Risks and procedures Flashcards
Going concern: rapid expansion -> overtrading = cash flow problems
- post YE management accounts -> review performance
- cash flow forecasts -> ascertain whether x can pay debts and whether assumptions are reasonable
Going concern: new venture = cash flow problems
- post YE management accounts -> review performance
- cash flow forecasts -> ascertain whether x can pay debts and whether assumptions are reasonable
Going concern: highly competitive market = pressure on margins
- post YE management accounts -> review performance
- sensitivity analysis on key variables eg. supplier contract fees
Going concern: performance to date has been poor, predicting to make a loss
- post YE management accounts -> review performance
- sensitivity analysis on key variables eg. supplier contract fees
Going concern: overdraft review -> possibility facility may be withdrawn
- borrowing agreements -> ensure company able to comply with T&Cs
- inspect correspondence with bank -> monitor relationship
- written representation on management’s intentions and going concern basis
Going concern: heavily reliant on supplier -> failure to reach agreement = loss of customers
- discuss with management plan if failure on agreement and if they believe company could continue
- management representation on directors’ plans and feasibility
Going concern: potential breach of compliance or regulation = financial difficulties -> fines or compensation
- inspect correspondence with company’s legal advisers -> ascertain likelihood of breach
Going concern: experienced adverse publicity
- discuss with management whether adverse publicity has impacted rate of growth
- enquire on actions to address issues
Revenue recognition: high proportion of online sales -> risk sales not recorded correctly in accounting system
- ascertain and test control procedures on recording of online sales
Revenue recognition: revenue increased by X% -> indicates overstatement
- compare actual revenue by product to forecasts and budgets -> ascertain reasons for significant deviations
Revenue recognition: revenue not recognised in correct period
- recalculate deferred income for sample
- trace total figure to SFP
Revenue recognition: refunds and credits not recorded correctly
- sample of cancelled xxxx -> test for correct treatment of refunds or credits
Revenue recognition: cash sales = risk of understatement -> cash misappropriated without recording transaction
- identify and test control procedures for cash sales
Revenue recognition: in-store transactions -> high cash sales = risk of misappropriation and not recorded
- identify and test control procedures for in-store cash sales
Assets: may be inappropriately capitalised or recorded incorrectly
- physically inspect assets/title deeds for property
Assets: useful lives not appropriately estimated
- enquire of management as to ULs and consider if appropriate
Assets: depreciation charge not recorded pro rata
- recalculate dep charge for year on sample
- trace total figure to income statement
FX: sales in foreign currencies not translated at appropriate rate
- agree FX rates to appropriate independent source eg. Bloomberg
- re-perform calculation of conversion for sample of invoices
Inventory: days increased -> potential inclusion of obsolete/perishable goods = inventory overstatement
- YE stock count -> observe/assess procedures, two-way count, note slow-moving/damaged items
- ascertain from prod manager how use of perishable goods is monitored and controlled
- identify obsolete items -> review age analysis of inv and post YE mvmts
Inventory: inv figure extracted from records = may not reflect physical quantities
- perform test counts at stock count -> compare quantities to perpetual inv system -> reasons for discrepancies
- review and evaluate periodic inventory counts
Inventory: costing system not reflect appropriate direct costs, and allocation of prod overheads involves exercise of judgement
- enquire with management on costing system
Inventory: overseas suppliers -> translation errors
- agree FX rates to appropriate independent source eg. Bloomberg
- re-perform calculation of conversion for sample of inventory
Inventory: existence of competition -> drive down selling prices = NRV below cost
- identify items which may have NRV below cost by reviewing selling prices after YE
Inventory: returned stock inappropriately included and inappropriately valued
- discuss with management intention regarding returned inventory
Unrecognised liabilities: breaches of regs and compliance -> penalties which need to be recognised/disclosed
- ascertain from management how it proposes to account for/disclose potential legal claims/penalties
- inspect financial statements for appropriateness of disclosure
Unrecognised liabilities: X provision is an estimate = judgemental which increases risk of errors
- enquire with management how provisions are estimated
Intangible NCAs: inappropriately capitalised costs
- schedule of capitalised costs of intang. NCAs -> ensure they meet recognition criteria
- review expense accounts -> ensure no other costs should have been capitalised
Intangible NCAs: UL estimate inappropriate -> amortisation charge incorrect
- discuss with management basis of estimated UL -> ascertain whether reasonable
- re-perform amort calculation
Trade payables: days fallen and gross profit margin increased -> understatement of purchases and payables
- evaluate and test controls over recording of supplier invoices and payments to suppliers
- reconcile payables in purchase ledger with supplier statements
- direct confirmation if supplier statements unavailable
- cut-off testing -> trace receivables to invoice entries and vouch invoices recorded back to goods received records
- inspect after date payments/invoices
- inspect new supplier contract terms -> tighter credit = fall in payables days
Trade payables: overseas supplier -> translation errors
- reperform sample of FX translations -> check against appropriate 3rd party rates
