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
Auditor’s response for forecast ratio from FD shows gross profit margin increase and operating profit margin decrease?
Classification of costs between cost of sales and operating expenses should be reviewed in comparison to prior year and inconsistencies investigated
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
Auditor’s response for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?
Timetable of perpetual inventory counts should be reviewed and controls over the counts and adjustments to records should be tested
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
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?
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
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
Auditors response for a number of assets which had not been fully depreciated were identified as being obsolete?
Enquire with FD if obsolete assets have been written off. If so, review adjustment for completeness
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
Auditors response for planning to include a current asset of 0.7 which relates to advertising costs incurred
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
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
Auditor’s response for payroll function was transferred to service organisation
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
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
Auditor’s response for company has spent 0.9 developing new product lines, some of which are in early stages of development
Obtain a breakdown of expenditure and verify that it relates to development of new products
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
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?
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
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
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%
Finance costs should be recalculated and any increase agreed to loan documentation for confirmation of 5% interest rate
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
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
Discuss with management the basis of refund liabiltiy of 0.25 and obtain supporting documentation to confirm reasonableness of assumptions and calculations
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
Auditor’s response for company stopping firther sales of a product and product recall has been initiated for any goods sold since June
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
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.
Auditor’s response for payables payment period and overdraft increase and current ratio decrease?
Detailed going concern testing to be performed during the audit, including review of cash flow forecasts and underlying assumptions
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
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
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
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
Auditor’s response for company outsourcing its receivables ledger processing to an external service organisation
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
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
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
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
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
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
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
Audit risk explanation for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4
Increase in inventory may be due to an increased level of pre-year-end orders. May indicate that they are overvalued
Auditor’s response for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4
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
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
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
During final audit, undertake increased testing over cut-off of revenye and completeness of contract 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
Auditor’s response for an allowance for credit losses/receivables has historically been maintained, but it is anticipated that this will be reduced
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
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
Auditor’s response for for preliminary analytical review of management accounts shows payables payment period decreased
Audit team should increase their testing on trade payables at year end with a particular focus on completeness of payables
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
Auditor’s response for upgraded its website for 1.1. Costs incurred should be correctly allocated between what’s expensed and what’s capitalised?
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
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
Auditor’s response for purchasing a warehouse and it is anticipated that legal process will be completed by year end
Inspect legal documents of ownerships, such as title deeds ensuring these are dated prior to 1 October 20X5 and are in the company name
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
Auditor’s response for significant finance has been obtained in the year, as the company has issued $5m of irredeemable preference shares
Disclosures for this share issue should be reviewed in detail to ensure compliance with relevant accounting strandards
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
Auditor’s response for finance director has requested that audit completed one week earlier than normal so that results can be reported earlier
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
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
Auditor’s response for company is intending to propose a final dividend once the FSs are finalised. Dividend is announced post-year-end
Discuss with management and confirm that dividend will not be included within liabilities for 20X5 FSs