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KNIGHT ELECTRONICS CO

Audit risks Auditor response

Hercules Co recently won audit of new client Hercules Co should ensure proper experienced

knight electronics. and enough time should be allocated to client

to
The audit form does not know the nature of
detect any material misstatement.
business and their transaction hence there are
Also detailed substantive procedures will be
an increase detection risk.
applied on the opening balances.
There is less assurance over opening balances

as the Hercules did not perform the audit last

year.

Knight electronics is considering stock exchange The audit team should stay alert to any

listing next year. manipulation in the financial statements due to

There is risk that they maybe manipulate the the listing on the stock exchange.

sales and revenue figure to attract investors The audit team should be experienced enough

leading to overstatement of sales, revenue and to track any misstatement.

assets.

Prices of components have been steadily The audit team should discuss with the
increasing over the past two years leading to a directors if they are aware of this and they
reduction in the gross profit margin. The should compare the price with the market price
forecast financial statements for the year to confirm the inventory prices are valued
ending 30 September 20X5 show inventory reliable.
valued at cost.

As the prices are increased the NRV may have

fallen leading to inventory being overstated.
Premises have been revalued from 3.8M to Discuss with management the method of
8.4M and the revaluation policy is also revaluation and make sure they are revalued
changed. under IAS 16.

This maybe because of the stock exchange

listing to show the company in good condition
this can lead to PP&E being overstated.

The useful lives of assets are being changed Discuss with management how the lives have
from 5 years to 8 years. been increased from 5 to 8 years and request
possible reasons and ensure the assets are
Under IAS 16 plants lives should be checked
going to last for 8 years.
annually so if the useful is genuinely increased
then the change is reasonable.

This can lead to lower deprecation cost and can

result in overstatement of profit for the year.

Due to the fire in the company premises they Discuss with management and ensure the
commenced legal action on the supplier. The contingent assets has been in writing form to
finance director included a receivable for the be reasonably certain or any other logic for
damages likely to be received from the supplier recording it in reasonably certain.
in the forecast financial statements.

Under IAS 37 the contingent asset should be

reasonably certain to be recorded in the assets.

If it is not this can lead to assets being

overstated.

The credit controller was ill and was absent Discuss with credit controller the risk of bad
form work for four months. Due to staff debts and inspect aged receivables.
shortages, no replacement credit controller was
appointed. The receivables collection period
has increased from 45 days to 75 days. Discuss with finance director the need of
allowance.

There is an increased risk of bad debts due to

work load no follow ups would have been
made.

This can result in overstatement of receivables

because due to increase in receivables
collection period some allowance maybe
needed.

Payroll fraud was also discovered during the Discuss with finance director what possible
year. A payroll clerk had set up a number of steps have been taken to identify the other
fictitious employees and the wages were then
paid into the clerk’s own bank account. frauds.
Controls have now been implemented to
prevent this from re‐occurring and the clerk
involved no longer works for the company. Also, extra substantive procedures should be
However, the audit manager is concerned that performed on payroll and profits.
additional fraud may have taken place in the
payroll department prior to the controls being
implemented.

There maybe other frauds not identified yet

leading to increased control risk.

If this is the case the profits in P&L will be

overstated.

MAGPIE
Ratio 20X5 20X4

Operating profit margin 2% 5%

Payables payment period 64 22

(c)

Audit risk Auditor response

ALREADY DONE IN PAST PAPER

ESK
Audit risk Auditor response

It is the first year of audit of ESK co for Bannock The audit team should ensure adequate time is
& Co. apportioned and well experienced team is
provided and detailed briefing is performed to
The audit team will not be familiar with the ESK
company transactions type and accounting cover key areas of risks.
policies there will be increased detection risk.
Extensive substantive procedures should be
The is also less assurance over opening applied on opening balances.
balances as the Bannock did not performed
audit last year.

ESK Co purchased a patent for $2.6m. The The audit team should ensure the 2.6M is
purchase cost capitalised comprises the cost of capitalised as for IAS 16 IAS 38 and if any
the patent and other costs such as legal fees revenue expenditure is involved it should be
and administrative costs. expense out and the extra cost should be
removed form asset register where it was
There is risk that extra cost maybe capitalised
recorded.
which should have been expense out leading to
overstatement of assets and understatement of
expense.

ESK Co obtained an interest-bearing bank loan The audit team should review the loan
of $2.5m during the year. The bank loan is agreement and ensure the loan is split correctly
payable in five equal annual instalments. between current and non current.

There is risk that the loan maybe split

incorrectly between current and non current
The interest should recalculate to ensure
leading to misstatement of current and non
accrual is correct.
current liabilities.

The payables ledger clerk has recently The audit team should review the investigations
discovered a batch of supplier invoices that had and ensure all supplier are recorded in the
been mis-coded and therefore had not been payable’s ledger.
recorded as trade payables. This error has now
been corrected but investigations are still
ongoing to determine how this happened and The review of supplier statement should be
whether any other batches of invoices have done to ensure all liabilities are recorded.
been mis-coded. The payables payment period
is decreased from 64 to 39 days.

There is risk that other supplier invoices may

have also mis-coded which leads to late
payment which can hurt company goodwill and
due to this error, the payables will be
understated.

There was a fire in the south warehouse in June The audit team should discuss with
20X5 which resulted in damaged inventory. The management how they identify the damaged
damaged inventory has not yet been replaced. inventory.
The inventory holding period is increased from
117 to 135.
The audit team should visit the year end
 inventory count and ensure the damage
There is risk that the damage inventory may inventory is not counted and removed.
have calculated in the closing inventory leading
to overstatement of inventory and
understatement of cost of sales.

For the damage inventory directors are The audit team should discuss with
claiming 1.1M from insurance company which management how this is recognised in the
is recorded in receivables but no confirmation receivables if the case is virtually certain this
has been received from insurance company. should be left that way in receivables it not
other treatment should be done through IAS
37.
The company should comply with IAS 37 and
the receivable should not be recognised until
the case is virtually certain.

This can lead to overstatement of receivables

and profit.

Sales staff receive bonuses if they meet sales The audit team should stay alert for fictitious
target each quarter. Higher level of sales bonus sales and for sales recorded in wrong period.
is available in quarter of 31 august.

Extra procedures should be applied on sales

This increase the chances of sales staff being figure.
recording extra vague sales or they may record
sales in wrong period for sales.

This can lead to overstatement of sales and

profits.

The manager in ESK Co's credit control The audit team should discuss with
department has been off work since December management how they assess this issue and
20X4 due to ill health and has been replaced by the audit team should ensure that aged
an inexperienced temporary manager. This receivables or slow moving receivables
resulted in no monitoring of aged receivables. allowance is updated.

The receivables days have been increased from

65 to 85.

This increased the risk of bad debts due to no

follow ups for 3 months leading to
overstatement of receivables and
understatement of allowance.
PEACH

Audit risks Auditor response

The new accounting system is not tested after The audit team should inspect the system and
the implementation the company did not ensure all the data is being transferred form
consider it necessary to undertake further the old system.
testing after implementation.

The audit team should check if the system is

There is risk that the system may still have working efficient and all the transaction are
errors due to the large scale of company as it processed clearly. 0.5/1
was tested but with another system alone it
may not bare that work leading to high risks of
financial statements and other company data By Gemini: Perform a data transfer test by
misstated. This can lead to data being missed, agreeing the closing balances of the old system
duplicated or not transferred from the previous to the opening balances of the new system to
system. 1/1 verify completeness and accuracy.

Development cost of 0.8M was capitalised. Obtain the breakdown of the cost 0.8M and
ensure the cost is split correctly between
development and revenue expenditure.
There is risk that the cost may not meet the
Review supporting documentation to verify the
criteria of IAS 38 as there may be some
nature of expenditure meets IAS 38
research cost too leading to overstatement of
capitalization criteria.
assets and understatement of expenses. 1/1
0.5/1

Inventory of 227,000 will is no longer sell due to The audit team should value the inventory with
market lack of demand. The directors believe according to IAS 2 lower of cost or NRV to
peach co can sell the remaining inventories
internationally marginally exceeding the cost. ensure the inventory is valued correctly. 0/1
And Peach Co will be responsible for all cost
relating delivery and shipping.
(The audit team only test it not value it)

There is risk that the NRV of the inventory is

less then the cost leading to overstatement of The audit team should review if there is any
inventory. contract with international customer and
should determine the NRV while keeping
delivery and shipping and agree to the
documents.

Discuss with management if any written down

is required.

Peach Co replaced two items of machinery The audit team should inspect the documents
there was significant staff costs involved in of wages expenses and discuss with
preparing the site for the new machinery and management the accounting treatment
testing the new machinery this whole cost was applied.
included in the wages and salaries expense.

The audit team should undertake a review of

There is risk of operating expense being the costs and review the costs that should be
included in the wages and salaries expense capitalised as part of machinery.
leading to overstatement of wages and the
machinery cost is not capitalised leading to
understatement of PP&E. If any adjustment is made by management that
should be reviewed.

Old machinery was sold at significant loss The audit team should discuss the basis of
during the year peach co decided to extend the increase with management and should also
useful lives of Plant and machinery by an agree the basis with IAS 16 to ensure why the
average of 5 years. useful life is increased.

There is risk of plant and machinery being Discuss with management the loss on disposal
overvalued in the asset register or obsolete and review the asset register for other assets
machinery being used. 1/1 being overvalued.0.5/1

Addition: The revised useful life of a sample of

assets should be compared to how often these
assets are replaced and any gain or loss on
disposal, as this provides evidence of the useful
life of assets.

The previous supplier has launched a legal Discuss with the lawyer the likelihood of the
claim for breach of contract. The lawyer repayment and inspect the financial statements
estimate that 0.3M will be payable. if provision is being made. 1/1

There is risk that the company may have not

made the provision leading to understatement
of provision and overstatement of profits.1/1

Peach Co obtained an interest-bearing bank The audit team should inspect the SOFP and
loan of $1.2m on 1 March 20X5 for the the loan agreement and reperform the
development and purchase of new machinery. calculation to check the loan was split correctly.

There is risk that the loan may be split

incorrectly between current and non current
leading to misstatement of liabilities.

In order to secure the bank loan, Peach Co The audit team should verify the figures and
agreed to maintain a minimum operating profit the agreement and discuss with management
margin and meet specific sales targets. the basis of agreement and if the company can
continue this.

The agreement may result in the profit margin

being overstated to obtain the loan. They should recalculate the figures if any
manipulation has been occurred and should be
discussed with management.
If they are not meet there maybe fines or
instant repayment leading to cash flow
problems.

Corley Appliances
WRONG (Correct one on next page)
Audit risks Auditor response
The directors anticipated in the draft financial The audit team should recalculate the figures
statements that the warranty provision will be and compare them with sales made during the
lower than prior year due to product high year and prior year sales to verify if the
quality. provision is enough.

There is risk of recording provision less then Crucially, review the level of actual claims
required and costumers may find more defects made under warranty post-year-end to assess
which can lead to understatement of warranty the reasonableness of the reduced provision.
provision. (Added)

Also discuss with management the basis of

provision.

The company goods are shipped from Asia The audit team should review the documents
which take one month and the company has and ensure only the goods which are received
responsibility for the goods in transit form the are recorded.
point of despatch by the supplier.

Any goods in transit should not be recorded

There is risk of goods not received at year end until they are received as they will take 1
or being damaged or lost on the way leading to month anything can happen on the way. 0/1
overstatement of inventory at year end as the
company will assume the goods are in transit.

If the goods are lost this can lead to

overstatement too. 0/1

Receivables days increased from 42 to 55 days. Obtain the industry average for the year and
The finance director believes it is unlikely that compare it with the company ensure the
any increase in the allowance for credit allowance increase is not required if this is not
losses/receivables will be necessary at the year the case increase of allowance and decrease of
end as compared to the prior year. receivables should be needed.

There is risk of bad debts as the receivable’s Also discuss with management the reason for
days increased as compare to prior and not increasing the allowance.
allowance is not increased this can lead to
overstatement of receivables and
understatement of allowance. 1/1
Corley Appliances
(2nd attempt)

Audit risks Auditor response

The company has a returns policy which allows Obtain the sales invoice and inspect the ledger
a customer to return goods within 28 days of for the return liability which is 5% historically
purchase if they are not satisfied with the and verify the company policy is to only
product. Historically, 5% of customers return recognised the revenue to the extend of sales
goods within the return period. and ensure right amount of return liability is
recorded as compared to sales made.

IAS 15 allows companies to book profit to the

extend to goods sold. There is risk of the
company may recognise the complete amount
in sales which is historically only 5% return so
the 5% should be in return liability if not this
can lead to overstatement of sales and
understatement of return liability.

The company also provides a six-month

warranty on its products. It is anticipated that
Obtain the relevant documents and discuss
the warranty provision in the draft financial
with management the reason of reduction as
statements will be lower than the prior year as
the company does not manufacture if there is
the directors is confident the products sold by
no fair reason the provision should be
the company are built to a very high standard.
increased.

The company reduced the provision but they

Also compare it to the prior year and discuss
do not manufacture the product this is not
with management.
reason for lower warranty provision which can
lead to understatement of provision in the year
end statements.

The company receive their inventory form Asia Verify the inventory is received post year end
supplier in 1 month and the company is and it was recorded in the statements on time.
responsible from the point of dispatch.
There is risk of the company may not record the Perform extensive cut-off and other procedures
inventory on right time leads to cut-off problem to ensure the figures are correct.
which can result in understatement of
inventory and payables.

The central warehouse and all 20 branches will The auditor should obtain the counts forms of
be carrying out a full year-end inventory. the warehouses not visited and discuss with
directors and obtain the controls applied there
and ensure the counts was under review and
There is risk of the auditor may not visit all the are true.
20 branches and it will not be possible to trust
on the counts not visited leads to detection
risk.

Receivables days increased from 42 to 55 days

while the allowance is same as prior year.
Obtain the allowance details and discuss with
management the reason of no increase if they
did not provide fair reason increase the
There is risk of bad debts as the receivable’s
allowance accordingly and compare it to the
days increased and the company should have
prior year for best estimate.
increased the allowance accordingly if not this
can lead to understatement of allowance and
overstatement of receivables.

Payables ledger supervisor diverted funds to a Obtain the payables ledger breakdown and
fictitious supplier set up in the payable’s perform extensive substantive procedures to
accounts. The employee is dismissed and the detect any errors still present there also discuss
diverted funds will be recognised as expanse in with management which steps are taken for the
P&L. control risk after that to ensure the control is
now sufficient.

There is risk of the supervisor may have

committed more fraud as which is not
discovered till now leading to understatement
of expense and overstatement of receivables.
And it represents that the company has high
control risk as the fraud was undetected.

The company purchased and unstacked Obtain the documents and verify that the
automated despatch system costing 0.9M capitalisation is accordingly with IAS 16 and the
which was recognised as PP&E. These 0.1M is expensed.
capitalised costs include the purchase price of
$0.6m, installation costs of $0.2m and staff
Obtain the breakdown of the nature of
training costs of $0.1m.
transactions of 0.9M and discuss with
management why 0.1M was capitalised.

The capitalisation is not done accordingly with

IAS 16.

There is risk of revenue expenditure being

capitalised leading to overstatement of PP&E
and understatement of expenses.

KEY MISTAKES:

Trap 1: Returns Policy Error: Cited IAS 15 instead of IFRS 15. Relied on historical ledgers instead of
future evidence. Fix: Change to IFRS 15. Add: "Review actual post-year-end returns to verify the 5%
estimate."

Trap 2: Warranty Provision Error: Missed understatement of expenses. Relied on management

discussion. Fix: Add "understatement of expenses". Replace discussion with: "Review the actual
claims made under warranty post-year-end."

Trap 3: Goods in Transit Error: Used filler "perform extensive cut-off procedures." Fix: Replace with:
"Inspect a sample of shipping documentation immediately before and after the year-end."

Trap 4: Inventory Count Error: Used filler "ensure the counts are true." Fix: Replace with: "Review
the level of exceptions and errors noted during the unvisited counts."

Trap 5: Receivables Allowance Error: Relied on industry averages and management discussion. Fix:
Replace with: "Perform extended post-year-end cash receipts testing."

Trap 6: Payables Fraud Error: Said "overstatement of receivables" instead of payables. Used filler
"perform extensive procedures." Fix: Change to overstatement of payables. Replace filler with:
"Verify the fictitious supplier has been actively removed from the payables system."

Trap 7: Capitalised Costs Error: Told the auditor to discuss an obvious IAS 16 violation instead of
correcting it. Fix: Replace with: "Request management writes off the $0.1m training costs to profit or
loss and review the adjusting journal entry."

Golden Rule: The Post-Year-End Rule: If a risk involves an estimate, provision, or allowance, your
primary audit procedure must always include the phrase "post-year-end".
HART
Audit risks Auditor response

Hart is the new client of Morph and this is the An experienced audit team should be
first year of audit. apportioned to the audit which have relevant
experience in the industry and enough time
should be apportioned to the audit.
This is the first year of audit the auditors have
less knowledge of company nature of
transactions and policies. Extensive substantive procedures should be
performed over the opening balances.
There will be less assurance over opening
balances as the Morph did not performed audit
last year.

The finance director has indicated that the Increased testing should be performed over the
directors are very pleased with the forecast judgemental figures and an experienced team
performance for the year as the directors are and enough time should be given to verify the
paid a bonus based on a percentage of profit figures are not manipulated just for the bonus.
before income taxes.

There is risk of directors may manipulate the

figures to obtain the bonus leading to
overstatement of judgemental figures and PBIT.

Customers pay a 25% deposit on signing the Obtain the 25% payment breakdown and agree
contract, with the balance payable when it to the bank statement the money is received
control of the playground is transferred to the and agree it to the deferred income to verify it
customer. is not recognised as revenue and if it is correct
it.

There is risk of the 25% being recognised as

revenue as the customer have paid leading to
overstatement of revenue and understatement
of differed income.

WIP valuation will be carried out at all 16 sites Obtain the WIP valuation of the remaining 11
but the auditors will only attend 5 counts. sites and discuss with management which steps
was taken to reduce the detection risk and how
was the judgement performed for this.
The WIP valuation is technical work and as the
auditors can not visit there is risk of errors or
manipulation leading to misstatement of WIP
leading to high detection risk.

The warranty provision is decreased from 6% to Discuss with management what was the reason
2% of revenue. Finance director has made this for the decrease and if there is no reason the
change despite no significant difference in provision should be increased accordingly to
construction techniques or the level of claims in IAS 38.
the year.

As the construction techniques are not changed

this is not fair reason for the change in the
claim this is not according to IAS 38 this can
lead to understatement of provision.

Hart Co incurred expenditure of 1.8M relating

to the research and development $0.6m of the
Obtain the breakdown of 1.8M and verify the
expenditure to date has been written off to the
cost is correctly split and if not discuss with
statement of profit or loss. The remaining
management the reason and split this
$1.2m has been capitalised as an intangible accordingly.
asset.

Also agree the breakdown to the asset register.

There is risk of expenditure not split correctly
between research and development
expenditure which can lead to misstatement
expenses and intangible assets.

Company contracted to purchase new Obtain the asset register and verify the 1M is
machinery costing $2.4m. It paid 1M and the not recognised and obtain the SOFP and verify
machine delivery is delayed which will be the 1M is recognised as prepayment.
delivered now after the year end.

If the 1M is recognised as assets then change it

There is risk that the company may recognised to prepayment and discuss with management
the whole machine as asset or the 1M in the why was it recognised.
asset register which can lead to overstatement
of assets. Only asset present at the year end
will be recognised if this is recognised as asset
and not prepayment this can lead to
understatement of prepayment.

Hart Co made a rights issue to existing The audit team should obtain the breakdown of
shareholders at a price of $0.75 for each $0.50 the share issue and recalculate them to verify
share. the split was correct.

There is risk that the share issue and share The audit team should also ensure it was made
premium are not split correctly or the with adequate disclosers.
transaction is not recognised accordingly
leading to misstatement of share capital and
share premium. The audit team should obtain the relevant
documentation to verify the number of shares
issues.

MARKS = 13/16
SCARLET
All the bold text is added and the bold text is where I made mistake or missed
Audit risk Auditor’s response

Scarlet is new client of Orange Co and this is the An experienced audit team should be
first year of audit. apportioned to the audit with experience in the
relevant industry.
There is risk of less understanding of scarlet
company policies and nature of transaction Sufficient time should be given to the audit to
leading to higher detection risk. decrease the detection risk as much as possible.

Also, there will be less assurance over opening

balances as the Orange Co didn’t performed
Extensive substantive procedures should be
audit last year.
performed over opening balances.

Financial accountant was taken ill suddenly and The audit team should review the work of
a temporary financial accountant had prepared financial accountant with well experienced
the draft financial statements. team and should allocate enough time to
ensure the work is free of errors.

There is risk that the new financial accountant

may have less understanding of company And any changes in draft statements should be
policies and transaction and internal controls requested to management to made in the
which can lead to errors in draft financial statements if required.
statements.

The training cost of 15000 for the specialised Obtain the breakdown of capitalisation and
machine have been capitalised as part of the expense out the 15000 costs to P&L and discuss
cost of the asset. with management to remove it from asset
register if recorded.
Under IAS 16 the training cost should be
expense out to P&L if it capitalised this can lead
to overstatement of assets and understatement
Discuss with management the reason of
of expenses.
capitalisation and ensure no more costs like this
are capitalised.

The company sources many of its raw materials Under IAS-2 Goods which are in transit and you
and it takes 3 weeks to arrive and the company are responsible for it you should record them as
is responsible for the good as soon as they soon as they are out for delivery.
leave the supplier warehouse.

The audit team should obtain supplier dispatch

There is risk that the company may not record note the purchase orders and agree it to post
the goods as they are not present in year end year end GRN to verify all the goods which are
inventory count which can lead to ordered are recorded in the inventory and
understatement of inventory and payables. payables.

Receivables collection period increased from 38 Obtain the aged receivable listing and ensure
to 52 days and the credit controller also any receivable which are making delays very
confirmed that some customers are taking long are written off.
longer to pay.

There is risk of customers being bad debts

Discuss with management the reason of writing
which are not going to pay while the company
off the receivables.
still record them as receivables which can lead
to overstatement of receivables and Also obtain board minutes to ensure the view
understatement of allowance. of directors on the receivables.

Review post-year-end bank statements to

verify if cash was actually received from these
slow-paying customers.

Four staff members being made redundant. Inspect the financial statements and verify
sufficient redundancy cost is recorded and
agree them to the bank after the year to ensure
There is risk of less or no redundancy cost being they are being paid.
recorded in the statements leading to
Recalculate the redundancy provision based
understatement of expense.
on the 4 staff members' contracts to verify
accuracy.

Directors received bonus and included them in The audit team should request the
payroll charge for the year while the local management to remove the bonus form payroll
legislation requires separate disclosure of expense and being separately disclosed in the
directors’ bonuses in the financial statements. financial statement same as required by local
laws.

The company should follow the local legislation

if not there is risk of payroll expense being
overstated and the financial statement being
not in the local laws.

Company sold batch of chemicals for 120,000 Discuss with company lawyer and ensure the
during the year customers returned the payment amount and ensure it is recorded in
chemicals because the chemical mix was not the payables and agree it to post year end bank
inline with customer specifications a credit note statement to verify it is being paid.
yet to be issued and the chemicals are written
down to scrap.
Customer = Sales/Receivables. This had
nothing to do with payables or lawyers. It
There is risk that the company may not record required a simple review of a credit note.
the credit note which can lead to
overstatement of payables.

PEONY
Audit risks Auditor response

Reliance on internal audit The audit team should ensure the testing
performed by IA dept was strict and should
The external auditors have to rely on work of
obtain the IA procedures and review if they are
internal auditors on the control testing, there is
enough to place reliance on.
high detection risk and the IA dept may have
made errors which can lead to less procedures An experience audit with sufficient time and
being performed by external auditor on the increased team should be appointed to the
financial statements leads to high risk of audit and the risky areas should be tested
misstatements. more.

Operating margin decrease DONE IN NOTEBOOK

The Gross profit margin is expected to increase
4% and the operating profit margin is expected
do decrease by 3. The expense should be
apportioned correctly between both if not this
can lead to cost of sales expense being
Blackberry 13 out of 16
Audit risks Auditor response

The inventory is cost include general The audit team should ensure the inventory is
overheads. treated under IAS 2 through which the general
should be requested from management to
Under IAS 2 inventory should only include raw
remove them.
material cost, production and production
overheads although general overheads do not Discuss with management the reasons of
meet the criteria to be included if they are inclusion.
included this can lead to over valued inventory.

Inventory counts will conduct after the year The auditor should visit the counts and note the
end on 2,3 and 4 October. GDN and GRN and agree them to the
reconciliation of management.
There is increase risk of cut-off if adjustment is If there is any error discuss with management
not made correctly this can lead to year end and ensure it is corrected.
inventory in financial statements being
misstated.

1.1M of purchase of patent was expensed to Obtain the asset purchase invoice and request
current year profit and loss. management to capitalised it.

Under IAS 38 the purchase of patent should be Request management to remove the expense
capitalised and amortised over its useful life. and add back to assets.

As the 1.1M is expensed out the expense will Also discuss with management why was it
be overstated and the intangible assets will be expense out.
understated.

Blackberry Co raised 1.2M through issuing Audit team should obtain the breakdown and
share at a premium. verify the shares are correctly treated and both
amounts are correct also discuss with
The share issue should be split correctly
management if any changes are required to be
between share capital and share premium if
made and discuss the split with management.
any errors is being made it can lead to
misstatement of equity.

Fraud in receivables ledger processing was Audit team should perform extensive
found out conducted by 4 employees. substantive procedures on receivables.

The whole fraud may have not identified and Discuss with management the steps taken to
there may still have some fraudulent fully identify the fraud and ensure extra
transaction. This can lead to overstatement of controls are placed on the receivable dept.
receivables. Also, there is high control risk as
the fraud was undetected for certain time.

The company is outsourcing its receivables To place reliance on the work the auditor
ledger processing to external service should contact with service organisation
organisation. auditor through management and ensure the
controls applied on the work performed to
To place reliance on the work of external
ensure the quality of work and should reliance
service organisation there is high detection
should be place on the work.
risks the work may contains errors not
identified.

Financial accountant has threatened to sue the Audit team should obtain lawyer statement on
company for unfair dismissal. the case status and verify correct treatment is
been made in the statements.
For legal claims allowance or disclosure should
be made in financial statements if not this can If not discuss with management to make the
lead to understatement of allowance and adjustment.
expenses.
The work of finance accountant was allocated Extensive procedures should be performed on
to other members of dept. This increase the the work and experienced team with sufficient
risks of errors in the work due to high work load team should be apportioned also discuss with
leading to high detection risk. 0 management if any controls was placed. 0

3 days to AA

3 days to AA
GREEN CO
First year of audit no knowledge of company polices and less assurance over opening balances -
experience team enough time and more procedures on opening balances 2 owner saleing all his
shares can lead to manipluatoin of esitamtes to increase share price high inherent risk - Professinal
scpetisicm and more procedurs on estimates and experanced team 3 Refurvhisment cost 14.2m may
wrong added in PP&E not using IAS 16 overstatement of PP&E understaemetn of expenses - Obtain
the breadkown invoices - verify the expense discuss with mangemet 4 Loan 10m wrong split
between current non current lead to misstaement - Obtain loan agreemnet verify the split is correct
5 400000 on ads under IAS 38 not capitliased crtiera should be epxned if capiralised leads to
overstaemnt of intangble assets and understatement of expense - Obtain the breakdown and verify
critera IAS 38 and tell mangement to exepens out 6 No provision recognsied for the buliding
authority claim understaeemtn of proviisn overstaent of profir - confrim from laweyer any proviiosn
tell managemnt to recognsie if needed 7 R&D 350000 recongnied intanglbe assets the reserach cost
should expene out if not leads to overstaemtn of asets understaemtn of expesen - Obain invoces and
verify only the development cost is captialesed 8 invenotry maybe not recognsied at NRV leading to
overstatement of inveotry - At year end obtain the valuation crtiera and ensure valued at lower fo
cost or NRV

FULL MARKS
KNIGHT ELECTRONICS CO

HINTS ANSWER: same as the prevoius the first time audit give 2 marks :: 2 Consdiering stock
exchangbe lesiting may manipluate figures to get attractive price in the stock exchange leading to
high inherent risk and high risk in estiamtes financial - Professional sceptisim during audit and
extesnvie procedurs on estiamtes 3 Cutomsre pay for sercive agreemtn in full for the three year risk
they may record full in revenue instead of deffered income leading to understatement of def income
and overstatement of revenue - Obtian breakdonw and for sample trace to revenue and def income
verify only the wareenty provided is reconginsed as revenue 4 forecast FS for the year show invenoty
valued on cost : IAS 2 says that iventory should be valued to the nearnest possibile esmitae lower of
cost or NRV as the prices are going high the NRV may give good estimate if not valued on NRV
leading to misstatement of invetoyr : Obtain the breakdown verify valued at lower of cost or NRV
with complaince of IAS 2 5 Property revalued from 3.8 to 8.4 by management they are not expert
they may also wrong or revalue high for attractive assets figures leading to overstaemetn of
properties and depricatoin : Obatin expert report on revalution and ensure value thorugh that 6
Small fire - leagal actoin and recorded receivable under IAS 37 this only be recongnied if it is
probalbe if not and recorded leads to overstaeemtn of receivables : Obtain lawyer statement ensure
if probable then recorded if not probable or virtually certain tell managemnt to remove 7 staff
sthorga e increase in receivables days 30 days leads to bad debts if not recognsied leds to over
receivales under bad debts - obtain post year BS agree any paid if not discuss with mangemtn to
recongniode allowance 8 fraud by payroll cerlk risk of total fraud not idenifeid and still errors or
fraud there leading to high control and inherent risk - Perform extesnvie substantive proceurs over
payroll

2 Mistakes: Only virtually certain should be recorded in receivables not probable

And in high prices increasing and lower GP means that cost increased but priced stayed same
means the NRV is lower than cost.