ACCA_F8_Risk and audit responses

Audit risk and response examples

audit response in case the audit firm have new client

• risk: not familiar → increase detection risk

• assign a suitably experienced team

• allocate adequate timeline to obtain understanding about client

• increase audit procedures

audit response relating to expenditure has been recognized as PPE → IAS16

• risk: some items may be capitalized in contravention of IAS 16 → overstated PPE + understated expense

• obtain a schedule of cost which have been capitalised

• review supporting documentation to establish they are capital in nature

• discuss with management about

audit response relating to applying new sales system

• risk: transfer incorrectly bwt old and new & issue of operation the new system → misstated sales and receivables

• fully document & test the new system → use TOC

• perform substantive tests over the opening balances to ensure correct transfer

• discuss with management about the issues have arisen relating to new system

The differences in cash takings reports from stores have not been investigated or reconciled, as they have been only small amounts. What is audit response?

• risk: threat of fraud

• discuss with management whether this shortage may be indicative of fraud

• apply professional scepticism to recognise that fraud may have arisen as a result of the cash shortages

• extend substantive procedures over the cash sales cycle

The receivables collection period increased from 101 days in 20X4 to 149 days in 20X5. What audit reponse?

• risk: those amount can become irrecoverable debt → overstated receivables and understated the allowance for receivables

• discuss with credit controller the likelihood of recovering the overdue balances

• conduct cash receipts testing to identify if the overdue balances have been clear

• discuss with financial director the need to increase the allowances for receivables

The soil relating to a batch of plants with a cost of $0.1m is contaminated, meaning that the plants may not be able to be sold. What if the damage can’t be remedied & $0.1m not written down to NRV?

• oversted inventory

• understated cost of sales

The soil relating to a batch of plants with a cost of $0.1m is contaminated, meaning that the plants may not be able to be sold. What is audit response?

• risk: not written down to NRV based on IAS2

• discuss with management whether the damaged inventory will be written down

• agree this write-down to the final inventory valuation

• perform review of post-year-end saless invoices to determine the price that has been sold → compared to inventory valuation

• recalculate the inventory valuation

operating profit margin reduce & gross profit margin increase. What is audit responses?

• risk: cost may be omitted from COS & direct costs in overhead expense → classification risk

• review the nature of operating expenses

• increase cut-off testing of purchases and accruals to verify the cost is recorded in correct period

recommendations for less effective shareholder engagement

• encourage regular effective engagement with major shareholders

• include: regular meetings to seek shareholders’ view

$5m for updating, repairing and replacing a significant amount of the machinery used in the production process - IAS 16

• risk: can be missclassified as capital expenditure or expenses in profit → misstatement PPE and profit

• Review a breakdown of these costs to ascertain the split of capital and revenue expenditure

Count all warehouses at the end of the year

• risk: