202)
overseas purchases- foreign currency risk, amount may be overstated understated and profit
can be overstate
safeguard: at the time of purchases perform foreign currency exchanges, what is the present
rate and how’s the conversion is performed, procedures for rawmaterial
goods are transit for upto six weeks; risk of material msistatement, transactions maybe
overstate, possiblity of lost and damages and nrv low, WOP completion check
AUDIT RISK AUDITORS RESPONSE
goods in transit The auditor’s team should accurately undertake
lapis co purchass its raw materials the detailed procedure of cutoff testing of purchases of
from overseas and has responsibility raw materials at the end of the year. To ensure that the
for goods at the time of dispatch, cut off is complete and accurate, the sample of shipping
with materials in transit for upto six documentation should take place immediately before
weeks. and after the year end realting to goods from overseas
At the year end, there is a risk of suppliers.
cutoff not being accurately verified
and purchases nventory paybles can
be understated and overstated as the
company may not correctly recognize
the raw materials at the time of
dispatch.
Internal audit The external audit team should meet
Indigo co may place reliance with internal department staff and
on thecontrols testing work read their reports and
undertaken by the internal review their files relating to controls
audit department. testing performed at the factories to ascertain
Reliance placed on the basis the work undertaken. The team need to evaluate and
of work performed is perform audit procedures before using the of internal
inadequate for the audit audit, the team will need to reperform some of the
purpose, external team may testing carried out by internal audit to assess its
form an incorrect conclusion adequacy.
on the strength of internal
controls at lapis co.
No allowance for receivables The audit team should apply test of controls
A signifiacant wholesale customer and perform review in which the financial
has informed lapis co that is director identifies old or potentially
experiencing financial difficulties. Its irrecoverable receivables balances and
finance director doesn’t believe n processes to ensre they are operating
allowance for receivables is required effectively.
in the draft financial statements for A review for the correspondence with this
the yearbended 30 sep 20x5 customer and discuss with the finance
There is a risk the recivables will be directorthe rationale for not maintain an
overvaled allowance for recievabkes.
Warranty provision Audit teams should Discuss with management
The company company changed its their procedures for estimating the
suppliers to a cheaper alternative warranty provision and specifically if
and ths had led to an increase in they have identified the reason for the
warranty claims. increase in claims and the effect of this
If the number of customer complains on the estimate.
increases it could increase the Review the level of claims received during
possibility of higher provision. As the the year and post year end and compare
fiannce directore states the overall this to the provision made at the year
level of the provision will be similar end to assess the adequacy of the provision.
to the prior year, there is a risk the
provision and expenses are
underrated.