Management bias aiming to achieve a stock market listing within
five years. & Ambitious Expansion plans
significant pressure on management to report
strong financial performance, and the risk of
earnings management is high
lead to a range of inappropriate accounting
treatments including early recognition of
revenue and other income and deferral of
expenses.
Corporate governance and internal controls There is a high scope for errors in financial
reporting processes and for deliberate
manipulation of balances and transactions, as
the internal audit team does not have sufficient
resources for thorough monitoring and reporting.
Audit committee=failure =fulfil its
resposnibiliites= with regards to internal audit.
1= Materiality Calculate
Examiner 2= Relevant accpounting rule
3= apply to the scenario= where is the risk
Comment 4= F/S=impact=understated or overstated
Government grant Def:
government grants are recognised in profit or
loss on a systematic basis over the periods in
which the entity recognises expenses for the
related costs for which the grants are intended to
compensate.
there is a risk that the company has recognised
the income too early, and a proportion of it
should be deferred. This leads to overstated
profit and understated liabilities.
May require complete or partial payment so
recognize a provision or disclose a contingent
liability. = understated liabilities or inadequate
discosure = not per IAS 37.
Grants related to the Capital Expenditure will be
recognized as deferred in SFP and assuming that
grant will be used to upgrade the PPE, grant=
recognize P/L in the period in which dep expense
is recognized.
Bank loan 30 million=received, maturity= 34 million return
Deep discount bond, should be amortised over
the term of the loan.
Risk is that finance costs and non‐current
liabilities will be understated.
Asset (capital) expenditure and maintenance Asset expenditure is recorded at $32 million this
costs year compared to $20 million in the previous yea
audit work will need to focus on the possible
overstatement of non‐current assets.
Related party transaction material by nature.
there is a risk that the disclosures are
incomplete.
Disclosures includes = nature of the related party
transaction, its amount, and the relevant terms
and conditions of the loan.
Data management system Not all staff may yet have been trained in
operating the system, leading to a higher risk of
error, and controls may not yet have been fully
implemented.
Financial Analysis staff costs increase by 7% , maintenance and
repair costs which have increased by 3.8%. Given
the increase in revenue of 17.8%,
expenses would be expected to increase by a
larger amount this year
expenses have been omitted in error, or have
been deliberately excluded, thereby understating
expenses and overstating profit.
Increase in revene consistent with increase in
proifit but fire in warehouse= should result in
decrease in assets= overly optimistic=
overstatement of assets= not written down
Receivable’s increased by 91% & Current
Ratio=86% = not been explained= not give
sufficient detail= motivation for directors to
overstate to get the loan
Revenue recognition there is a risk that revenue is recognised
incorrectly
free access to the unemployed should not result
in revenue recognition.
Overtime vs point in time
Recording upon invoice rather than upon delivery
New Client First year=increases detection risk
Does not have experience with this client
More difficult = detect material; misstatements.
Risk= o/p =not correct= not audited by our firm
As per ISA audit friom should ensure that
opening balanacen and comparative information
both free from material msistatmetn
Going Covern Several indicators = despite rev and profit
increased C faces GC problems.
Examples:
Destroyed Timber planation,industrial
Action,reputational damage by legal
claim,financial problems caused by lack of cash.
Action:
MAangment= should provide note to F/S=
material uncertainity over GC ,
If no note= significant audit risk.
Reduction in Fair value of Timber Plantation 90.9% of Total assets
Risk = management not record full loss
Risk= Expert valuation is not appropriate
Expert=considered only affect on trees not on
roads and buildings= then tested for impairment.
Risk= loss not fully recognized in this year
Inventory Tailroed= not exported= Risk= not as per IAS 2 on
NRV
Overstated Currernt assets and overstated Profit
Warehouse Fire 1st= Materility=calculate
IAS 36 impairment= R.A= Higher of fair value –
cost to sell and value in use = failure to use V.I.U
calaultion=overstate,nt of asssets = understated
impairment cost
Risk must be mitigated by aduit team= Proper
verification of insurance claim
Legal Provsions Fact = legal claim npt discussed during
meeting=integrity of senior management is
questionable & Credidbility of F/S
Mgt Representaion= subject to Profesional
skepticism.
Eco Friendly Vans Risk of impairment= deluivery capacity=reduced
Classification and measurement of acquired Refitted=PPE
proeperties Sold=IFRS 5, IAS 40 depending
12 month expected, actively marketed=IFRS 5
Longer term. Not for future use=IAS 40
Measuremnet and disclosure implications if IFRS
5= lower of C.V & F.V-Cost to sell, IAS 40= F.V=
assets understated or overstated if classification
is not appropriate.
Group Audit Risks
Planned Disposal and acquisition of another C IAS 10= diclsoure= nature of event and estimate
of its financial effect= audit risk=incompelete or
inaccurate disclosure.
Disposal of Primal Burgers Co IFRS 5= conditions= SALE=assets reclassified= at
FV-Cost to sell, should not depreciated .
IFRS 5 require that priori to classifiying as held for
sale, impairment is measured and recongiszed
Projected Revenue = falls by 3.9% indicates
impairment= risk of missttamnet
Risk= W.R.T disclosure as held for sale should be
recognized seperatley.
Risk= it is not treated as discontinued operation.
Definition= componenet of an entity….
`Diposal For primal burgers co- Potential for Results of cusbisdary could be manilultated in
manipulation order to look ir more favorable to any potential
purchaser.
[Link]= shows revenue is declining so
manipulation….
Cost could be shifted to other group C to look this
C more attractive.
Investment in Peppers Co: 1st= Materiality
IFRS 11= 50%,50% share & right to net assets of
an entity=joint venture
Audit Risk= equity accounting not applied as per
IAS 28
Capital Expenditures: Audit Risk= classification b/w PPE and intangible
assets= liccences =IAS 38= PPE=overstated and
Intangibles =understated
Reportable operating Segment Total Company Revenue= 14% of Monday coffee
shops
Operating Segment:
which engages in business activities from which
it may earn revenues and incur expenses
whose operating results are reviewed regularly
by the entity’s chief operating decision maker to
make decisions about resources to be allocated
to the segment and assess its performance,
for which discrete financial information is
available.
Risk= disclosures are not provided or incomplete
See the Next Page:
Conclusion:
If requirement starts with “Discuss” or Evaluate and Prioritize:
In conclusion, Winberry Co faces several high-risk areas that carry a potential risk of material
misstatement, which have been ranked based on the magnitude of potential misstatements and their
likelihood of occurrence. The warehouse fire and the joint venture with Durian Co carry the highest
risks. It's recommended that Quince & Co reassesses planning materiality and implements appropriate
audit procedures and assigns highly competent staff to address the risks effectively.