RISK & AUDITOR'S RESPONSE

fact: Fixed asset does not exist at auditing time

There is a risk that financial statements reflect fixed asset not existing at year end (overstated fixed asset and depreciation)

fact: Fixed asset does not exist at auditing time

Physically verify/count a sample of fixed assets to ensure existence at reporting date

fact: Unqualified expenses are capitalized to fixed assets

There is a risk expenditures not meeting capitalization criteria are capitalized (FA overstated, expenses understated)

fact: Unqualified expenses are capitalized to fixed assets

Review breakdown, agree to invoices, assess nature of expenditure under IAS 38, agree to asset register/P&L

fact: No recognition of disposed assets

There is a risk fixed assets already disposed are not removed (FA overstated)

fact: No recognition of disposed assets

Review asset register, confirm disposal proceeds in bank, recalculate profit on disposal

fact: Mortgaged assets for a loan

There is a risk mortgaged assets are not disclosed (missing disclosure of associated risks)

fact: Mortgaged assets for a loan

Review loan agreement; circularise bank as part of bank confirmation

fact: Change in depreciation time/method

There is a risk depreciation reduction to achieve profit targets (FA overvalued, profit overstated)

fact: Change in depreciation time/method

Discuss rationale with directors; compare useful life with actual replacement cycle

fact: Fixed assets revalued due to loan covenant pressure

There is a risk FA value overstated after revaluation

fact: Fixed assets revalued due to loan covenant pressure

Discuss assumptions with management/valuer; ensure whole asset class was revalued

fact: Loan covenant pressure

There is a risk company fails covenant

fact: Loan covenant pressure

Review covenant; discuss status; perform detailed going concern review

fact: Misclassification of current portion of long-term loan

There is a risk of wrong classification of loan/liquidity

fact: Misclassification of current portion of long-term loan

Review loan contract; review related disclosures

fact: Interest expense omitted

There is a risk finance costs understated and profit overstated

fact: Interest expense omitted

Recalculate finance costs; reconcile with bank statements

fact: Customers in financial difficulties or long outstanding receivable

There is a risk these receivables are irrecoverable (AR overvalued)

fact: Customers in financial difficulties or long outstanding receivable

Perform extended post-year-end cash receipt testing; review aged receivables; review correspondence; discuss allowance

fact: AR days increase / AR growth higher than sales

There is a risk of insufficient allowance (AR overstated)

fact: AR days increase / AR growth higher than sales

Perform extended post-year-end cash receipts test; review aging; discuss allowance with FD

fact: Reconciliations not performed regularly

There is a risk of errors within trade receivables (over/understated)

fact: Reconciliations not performed regularly

Review year-end sales ledger control account reconciliation; focus on unusual items

fact: Online sales system errors

There is a risk revenue is incomplete (understated)

fact: Online sales system errors

Perform extended controls testing; perform detailed completeness testing

fact: Refund requirement / refund terms in contract

There is a risk revenue overstated (refund sales not removed)

fact: Refund requirement / refund terms in contract

Review cut-off of refunds; review contract terms; discuss refund terms

fact: Deposit income included in revenue

There is a risk revenue overstated and liabilities understated

fact: Deposit income included in revenue

Review deposit accounting system; ensure deposit recognized as deferred income; extend cut-off testing

fact: Employee bonus based on sales

There is a risk fictitious sales/aggressive revenue recognition (overstated revenue)

fact: Employee bonus based on sales

Increase sales cut-off testing; review post-year-end cancellations

fact: Contingent liability (unfair dismissal, warranty)

There is a risk missing disclosure or provision under IAS 37

fact: Contingent liability (unfair dismissal, warranty)

Discuss with management; confirm possibility and proper treatment (provision/disclosure)

fact: Provision of redundancy announced before year end

There is a risk provision understated

fact: Provision of redundancy announced before year end

Inspect board minutes; obtain redundancy calculation; recalculate

fact: Other fines or penalties

There is a risk unreasonable provision estimation or missing disclosure

fact: Other fines or penalties

Discuss estimation method with management

fact: Inventory with reduced value/slow-moving

There is a risk NRV < cost

fact: Inventory with reduced value/slow-moving

Test cost and NRV line-by-line

fact: Outdated costing method or standard cost

There is a risk inventory over/understated

fact: Outdated costing method or standard cost

Test standard cost; compare to actual cost; discuss variances

fact: Complex production/WIP valuation challenging

There is a risk WIP misstated

fact: Complex production/WIP valuation challenging

Consider expert involvement

fact: Inventory at many locations

There is a risk existence/completeness issues

fact: Inventory at many locations

Attend counts at all/material locations

fact: Goods with long transportation time

There is a risk cut-off errors in inventory/purchases/payables

fact: Goods with long transportation time

Perform detailed cut-off testing of goods in transit

fact: Physical count without production cessation

There is a risk omission or double-counting

fact: Physical count without production cessation

Review GRN/GDN during count and trace to count sheets

fact: Physical count before/after reporting date

There is a risk inaccurate adjustments

fact: Physical count before/after reporting date

Review adjustment schedule; obtain support for adjustments; increase cut-off testing

fact: New accounting system running in parallel

There is a risk errors during data transfer

fact: New accounting system running in parallel

Document system; test data transfer from old to new

fact: New Finance Director appointed

There is a risk increased errors in judgments and policies

fact: New Finance Director appointed

Carefully review judgments and accounting policy changes

fact: Timing pressure for audit team

There is a risk increased detection risk

fact: Timing pressure for audit team

Confirm timetable; consider interim audit

fact: Client requires early audit report issuance

There is a risk increased detection risk

fact: Client requires early audit report issuance

Confirm timetable; consider interim audit

fact: Management bonus based on profit

There is a risk manipulation of judgmental areas

fact: Management bonus based on profit

Review judgments; obtain written representation

fact: Management bonus disclosure required

There is a risk incomplete disclosure

fact: Management bonus disclosure required

Discuss with management; review disclosure

fact: First year audit / new client

There is a risk increased detection risk and unreliable opening balances

fact: First year audit / new client

Use experienced team; perform increased testing over opening balances

fact: Going concern issues (cash flow, key customer/supplier, personnel)

There is a risk FS prepared on wrong basis

fact: Going concern issues (cash flow, key customer/supplier, personnel)

Review cash flow forecast/business plan for future period