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