Audit risk Audit response
The surplus plant was sold resulting in a profit on The auditor should perform a sample of test on
disposal of $210000. There is an inherent risk as assets to confirm that it has not been recorded
there is a possibility that the asset is still recorded and recalculate the dep exp to agree that it was
in the property plant and equip which will calculated with right amount
overstate the asset or the dep exp was not
calculated correctly over the asset useful life
which understate dep exp and overstate profit.
Maple and co not uncovered the fraud during the The maple co should be skeptical in identifying
last year audit there is a control risk as there is the risky areas to ensure where the auditor need
still an opportunity for fraud which can affect the to be careful during the conduct of audit.
audit carried out.
A new director was appointed who was Auditor should review the work perform by the
previously a financial controller of a bank. There new director to confirm that the work carried out
is an auditrisk as the new fd does not have the is accurate and does not contain error and can be
relevant experience to perform the work which accepted for the audit
increase the risk of error.
The full amount of 1.8 m is recorded in financial Review a breakdown of the amount 1,.8 m and
statement as an intangible asset at different recalculate the amount to confirm that the
development of projects on developing new research and development cost has not been
products. There is an inherent risk as all the cost included and recognize the amount which fulfill
has been recognized in the intangible asset there the criteria of intangible assets only.
is a risk that it also include the research and
development cost which overstate the intangible
asset and understate the expenses which
overstate the profit.
The $2m was borrowed from the bank and is due Review the financial statement to confirm that
for repayment over a ten year period. It include the loan has been classified between current and
inherent risk as there is risk that it is not classified non current liability.
into the current and non current liability which
will understate the payable and liability.
The bank has attached the minimum targets as The auditor should perform the sample test on
part of the loan covenants there is risk that the the profit to confirm that is not overstated and
management will try to overstate the profit to has been calculated correctly.
meet the minimum target of the loan convnants
which will overstate the profit
There has been increased in no of sales return The auditor should inspect the sales return made
over 0.5m it increased the inherent risk as there during the year and perform a sample of test to
is a poosibilty that revenue has been overstated confirm the revenue has been amended.
and which will also overstate the profit of the
company.
The auditor raised concern that during the count The auditor should discuss with management
there were movi=ement of goods in and out the that moveable inventory should be separated or
warehouse it increase the risk that during the the auditor can agree the purchase invoice with
count inventory has been omitted or is counted good receive note.
twice which will under or overstate the inventory
valuation
Latte co (substantive procedure)
Trade Receivable
1. Analyze the trade receivable which has been increased by 25% as compared to previous year and
discuss with management the reason behind it.
2. Analyze the reduction in allowance which has been decreased by 33% while the trade receivable
has been increased by 25%.
3. Inspect the sales invoice and agree with dispatched notes to confirm the accuracy of the trade
receivable been calculated by the management
4. review the customer list to investigate is there any customer facing financial difficulty which will
not be able to pay to confirm the reasonableness of the allowance
5. review the receivable collection period of current and prior year to investigate any unusual
fluctuation
6. review the post year end receipt from customer and trace it to the receivable balance to confirm
the customer existence.
PROVISION FOR LEGAL CLAIM:
1 Review the basis of the claim made by former employee of 0.6m to assess the reasonableness of the
claim being made.
2 discuss with the lawyer the chances of claim being successful and what the maximum amount co need
to pay for the claim
3 recalculate the provision to confirm it is in accordance with the maximum amount if not discuss with
management the reason
4 discuss with management the basis use to recognized the provision of 0.25m when the actual amount
is grater than it
5 seek a representation letter from the management to confirm the completeness of the provision been
recognized.
Bank loan
1 inspect the loan agreement to review the conditions of loan, duration of loan, repayment of loan or
any late penalty
2 analyze the loan to confirm it is split between the cl and ncl in financial statement
3 recalculate the interest charge to ensure the right amount is calculated and paid
4 review the post year bank balance or cash book to agree with payment of loan being paid for the
quarter
5 discuss with management reason for payment of quarter 31 march not yet paid and analyze the
operating expense to confirm is there any late penalty of payment which is not yet paid.
HERON CO
ADDITION OF PLANT AND EQUIPMENT
1 inspect the purchase invoice of manufacturing line eg the machine code/number to confirm the
ownership of it
2 analyze the breakdown of cost 3.6 m to confirm it met the criteria of IAS 16 and the plant and
equipment are recorded correctly
3 review the cost recognized in addition of plant and equipment to confirm it is net off refundable
purchase tax and staff training as it is an expense which will overstate the assets
4 discuss with management the reason for capitalizing the cost of 0.2m as it should be recorded as the
research and development cost.
5 recalculate the dep of the machine to confirm it is depreciated with the right amount over it usefull life
and there is no under or over depreciation
Bank balance
1 analyze the financial system to confirm the overdraft of 3m has recorded in the current liability so it is
not understated
2 circulates the confirmation letter from the bank to confirm the overdraft amount or if the limit has
been exceeded or is there any penalty related to the limit exceeded
3 analyze the overdraft balance of current yr with prior year to investigate any significant fluctuation
4 recalculate the reconcile amount at the post year end to agree the bank balance of co to the bank to
confirm it is reconciled accurately
5 discuss with management the reason for the overdraft amount to confirm is company facing the going
concern issue or facing the financial difficulties.