QUESTION – 3
AUDIT RISKS AUDITOR’S RESPONSE
The auditor supervisor has been Discuss with the
recently appointed as auditor to engagement partner to extent
green co. the audit strategy, plan and
May be the auditor has been procedures.
inconsistent or lack of knowledge Discuss with prior auditor of
with entity and environment, the client for further
accounting policy and green co understanding about the
regarded accounting framework environment and inherent risk
and risk factors. factors.
It impact the nature and
timing and extent of the
procedures, so auditor extent
the audit strategy and plan
and procedures.
Aidan has been classify the cafes Auditor need to corroborate
as PPE at the cost of $14.2 M the Cafes and regarding
capital expenditures are
Green co may overstate the satisfy the criteria of IAS-16
Asset and understate the Expenses, PPE.
so auditor inspect the accounting If never met the criteria,
method. auditor need to obtain the
evidence and made
adjustment and review the
misstatement is susceptibility
with the other assertion.
The green co obtain $10 M loan for Inspect the Recognition of the
refurbishment and he agreed to loan in statement.
repay the loan in five annual Auditor estimate the loan’s
instalments. principal and interest by bank
loan policy estimates.
Obtain the confirmation letter
form the bank about the green
co bank balances and loan.
Consider the Green co credit
history from external sources.
Reconcile the client bank
statement to the ledger and
statement to confirm the
completeness of the loan.
The green co classify the The auditor remove the
advertising expenses as Intangible advertisement from intangible
asset and also estimate the asset and classify as expenses.
amortization for over 24 months. Remove the amortization
The green co may overstate estimates from statement.
the asset and understate the Review the misstatement
expenses, so the auditor extent the susceptibility with the other
plan and procedures. assertions via additional
According to the IAS-38 procedures.
Intangible asset denotes that the
advertisement never ever classified
as intangible asset.
The green co refurbishment the Reconcile the title deeds of
café not been performed by the green co to the building
accordance with building regulatory documents with
regulations. the independent expert.
This significant risk may Discuss about the penalty
impact the going concern of the amount and risk factors with
entity. the Client’s advocate with
And consider and made client’s permission.
adjustment in the procedure’s
nature, timing and extent.
The green co initiate the project t The auditor consider the the
to develop new technology for development project is satisfy
maintaining the correct the development cost criteria
temperature and humidity in its as per IAS-38.
greenhouses at the cost of And inspect the expenses
$350,000. document of the project is
Review the accounting regarded to the project
method of the development cost of development cost as per IAS-
the green co. 38.
May be the green co overstate Review the development
the asset and understate the project’s amortization
expenditure. estimates and useful life.
Flood damage the inventory of Auditor inspect the damaged
green co, so they sold at low price. inventory and reconcile the
quantity of damaged
The auditor consider the inventory to the records in
damaged level of the inventory and statement and disclosure.
check the disclosure about this risk Reconcile the estimates of
factor in statement. price of damaged inventory
and independent own
estimates.
Inspect the inventory records,
the damaged inventory still
classified under inventory in
goods dispatch note to ensure
the existence.
According the auditor’s ratio Review and recalculate the
calculation, the gross profit was forecast by the basis of
decreased than forecast but management used documents,
operating profit margin was consider with management if
increased than forecast. significant difference.
Auditor give the attention, Reperform the forecast as per
because if this misstated by green the IFRS by the basis of
co may impact the statement level. management documents, to
reconcile own estimate the
actual outcome to ensure the
green co integrity of
estimates.
QUESTION – 1
1) b
2) b, e
3) a
4) consistent, not consistent, consistent.
5) b
QUESTION -2
20X5 20X4
1)
Gross profit margin 44% 47%
Current ratio 2.3:1 2.4:1
2) c
3) a, b, e
4) b
QUESTION – 4
AUDIT RISK AUDITOR’S RESPONSE
Materiality for the draft financial Review and recalculate the
statements has been calculated as draft statement to confirm the
$153,000, which is 5% of profit risk for peach co.
before income taxes. Consider the misstated
Usually, with in 5% is only circumstances is susceptibility
acceptable level, but the peach co the other assertions.
have 5% is material misstatement. Confirm the misstated area is
significant to the statement or
not pervasive.
Convey to the management
adjust the misstatement.
A new accounting system was Inspect the new policy of the
introduced via direct changeover in client and consider the policy
March 20X5. suitable for the client nature
Because the wrong policy of entity.
may impact the going concern of Review the applicability of
the company. the new policy.
Discuss with board directors
about the reason for use of
new policy.
Reconcile the prior policy and
new policy to confirm the
new policy never affect the
culture and accounting
methods of the company.
Discuss with the prior year
auditor to confirm this change
is necessary or not.