Romm @ overall financial statement level

Question 1

Recently appointed auditors

Answer 1

1. management may use the opportunity to manipulate the financial statements knowing that the auditor is new and unfamiliar with operations
2. The opening balance figures are brought forward incorrectly/misstated
3. Audit firm does not have the experience in this company and may miss material misstatements contained in the financial statements

Question 2

Listed on the JSE

Answer 2

Risk that management may manipulate the financial statements to meet shareholder expectations to increase the share price

Question 3

Holding company is listed on the NYSE

Answer 3

pressure from shareholders is filtered down, thus management may feel pressured to manipulate the F/S

Question 4

Strict deadline on the audit

Answer 4

1. Audit company has limited time and may miss material misstatements
2. Subsequent events may not be appropriately identified and disclosed
3. Management may use the opportunity to manipulate the financial statements knowing that the auditors have limited time.

Question 5

Executive directors hold a % of the shares in the company

Answer 5

Directors are incentivised to overstate the financial position and performance of the company for personal benefit

Question 6

Loan obtained from the bank has F/S conditions

Answer 6

Management may be pressurized to overstate the company’s financial position to keep the loan

Question 7

Subsidiary was purchase during the year

Answer 7

Increased risk that the F/S was manipulated bu prior owners to try and increase the sale value

Question 8

New management was appointed this year

Answer 8

Risk that management may not have the necessary competence and skills required, increasing the risk in error.

Question 9

Going concern:

Answer 9

There’s a risk that the F/S are not prepared on a going concern basis when they should be because…. (provide scenario evidence)

Question 10

Internal control

Answer 10

There are weaknesses in internal control as (provide reasoning) which may increase the risk of fraud and error

Question 11

ABC is part of a group with related party transactions

Answer 11

There’s a risk that related party transactions are:
1. Not at arm’s length
2. Not appropriately disclosed in terms of IAS 24
3. Not appropriately eliminated on consolidation

Question 12

Sub was acquired during the current financial year

Answer 12

1. Risk that sub’s transactions for the whole year are included in the consol of the group
2. Risk that the business combination is incorrectly accounted for, because the fair value of identifiable assets and liabilities must be determined in terms of IFRS 3

Question 13

ABC has limited staff

Answer 13

Significant pressure in the accounting department may lead to errors in the AFS

Question 14

Bonus

Answer 14

Management has the incentive to increase profits in order to receive bonuses at year end

Question 15

Staff compentencies

Answer 15

The accounting staff does not have the relevant FIRS knowledge to compile the AFS, therefore, the integrity and reliability of the AFS is questionable and may contain errors.

Question 16

Management integrity

Answer 16

Management integrity is questionable which may lead to the manipulation of the AFS (explain why management is acting sus)