Risks and procedures

Question 1

Going concern: rapid expansion -> overtrading = cash flow problems

Answer 1

• post YE management accounts -> review performance
• cash flow forecasts -> ascertain whether x can pay debts and whether assumptions are reasonable

Question 2

Going concern: new venture = cash flow problems

Answer 2

• post YE management accounts -> review performance
• cash flow forecasts -> ascertain whether x can pay debts and whether assumptions are reasonable

Question 3

Going concern: highly competitive market = pressure on margins

Answer 3

• post YE management accounts -> review performance
• sensitivity analysis on key variables eg. supplier contract fees

Question 4

Going concern: performance to date has been poor, predicting to make a loss

Answer 4

• post YE management accounts -> review performance
• sensitivity analysis on key variables eg. supplier contract fees

Question 5

Going concern: overdraft review -> possibility facility may be withdrawn

Answer 5

• 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

Question 6

Going concern: heavily reliant on supplier -> failure to reach agreement = loss of customers

Answer 6

• discuss with management plan if failure on agreement and if they believe company could continue
• management representation on directors’ plans and feasibility

Question 7

Going concern: potential breach of compliance or regulation = financial difficulties -> fines or compensation

Answer 7

• inspect correspondence with company’s legal advisers -> ascertain likelihood of breach

Question 8

Going concern: experienced adverse publicity

Answer 8

• discuss with management whether adverse publicity has impacted rate of growth
• enquire on actions to address issues

Question 9

Revenue recognition: high proportion of online sales -> risk sales not recorded correctly in accounting system

Answer 9

• ascertain and test control procedures on recording of online sales

Question 10

Revenue recognition: revenue increased by X% -> indicates overstatement

Answer 10

• compare actual revenue by product to forecasts and budgets -> ascertain reasons for significant deviations

Question 11

Revenue recognition: revenue not recognised in correct period

Answer 11

• recalculate deferred income for sample
• trace total figure to SFP

Question 12

Revenue recognition: refunds and credits not recorded correctly

Answer 12

• sample of cancelled xxxx -> test for correct treatment of refunds or credits

Question 13

Revenue recognition: cash sales = risk of understatement -> cash misappropriated without recording transaction

Answer 13

• identify and test control procedures for cash sales

Question 14

Revenue recognition: in-store transactions -> high cash sales = risk of misappropriation and not recorded

Answer 14

• identify and test control procedures for in-store cash sales

Question 15

Assets: may be inappropriately capitalised or recorded incorrectly

Answer 15

• physically inspect assets/title deeds for property

Question 16

Assets: useful lives not appropriately estimated

Answer 16

• enquire of management as to ULs and consider if appropriate

Question 17

Assets: depreciation charge not recorded pro rata

Answer 17

• recalculate dep charge for year on sample
• trace total figure to income statement

Question 18

FX: sales in foreign currencies not translated at appropriate rate

Answer 18

• agree FX rates to appropriate independent source eg. Bloomberg
• re-perform calculation of conversion for sample of invoices

Question 19

Inventory: days increased -> potential inclusion of obsolete/perishable goods = inventory overstatement

Answer 19

• 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

Question 20

Inventory: inv figure extracted from records = may not reflect physical quantities

Answer 20

• perform test counts at stock count -> compare quantities to perpetual inv system -> reasons for discrepancies
• review and evaluate periodic inventory counts

Question 21

Inventory: costing system not reflect appropriate direct costs, and allocation of prod overheads involves exercise of judgement

Answer 21

• enquire with management on costing system

Question 22

Inventory: overseas suppliers -> translation errors

Answer 22

• agree FX rates to appropriate independent source eg. Bloomberg
• re-perform calculation of conversion for sample of inventory

Question 23

Inventory: existence of competition -> drive down selling prices = NRV below cost

Answer 23

• identify items which may have NRV below cost by reviewing selling prices after YE

Question 24

Inventory: returned stock inappropriately included and inappropriately valued

Answer 24

• discuss with management intention regarding returned inventory

Question 25

Unrecognised liabilities: breaches of regs and compliance -> penalties which need to be recognised/disclosed

Answer 25

- ascertain from management how it proposes to account for/disclose potential legal claims/penalties - inspect financial statements for appropriateness of disclosure

Question 26

Unrecognised liabilities: X provision is an estimate = judgemental which increases risk of errors

Answer 26

- enquire with management how provisions are estimated

Question 27

Intangible NCAs: inappropriately capitalised costs

Answer 27

- schedule of capitalised costs of intang. NCAs -> ensure they meet recognition criteria - review expense accounts -> ensure no other costs should have been capitalised

Question 28

Intangible NCAs: UL estimate inappropriate -> amortisation charge incorrect

Answer 28

- discuss with management basis of estimated UL -> ascertain whether reasonable - re-perform amort calculation

Question 29

Trade payables: days fallen and gross profit margin increased -> understatement of purchases and payables

Answer 29

- 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

Question 30

Trade payables: overseas supplier -> translation errors

Answer 30

- reperform sample of FX translations -> check against appropriate 3rd party rates