Audit Risk

Esk Co
Audit Risk Audit Response
1-Inventory days has been increased Do detailed testing of cost and NRV
from 48 to 63 days. There is a risk that and assess the aged debtor analysis
inventory may be overstated. report to verify the valuation of
inventory.
2-Receivable days have increased from Do detailed testing of post year end
65 to 72 days. There is a risk of cash receipts and assess the aged
recoverability of receivables hence inventory report to verify the
receivables may be overstated. valuation of receivables.
3-Responsible for the audit of new client. Obtain the understanding of entity
There is a risk that the auditor might not through discussion with
detect the errors due to lack of management and enquires to staff.
understanding of the entity hence there
is increased detection risk.
4-Esk Co obtained the interest bearing Audit team should review that loan
loan of 2.5m. There is a risk that the loan is actually received and in addition
may be incorrectly split between current loan in correctly split between
and non current liabilities hence current current and non-current liabilities.
and non current liabilities are misstated. Audit team must ensure that
disclosure is in accordance with
relevant accounting standard.
5-The damaged inventory has not yet Do detailed testing of cost and NRV
been replaced as there is sufficient and ensure inventory is recorded as
inventory in warehouse. IAS 2 requires per relevant accounting standard.
inventory to be recorded at loweroff of
cost and NRV hence inventory may be
overstated.
6-Esk co sales staff will receive bonus if Audit team should remain alert
they meet sales target each quarter. throughout the audit to the risk and
There is a risk that sales staff might compare balances to the prior year.
manipulate the sales to get bonus hence
sales may be overstated.
7-Manger of credit control department is Audit team should remain alert
ill and replaced with temporary throughout the audit to risk.
inexperienced manager. There is a risk of
increased errors due to burden on the
credit control department.
8-Esk co purchased a patent for 2.6m. Obtain the breakdown of cost and
There is a risk that the expenditure might agree to invoices to assess the
be incorrectly split between revenue and nature of cost if it is capital
capital hence capital and revenue expenditure it must be capitalized
expenditure may be misstated. and included as PPE and if it is a
revenue expenditure it must be
expensed out to profit and loss.

Peach Co
Audit Risk Auditor Response
1-A new accounting system was Discuss with management the process
introduced via changeover. There is a of transfer of data and perform sample
risk that data transfer from old system calculations to verify that data transfer
to a new system may be inaccurate is complete and accurate.
and incomplete hence there is
increased control risk.
2-Peach co has been developing a new Obtain the breakdown of cost and
production process and capitalized agree to invoices to assess the nature
[Link] is a risk that expenditure of the cost. If it is a revenue
might be incorrectly treated as expenditure it must be expensed to
revenue expenditure hence assets and the statement of profit and loss and if
expenses may be misstated. it is a capital expenditure it must be
included as asset in PPE.
3-Reconciling all physical assets to the Request the management to do
non-current asset register have not reconciliation or physically perform
been completed by year [Link] is reconciliation to find any error.
risk that assets may be over and under
stated.
4-Peach co obtained a interest bearing Audit team should ensure that loan is
loan of [Link] is risk that loan actually received and in addition it is
may be incorrectly split between the correctly split between current and
current and non current liabilities non current liabilities. Auditor must
hence current and non current ensure that Disclosure of loan is on
liabilities may be misstated. accordance with relevant accounting
standard.
5-To secure loan Peach Co agreed to Audit team should remain alert
maintain minimum net profit margin throughout the audit to the risk and
and meet specific sales targets. There agree balances with the subsequent
is a risk that sales might be overstated invoices.
by the management to achieve the
targets to get loan.
6-Old machinery was sold at a Review non current asset register to
significant loss. There is a risk that verify that asset disposed off has been
assets being sold might not be removed or not and recalculate the
removed from the non-current asset loss on disposal.
register hence non-current assets may
be overstated.
7-Director of Peach co decided to Review the reasonableness of
extend the useful life of plant and extending the useful life of plant and
machinery by average 5 [Link] is machinery and recalculate the
risk that depreciation expense may be depreciation expense.
overstated .
8-Testing and staff cost involved in the Obtain the breakdown of cost and
preparing site for new machinery have agree to invoices to assess the nature
been included with wages and salaries of the cost. If it is a revenue
expense. There is a risk that costs are expenditure it must be expensed to
incorrectly treated between revenue the statement of profit and loss and if
and expenditure hence expenses may it is a capital expenditure it must be
be overstated and assets may be included as asset in PPE.
understated.

Hart Co
Audit Risk Auditor Response
1-Planning the audit of a new client. Obtain a detailed understanding of the
There is a risk that auditor may not entity through discussion with
detect errors due to a lack of management and enquires to staff.
understanding of the entity hence
there is increased detection risk.
2-WIP count and valuation will be Auditor should visit those warehouse
carried out at all sites on year end. where there is major inventory present
There is a risk that 100% verification of and where there is history of inventory
WIP of all sites is impossible for the count isssues.
auditor to visit hence inventory may be
misstated.
3-The delivery of new machinery is Auditor should review the non current
delayed and now schedule to be asset register and ensure that only
delivered after year [Link] is a risk those assets are included that are
that new machinery may be incorrectly present in the company.
included in the non current asset
register hence assets may be
overstated.
4-Payroll function is outsourced to an Consideration should be given to
external department. There is a risk contact the external service
that external organization may have organization and ask about the level of
weak controls that can lead to errors in control in place.
payroll function hence there is
increased risk that payroll expense
may be over/under stated.
5-The warranty provision has been Discuss with management the
decreased from 6% of revenue to 2% reasonableness of provision and
of revenue. There is a risk that ensure that provisions are made in
provision are not made in accordance accordance with relevant accounting
with IAS 37 hence there is a risk that standard.
provision may be understated.
6-1.8m expenditure is incurred on Obtain the breakdown of cost and
research and development of which agree to invoices to assess the nature
0.6m is written off to the profit and of expenditure. If it is a revenue
loss. There is risk expenditure is expenditure it should be expensed to
incorrectly treated as revenue profit and loss and if capital it should
expenditure hence expenses may be be capitalized and included as PPE.
overstated and assets may be
understated.
7-Hart co made the right issue to The audit team should ensure that
existing shareholders. There is a risk shares are actually issued and correctly
that share of issue may be incorrectly split between share capital and share
split between share capital and share premium. In addition, they must
premium hence balances of share ensure that disclosure of share issue is
capital and share premium may be in accordance with relevant accounting
misstated. standard.
8-Directors are paid bonuses based on Audit team should remain alert
the percentage of profit before tax. throughout the audit to the risk and
There is risk that directors may recalculate the profit figure to find any
increased the profit before tax by error.
manipulating the accounting hence
profit may be overstated.

Darjeeling Co
Audit Risk Auditor Response
1-Inventory days has been increased Do detailed testing of cost and NRV
from 45 days to 54 days. IAS 2 require and review aged inventory report to
inventory to value at lower off of NRV assess the valuation of inventory.
or cost hence inventory may be
overstated.
2-Receivable days have been increased Do detailed testing of post year end
from 38 days to 51 days. There is risk cash receipts and review the aged
of recoverability issue of receivables receivable analysis report to assess the
hence receivables may be overstated. valuation of receivables.
3-Current ratio has been decreased Detailed going concern audit
from 3:1 to 1.6:1. There is a risk of procedures should be performed and
cash flow and liquidity issues which discussed with directors to ensure
can lead to going concern. This basis for going concern is appropriate.
increases inherent risk.
4-The company borrowed 4m from the Audit team should ensure that loan is
bank. There is a risk that loan may be actually received and correctly split
incorrectly split between the current between current and non current
and non current liabilities hence liabilities. Audit team must ensure that
current and non current liabilities may disclosure of loan is in accordance with
be over/understated. relevant accounting standard.
5-Company installed new machinery Obtain the breakdown of cost and
and capitalized cost includes purchase agree to invoices to assess the nature
price, installation cost and five year of expenditure. If it is capital
maintenance [Link] is risk that expenditure if should be capitalized
expenditure is incorrectly treated and and included as PPE and if it is revenue
included as PPE hence Assets may be expenditure it should be expensed out
overstated. to profit and loss.
6-Developing products as company Audit team should remain alert
intend to undertake a stock exchange throughout the audit to risk review
listing in next 12 months. There is risk non current asset register to ensure
that Assets may be overstated by the that only those assets are included
management to get listed in the stock that are owned and controlled by the
exchange. company.
7-Product recall has been initiated for Audit team should ensure that sales
any of specific paint sold since June. return is removed from the sales and
There is a risk that sales return may perform sample calculations.
not have been correctly treated and
not removed from sales hence sales
may be overstated.
8-Credit terms to its customers were Do detailed testing of post year end
increased .There is risk of cash receipts and review the aged
recoverability of receivables hence debtor analysis report to assess the
receivables may be overstated. valuation of receivables.

Blackberry Co

Audit Risk Auditor Response

1-Inventory is valued at lower of cost Do detailed testing of cost and nrv to
and NRV cost includes purchase price assess the valuation of inventory.
of materials, labour, Production and
general overhead. IAS 2 require
inventory to recorded at lower of cost
and NRV hence inventory may be
misstated.
2-The company plans to do inventory Auditor should visit the warehouse
count at three warehouse across the where major inventory is present or
country .There is risk that 100% where there is history of inventory
verification is not possible because count issue.
auditor cannot visit all warehouses
hence inventory may be misstated.
3-Company buy the patents for 1.1m Obtain the breakdown of cost and
and this expenditure is expensed to agree to invoices to assess the nature
profit and loss. There is risk that of expenditure if it is capital
expenditure is incorrectly treated expenditure it should be included as
hence expenses are overstated and PPE and if it is revenue expenditure it
assets are understated. should be expensed to profit and loss.
4-Blackberry raised 1.2m through Audit team should ensure that share
issuing shares at premium. There is risk are actually issued and correctly split
that issuing of share may be incorrectly between share capital and share
split between the share capital and premium. Audit team must ensure that
share premium hence capital balance disclosure of issue of share is in
may be misstated. accordance with relevant accounting
standard.
5-Blackberry decided to outsource its Consideration should be given to
receivable processing to external contact external service organization
service organization. There is risk that to enquire about the level of controls
controls at the external service in place.
organization may be weak to detect
any error hence receivables may be
under and overstated.
6-Records were transferred to service Discuss with management the process
organization during the year. There is a of transfer of data from company
risk that data transfer from company system to service organization and
to service organization may incomplete perform sample calculations to verify
and inaccurate hence balances may be that data transfer is complete and
misstated. accurate.
7-Financial accountant responsibilities Audit team should remain alert
has been allocated to other members throughout the risk to audit and
of finance department. There is a risk perform sample calculation to detect
of increased errors due to overload of any error.
work on remaining members of
finance department hence there is
control risk.
8-Fraud has been discovered in Audit should maintain professional
receivables ledger department. There skepitism and remain alert to any risk
is risk that there might be any error of future fraud or error.
that remained unaddressed hence
receivable balance may be
over/understated.