Risk/Environment/Fraud

Question 1

What are the 2 key responsibilities of the auditor?

Answer 1

To provide an opinion on the truth and fairness of the financial statements

To conduct an audit in accordance with International Standards on Auditing

Question 2

Is it the auditor’s responsibility to express an opinion on the company’s going concern status?

Answer 2

No, it is the management’s responsibility

Question 3

What are the materiality benchmarks for profit after tax and revenue?

Answer 3

Profit after tax - anything above 5% is material

Revenue - anything above 2.5% is material

Question 4

Audit procedures when receivables is overstated - because customer can’t pay (bad debt write off)

Answer 4

• CORRESPONDENCE with the customer should be reviewed to assess whether there is any likelihood of payment
• DISCUSS with management as to why they feel no adjustment in the prior period FS
• REVIEW the post end period to see if any payments have been received from the customer

Question 5

What does IAS38 Intangible Assets state about research and development costs?

Answer 5

Research costs MUST always be expensed

Development expenditure can only be capitalised if it meets certain criteria
If they do not meet the criteria for capitalisation, they should be expensed

Question 6

What does ISA 315 “identifying and assessing the risks of material misstatement through understanding the entity and it’s environment” require auditors to do?

Answer 6

To identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels

The audit would have focused on the main risk areas, hence all material misstatements should have been identified and the correct opinion being given

Question 7

What are the benefits of assessing risks at an early stage?

Answer 7

More effective audit

• Helps the auditor to fully understand the entity
• Auditor will focus attention on the areas most likely to cause material misstatement
• Ensures that the most appropriate team is selected (more experienced staff allocated to higher risks)

Question 8

What is the purpose of an auditor doing a thorough risk analysis?

Answer 8

• Helps the auditor to fully understand the entity

- Reduce the risk of an inappropriate audit opinion being given

Question 9

Increased risk of fraud - audit procedures?

Answer 9

DISCUSS with management and those charged with governance if they are aware of any other fraud or potential fraud

REVIEW board minutes for evidence of management discussing

Obtain a WRITTEN REPRESENTATION from management acknowledging that they have disclosed all knowledge of actual and suspected fraud