once the FSs are finalised. Dividend is announced post-year-end

Answer 50

Discuss with management and confirm that dividend will not be included within liabilities for 20X5 FSs

Question 51

Audit risk explanation for directors have not disclosed the individual names and payments for each of director’s renumeration?

Answer 51

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

Question 52

Auditor’s response for directors have not disclosed the individual names and payments for each of director’s renumeration?

Answer 52

Discuss this matter with management and review requirements of local legislation to determine if disclosure for FSs is appropriate

Question 53

Audit risk explanation for revenue has grown by 19% in the year, however cost of sales has only increased 13%

Answer 53

Could potentially be an overstatement of revenue

Question 54

Auditor’s response for revenue has grown by 19% in the year, however cost of sales has only increased 13%

Answer 54

A detailed breakdown of sales will be obtained, discussed with management and tested to understand the sales increase

Question 55

Audit risk explanation for level of debt increasing when there should be additional finance costs

Answer 55

Omission will mean finance costs may be understated and profit overstated

Question 56

Auditor’s response for level of debt increasing when there should be additional finance costs

Answer 56

FInance costs should be recalculated and any increase agreed to loan documentation for confirmation of interest rates

Question 57

Audit risk explanation for land and buildings are to be revalued at year end. It is likely that revaluation surplus/deficit will be material

Answer 57

Revalaution needs to be carried out and recorded in accordance with IAS 16. Non-current assets may be incorrectly valued

Question 58

Auditor’s response for land and buildings are to be revalued at year end. It is likely that revaluation surplus/deficit will be material

Answer 58

Discuss with management the process adopted for undertaking the valuation, including whether whole class of assets was revalued. If revaluation done by expert, must be in compliance with IAS 16

Question 59

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?

Answer 59

Adjustments may not be made accurately or completely. Risk that inventory could be overstated or understated

Question 60

Auditor’s opinion 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?

Answer 60

During final audit the year-end inventory adjustments schedule should be reviewed in detail and supporting documentation obtained for all adjusting item

Question 61

Audit risk explanation for bank reconciliations for May and June both contain unreconciled amounts and FD believes the overall differences to be immaterial

Answer 61

If differences are not fully reconciled, it could result in bank balances being under or over stated

Question 62

Auditor’s response for bank reconciliations for May and June both contain unreconciled amounts and FD believes the overall differences to be immaterial

Answer 62

Discuss issue with FD and request that September reconciliation is fully reconciled. The reconciling items should be tested in detail and agreed to supporting documentation

Question 63

Audit risk explanation for a director’s bonus cheme was inrroduced which is based on achieving a target profit before tax?

Answer 63

Risk directors might feel under pressure to manipulate results through judgements taken or throughthe use of provisions

Question 64

Auditor’s response for a director’s bonus cheme was inrroduced which is based on achieving a target profit before tax?

Answer 64

A written representation should be obtained from management confirming the basis of any significant judgements

Question 65

Audit risk explanation for FD has requested that audit commence earlier than normal so results can be reported earlier?

Answer 65

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

Question 66

Auditor’s response for FD has requested that audit commence earlier than normal so results can be reported earlier?

Answer 66

Timetable should be confirmed with FD. If it is to be reduced, consideration should be given to performing an intermin audit to reduce pressure on the final audit

Question 67

Audit risk explanation for if previous FD left in December after items discovered that fruad had been committed with regards to expenses claimed?

Answer 67

Risk finance director may have undertaken other fraudulent transactions, these need to be written off in SPL

Question 68

Auditor’s response for if previous FD left in December after items discovered that fruad had been committed with regards to expenses claimed?

Answer 68

Discuss with new FD what procedures have been adopted to identify any further frauds by the previous FD

Question 69

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?

Answer 69

Risk that new financial controller is not sufficiently competent to prepare FSs. Leading to FSs containing error

Question 70

Auditors response for new FD was appointed in and was previously a financial controller of a bank. Different company to where financial controller was originally at?

Answer 70

During audit, careful attention should be applied to any changes in accounting policies and in particular any key judgemental decisions made by finance director

Question 71

Audit risk explanation for there being a significant number of sales returns made subsequent to year end

Answer 71

As they are pre-year-end sales, thney should be removed from sales. If not, revenue is overstated and inventoryu is understated

Question 72

Auditors response for there being a significant number of sales returns made subsequent to year end

Answer 72

Review sample of post-year-end sales returns and confirm if they relate to pre-year-end sales, that revenue has been reversed and inventory included in year-end ledgers

Question 73

Audit risk explanation for company’s year-end inventory count there were movements of goods in and out?

Answer 73

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

Question 74

Auditor’s response for company’s year-end inventory count there were movements of goods in and out?

Answer 74

During final audit, GRN and GDN received during inventory count should be reviewed and followed through into inventory count records as correctly included or not

Question 75

Audit risk explanation for company purchases goods from Europe and goods in transit for two weeks

Answer 75

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

Question 76

Auditor’s response for company purchases goods from Europe and goods in transit for two weeks

Answer 76

Audit team should undertake detailed cut-off testing of goods in transit from suppliers in Europe to ensure cut-off is complete and accurate

Question 77

Audit risk response for FD undertaking fraudulent transactions?

Answer 77

These would need to be written off in the statement of profit or loss

Question 78

Auditor’s response for FD undertaking fraudulent transactions?

Answer 78

The team should maintain their professional scepticism and be alert to the risk of further fraud and errors.

Question 79

Audit risk explanation for an intangible asset can only be recognised if all the criteria of IAS 38 Intangible Assets are met

Answer 79

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

Question 80

Auditor’s response for an intangible asset can only be recognised if all the criteria of IAS 38 Intangible Assets are met

Answer 80

Breakdown of the development expenditure should be reviewed and tested in detail to ensure that only projects which meet the capitalisation criteria are included as an intangible asset, with the balance being expensed

Question 81

Audit risk explanation for Sycamore has borrowed $2.0m from the bank as a 10-year loan.

Answer 81

This loan needs to be correctly split between current and non-current liabilities in order to ensure correct disclosure.

Question 82

Auditor’s response for Sycamore has borrowed $2.0m from the bank as a 10-year loan.

Answer 82

The split between current and non-current liabilities and disclosures should be reviewed in detail to ensure compliance with relevant accounting standards.

Question 83

Audit risk explanation for the level of debt has increased, there should be additional finance costs

Answer 83

There is a risk that this has been omitted from the statement of profit or loss, leading to understated finance costs and overstated profit.

Question 84

Auditor’s response for the level of debt has increased, there should be additional finance costs

Answer 84

The finance costs should be recalculated and any increase agreed to the loan documentation for confirmation of interest rates and cashbook and bank statements to confirm the amount was paid and is not, therefore, a year-end payable.

Question 85

Audit risk explanation for if Sycamore does not have sufficient cash for the loan repayment?

Answer 85

There is a risk of profit manipulation to meet any covenants.

Question 86

Auditor’s response for if Sycamore does not have sufficient cash for the loan repayment?

Answer 86

The team should maintain their professional scepticism and be alert to the risk that profit has been overstated to ensure compliance with the covenant

Question 87

Audit risk explanation for there have been a significant number of sales returns made subsequent to the year end?

Answer 87

As these relate to pre-year-end sales, they should be removed from revenue in the draft financial statements and the inventory reinstated

Question 88

Auditor’s response for there have been a significant number of sales returns made subsequent to the year end?

Answer 88

Review a sample of the post-year-end sales returns and confirm that if they relate to pre-year-end sales

Question 89

Audit risk explanation for goods in transit were not carefully controlled?

Answer 89

Goods could have been omitted or counted twice. This would result in inventory being under or overstated

Question 90

Auditor’s response for goods in transit were not carefully controlled?

Answer 90

The GRN and GDN received during the inventory count should be reviewed and followed through into the inventory count records as correctly included or not.

Question 91

Audit risk explanation for significant profits or losses on disposal?

Answer 91

Indication that the depreciation policy of plant and equipment may not be appropriate. Therefore depreciation may be overstated

Question 92

Auditor’s response for significant profits or losses on disposal?

Answer 92

Discuss the depreciation policy for plant and equipment with the finance director to assess its reasonableness.

Question 93

Audit risk explanation for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares?

Answer 93

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.

Question 94

Auditor’s response for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares?

Answer 94

Review share issue documentation to confirm that the preference shares are irredeemable

Question 95

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.

Answer 95

If the customer is experiencing difficulties, there is an increased risk that the receivable is not recoverable and, therefore, overstated.

Question 96

Auditor’s response for a customer has had difficulties paying their outstanding balance of $1.2m and Hurling Co has agreed to a revised credit period.

Answer 96

Review the revised credit terms and identify if any cash receipts after the reporting date for this customer.

Question 97

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?

Answer 97

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.

Question 98

Auditor’s response 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?

Answer 98

Perform tests of details to confirm cost and NRV of the Luge products in inventory and that, on a line-by-line basis, the goods are valued correctly.

Question 99

Audit risk explanation for the company is intending to propose a final dividend once the financial statements are finalised?

Answer 99

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.

Question 100

Auditor’s response for the company is intending to propose a final dividend once the financial statements are finalised?

Answer 100

Discuss the issue with management and confirm that the dividend will not be provided for in the 20X5 financial statements.

Question 101

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?

Answer 101

There is an increased risk of errors within trade payables and the year-end payables may be understated.

Question 102

Auditor’s response 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?

Answer 102

The audit team should increase their testing on trade payables at the year end, with a particular focus on completeness of payables.

Question 103

Audit risk explanation for all of this expenditure has been recognised as an intangible asset?

Answer 103

If research costs have been incorrectly capitalised, there is a risk that intangible assets are overstated and expenses understated.

Question 104

Auditor’s response for all of this expenditure has been recognised as an intangible asset?

Answer 104

Obtain a breakdown of the expenditure and verify that it relates to the development of the new products.

Question 105

Audit risk explanation intends to obtain a stock exchange listing in the next 12 months?

Answer 105

Therefore, the directors have an incentive to manipulate the financial statements by overstating revenue, profits and assets

Question 106

Auditor’s response intends to obtain a stock exchange listing in the next 12 months?

Answer 106

The team needs to maintain professional scepticism and be alert to the increased risk of manipulation.

Question 107

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?

Answer 107

Could also be due to an increased risk over recoverability of receivables as they may be overstated and expenses understated.

Question 108

Auditor’s response 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?

Answer 108

Extended post-year-end cash receipts testing and a review of the aged receivables listing to be performed to assess valuation

Question 109

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?

Answer 109

This product recall will result in refunds to customers. The sales should be removed from the 20X5 financial statements and a refund liability recognised

Question 110

Auditor’s response for Darjeeling Co has stopped further sales of one product line and a product recall has been initiated for any goods sold since April?

Answer 110

Review the list of sales of the paint product between April and the date of the recall, agree that the sales have been removed from revenue and the inventory included

Question 111

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.

Answer 111

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.

Question 112

Auditor’s response for the company is holding damaged paint products in inventory and overall the inventory holding period has increased from 45 days to 54 days.

Answer 112

Discuss with the finance director whether the cost of the product will be written down and what, if any, modifications will be required to rectify the quality of the product.

Question 113

Audit risk explanation for revenue has increased by 16.8% and the gross margin has increased slightly from 36.4% to 37.3%.

Answer 113

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

Question 114

Auditor’s response for revenue has increased by 16.8% and the gross margin has increased slightly from 36.4% to 37.3%.

Answer 114

Obtain a detailed breakdown of sales and discuss with management to understand the sales increase

Question 115

Audit risk explanation for the payables payment period has increased from 40 to 58 days?

Answer 115

The current ratio has decreased from 3.08 to 1.65. The quick ratio has also decreased from 1.97 to 0.99

Question 116

Auditor’s response for the payables payment period has increased from 40 to 58 days?

Answer 116

Detailed going concern testing to be performed during the audit, including the review of cash flow forecasts and the underlying assumptions

Question 117

Audit risk explanation for external audit team may place reliance on the tests of controls performed by the IA department?

Answer 117

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

Question 118

Auditor’s response for external audit team may place reliance on the tests of controls performed by the IA department?

Answer 118

The external audit team should meet with IA staff, read their reports and review their files relating to store visits to ascertain the nature of the work performed

Question 119

Audit risk explanation for planning to make approximately 60 employees redundant after the year end?

Answer 119

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.

Question 120

Auditor’s response for planning to make approximately 60 employees redundant after the year end?

Answer 120

Discuss with management the status of the redundancy announcement; if before the year end, review supporting documentation to confirm the timing

Question 121

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?

Answer 121

Intangible assets and profits are overstated.

Question 122

Auditor’s response 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?

Answer 122

The amortisation expense should be calculated and the appropriate journal adjustment discussed with management, to confirm the accuracy of the expense and that the intangible is correctly valued at the year end

Question 123

Audit risk explanation for the report to management issued after the prior year audit highlighted significant deficiencies relating to the purchases cycle.

Answer 123

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

Question 124

Auditor’s response for the report to management issued after the prior year audit highlighted significant deficiencies relating to the purchases cycle.

Answer 124

If the controls are not in place or operating efficiently, adopt a fully substantive approach for confirming the completeness and accuracy of cost of sales and other expenses and trade payables.

Question 125

Audit risk explanation for if the company has not accounted for a bonus issue before?

Answer 125

A risk that an incorrect treatment could result in the under of overstatement of equity

Question 126

Auditor’s response for if the company has not accounted for a bonus issue before?

Answer 126

Review board minutes for authorisation and terms of the bonus issue and review if the transaction has been conducted in line with this approval