Hart Co
Audit Risk Auditors Response
Morph Co responsible for planning the final Auditor should spent more time on
audit of a new client understanding the entity.
There is a detection risk. There is risk that Put more seniors auditor into the group.
auditors do not have enough experience to
audit the new company or unfamiliar with
the company’s transactions.
The directors are paid a bonus based on a Auditor should inspect the profit and
percentage of profit before tax. expenses figures in the financial statements
to ensure no fictitious figures have been
There is risk that the directors might made.
overstate the profit, revenue and income
recorded and understate expenses in order Auditor should maintain professional
to increase their bonuses. scepticism and alert to any increased risk of
manipulation.
Customers pay a 25% deposit on signing Obtain the breakdown of revenue and
the contract, with the balance payable inspect year end revenues recorded to
when control of the playground is goods delivery notes to confirm that goods
transferred to the customer. have been delivered or not.
The deposit should not be recognised as Request management to amend if wrong
revenue immediately and instead should be recording has been made.
recognised as deferred income. (contract
liabilities) within CL until performance
obligations is satisfied. This is likely to
happened at point in time , when control of
playground is transferred to the customer.
There is risk that revenue is recognised
early, before the performance obligations is
satisfied and hence, revenue might be
overstated and deferred income
understated.
The warranty provision for the current year Discuss with management on the basis they
has been calculated as 2% of revenue. In calculate the provision.
the prior year, the warranty was based on
6% of revenue. Recalculate and compare current year
amount to prior year provision.
As per accounting standard, this items
should be recognised as a warranty
provision. Calculating warranty provisions
requires judgement as it is uncertain in
amount.
There is a risk that the warranty provision
might be understated and expenses and
liabilities might be overstated.
Risk is that since the claims and
construction technique did not change,
management might deliberately reduced
the p
Hart Co incurred expenditure of $1.8 m Obtain the breakdown of expenditure of
relating to R&D of a new type of $1.8m relating to R&D, identify the nature,
environmentally-friendly building material. assess whether the stages meet the
$0.6million of the expenditure have been criteria.
written off to the SOPL while $1.2million
have been capitalised as development Recalculate the amount to be capitalised
expenditure. and agree the amount to NCA account.
As per accounting standard IAS 38, Inspect market surveys/future
development expenditure can only be prospects/pre order sales list, cash and
recognised if it meets certain criteria. bank balances to ascertain (make sure) that
(PIRATE) development can be completed and
company have enough resources to
There is risk that, the criteria does not meet develop the product.
IAS 38 and so will be wrongly capitalised.
Hence, intangible CA will be overstated.
IAS 38 stated that only development
expenses that meet criteria for
capitalisation can be capitalised.
Risk is that there are some expenses
capitalised in the $1.2 million does not
meet criteria for capitalisation.
Hence, IA overstated and expenses
understated.
Or
Risk is that client misclassified between
research expenses and development cost
capitalised as intangible asset.
Hence, IA expenses might be
Hart Co placed an order for $2.4 m of Inspect NCA register and agree with
machinery, paying $1m in advance. The physical assets on the floor to ensure the
machinery was due to be received in July existence of all assets.
20x5 but will now be delivered post year
end. Discuss with management the correct
accounting treatment to confirm that
Only assets which physically exist at year amount paid in advance is recognised as
end should be capitalised as PPE. The $1m prepayment and inspect journal entry to
paid should be recognised as prepayment. review on any incorrect adjustment.
There is risk that company recognised the
PPE before it is received. Thus the PPE
account may be overstated and
prepayment account may be understated.
Hart Co made a rights issue to existing Inspect the share issuance document,
shareholders. calculate the amount for share capital and
premium.
The share’s value need to be split properly
between the share capital and share Agree to breakdown of share capital and
premium. share premium to confirm that they have
correctly recognised in the correct account.
There is risk that, the whole amount of
shares are included in the share capital Inspect disclosure notes in the FS to
account. Hence, share capital account confirm it as per accounting std
might be overstated and share premium
account understated.
Hart Co’s payroll function is outsourced to Discuss with management the extent of
an external service organisation. records the company have before pass to
the external service organisation.
This increase detection risk as auditor
unable to obtain sufficient appropriate Identify any controls undertaken by the
audit evidence (SAAE) to confirm the service organisation to ensure it is effective.
completeness of recording over sales and
receivables.
Hence, sales and receivables might be
overstated or understated.
Hart Co’s directors correctly disclosed their Discuss matter with management and
remuneration details in the forecast of FS in review the requirements of local legislation
line with IFRS standards. However, local to determine if the disclosure in the FS is
legislation in the country requires Hart Co included appropriately.
more extensive disclosure.
The company must comply with local
legislation since it is more comprehensive
than IFRS standards.
The directors’ remuneration disclosure will
not be complete if the additional
information is not disclosed.
a) Explain benefits of audit planning
1. This is to ensure auditor is able to meet the deadline
2. This is to ensure work done is in effective and efficient manner.
3. To help in planning and the review for quality control. (1m)
4. To ensure all risky areas are covered during the audit.