AA AUDIT RISKS
AUDIT RISKS AUDIT RESPONSE
Development Costs Discussion on Appropriate Accounting
Misclassification i.e. expense to assets and vice Policy and useful life .
versa . Recalculation of the Amortization expenses
Amortization calculation being performed for accuracy of the amounts .
incorrectly . Review on the cost capitalized through a
supporting document to determine the
nature of expenditure and agree this to the
relevant criteria as per IAS 38.
Inventory Valuation Obtain supporting documentation on costs
Lower of cost and NRV not performed to sell so to establish the NRV and discuss
appropriately , over/under statements of the requirement for it to be written off .
Inventory and Cost of Sales .
PPE Extension of Useful Life Discussion on the rationale behind
The company tends to have increased the useful extension of useful life .
life of the assets despite of the old assets being Revised Useful Life be compared to how
sold at a significant loss which results in assets often its replaced providing evidence on the
being overstated and depreciation expenses useful life of the assets .
being understated .
New Accounting System The audit team should discuss with the
There is a risk that the ongoing data may get management on any issues which have
lost if the data is not transferred from the old occurred since the new system was
system correctly . implemented.
If the new system is not operating effectively, The audit team should perform detailed
there is a risk of mis-statements of the testing to confirm that the balances have
accounting records . been accurately and completely transferred
to the new accounting systems.
Fraudulent Purchases Discuss with the management about the fraud
Control risk is increased if the fraud has gone to understand how the fraud was detected
undetected for a period of time . and corrected .
If the fraud remains undiscovered , then this could Understand the internal controls in place so
result in expenses being understated and payables as to assess its effectiveness on preventing
overstated . other frauds from occurring .
Inspect the non current assets register to
confirm on the existence of the assets .
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AA AUDIT RISKS
Legal Claim Audit team should review the
As it appears probable that the company will have correspondence with the Company’s lawyer
to pay the supplier , a provision is required to be so as to assess the likelihood of company
created as per IAS 37 . losing the case and the amount of payments
The risk is that if the company does not recognize which is required to be made .
the liability with regards to legal claim, the
provisions and expenses will be understated.
New Bank Loan Loan agreement should be reviewed and
Loan has not been correctly allocated between the calculations be re-performed to confirm that
current and non current liabilities resulting in the loan has been correctly classified as
wrong classification and liabilities being current and non-current liabilities.
understated .
Also , the finance costs are paid in arrears and may The finance costs should be re-calculated and
not have been correctly accrued at the year end agreed to the accruals schedule .
resulting in understated accruals and finance costs.
Refund Liability Enquiry with the finance department to
As per IFRS 15 , Sales only recognized to the extent identify how the returns policy is applied at
that the goods will not be returned and should the year end and whether it has been in
account for refund liability for goods expected to be accordance with IFRS 15 .
returned.
Risk is if not accounted correctly for refund liability
then revenue overstated and refund liability
understated .
Reduced Warranty Provision Review the calculation of the warranty
Liabilities and expenses may be understated . provision and assess its reasonableness in
(consider the situation why the reduction was terms of the claims received .
made which must be justifiable . )
Goods in transit Review the controls the company has in place
There is a risk that the inventory may not be to ensure that the inventory is recorded from
accurately accounted on dispatch which results in the point of dispatch.
payables and inventory being understated . Discuss with the management the point at
which the inventory is recorded and review
the contract with the supplier to verify the
requirements in place .
Allowance for Doubtful Debts Review the post year cash receipts as well as
If the allowances are not created for receivables which aged receivables ledger to identify valuation
may be irrecoverable then this may result in and the need for allowance to be created .
receivables overstated & expenses understated.
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AA AUDIT RISKS
Capitalized Training Costs Discuss the accounting treatment with the
Assets and Profits may be overstated if not treated finance director and request the training
as an expenses . costs be treated as expenses in profit or loss
to ensure its compliance with IAS 16.
Renewal of Bank Loan / Overdraft Discuss with the finance director on the
If the bank refuses to continue to provide finances availability of alternative sources of finances
then there may be doubts over company’s ability if the bank is unwilling to provide loan .
to continue as a going concern . The audit team should undertake detailed
going concern testing and discuss the basis
of accounting with management to ensure
that the basis is reasonable .
New Audit Client The audit team should ensure that they have
As the audit team is not familiar with the highly experienced team members and
accounting policies , transactions and balances adequate time has been devoted in
there will be an increased detection risk. understanding the entity including the key
Less assurance over opening balances since they areas of the risk .
had not performed the audit of the previous year . Detailed substantive procedures should be
performed over the opening balances .
Director’s bonuses The audit team should maintain professional
Profit may be overstated so as to obtain higher skepticism and be aware to increased risks
bonuses by increasing the revenue and income of manipulations such that experienced
while decreasing the expenses . member be assigned to significant
judgemental areas .
Inventory Counts The auditor should assess which inventory
As the audit team is not attending all of the sites , counts will they attend , most likely the ones
detection risk is increased as the audit team will with material balances or the ones with the
not be able to directly obtain evidence related to greatest risk of mis-statements .
Inventories .
Rights Issue (if at premium , split capital & premium) They should recalculate the split of capital
There is the risk that split between capital and and premium and agree this to the journal
premium has not been accounted correctly entry to record the rights issue .
resulting in balances being mis-stated .
Outsourced Functions The audit team should consider contacting
Should consider the level of controls at outsourced the auditor of the service firm to confirm
firm and whether the data is reliable . There is a level of controls in place through type 1 or
risk that if any errors occurred , could result in type 2 report .
………. being misstated .
Non Compliance with local legislation Discuss this matter with the management and
The ……………. disclosure will be incomplete and review the disclosures in the financial
inaccurate if the information is not disclosed in statements to ensure it complies with the
accordance with the local legislation . local legislation .
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AA AUDIT RISKS
Return of faulty goods (when credit note not issued) Inspect the credit note to confirm an
There is a risk that revenue and receivables are adjustments for the revenue and receivables
overstated if the credit note is not correctly has been recorded .
recorded .
Perpetual Inventory System The timetable of the perpetual inventory
Since the inventory is counted at least once a year , counts should be reviewed and controls over
there is a risk that inventory could be the counts be tested .
under/overstated if the perpetual inventory counts
are not all completed as some inventory lines may
not be counted at all .
Contingent Assets (when incorrectly recognized) Discuss with the management and company’s
The risk is that if the ………. has been recognized as lawyer to determine the likelihood of the
receivables then this would result in profit and amount being received such that appropriate
current assets being overstated . accounting treatment be made .
Disposals Recalculate the loss on disposals and agree
If there tends to be significant profits and losses on this to the supporting documentation .
disposals then there is a risk that depreciation may
not be appropriate resulting in depreciation being Agree that the asset has been removed from
understated and profits & assets being overstated . the non current assets register .
Also , disposals amount may not be removed
appropriately from the accounting records .
Revaluation of Property Discuss with the management to identify
PPE could be under/over valued if valuation not whether the whole class of assets was
performed in accordance with the IAS 16 and revalued and performed by the independent
disclosures not being made in the financial statements. expert .
Review the disclosures of revaluation to
assess its compliance with the IAS 16.
Incomplete Reconciliations Performed Discuss the issue with the finance director
There is a risk that if the reconciliations are not and request the reconciliations be
performed completely then this may result in undertaken for ………… .
company unable to verify accuracy and completeness All the reconciling items must be tested in
of transactions resulting in year end balances being detail and agreed to the supporting
mis-stated . documentation .