Business systems risk areas

New accounting system implemented

risk of data migration errors, accounts could be recorded in the wrong period and amount effecting multiple accounts.

Auditors response: Test reconciliation between old and new systems, perform additional substantive testing between cut-off and completeness

loan covenants attached to borrowing

pressure on management to inflate figures ( eg inflate profits) to avoid covenant breach - fraudulent financial reporting risk

Auditors response: review covenant terms, test for aggressive accounting policies, heighten professional scepticism.

capital expenditure on new stores

costs may be incorrectly capitalised ( overstating assets) or incorrectly expensed (understating profits) also risk of incomplete assets on balance sheet.

auditor response - obtain list of capital projects, inspect invoices, ensure assets exist physically, check if accounting policy is appropriate

intangible asset eg capitalised advertising

Advertising costs do not meet IAS 38 criteria for capitalisation- assets may be overstated and expenses overstated

auditors response - Review IAS 38 criteria, inspect supporting invoices, enquire of management of nature of costs, challenge if criteria is met

R&D expenditure

Research must be expensed, development costs only capitalised if specific criteria is met - risk of overstatement of intangibles

auditors response : Review split between Research and development spend , Asses wether ias 38 criteria is met for any capitilised accounts

New loyality scheme with tracking issues

Points liability (deferred revenue) may be understated, revenue could be overstated if points not properly deferred

Audit Response- Obtain managements model for calculating points liability, test calculations, inspect it systems data and compare to prior periods.

warranty provision unchanged from prior year

provisions may not reflect current trading conditions, either over or understated, effecting profit and liabilities.

auditors response - obtain managers basis for provision; inspect warranty claims in the year, recalculate future expected costs

cyberattack - potential fines

contingent liability may need to be recognised or disclosed under ias 37. financial statements may be incomplete without it.

auditors response - obtain legal correspondence, enquire of managment about regulatory investigations, review post year-end communications

system discrepancies during system transition

stock balance may be misstated overstated -( phantom stock), or understated effecting the cost of sales and net assets

auditors response- attend year end inventory count, reconcile physical account to records; investigate discrepancies, review write-offs.

New financial controller on interim basis

increased risk of error due to unfamiliarity with systems, journal entries may be incorrect, risk of management override

Increase extent of substantive procedures; review journal entries; verify key accounting decisions with senior management

sole supplier reliance

Supply chain disruption could threaten going concern; over-reliance creates business risk affecting future revenues

auditors response - Review supplier contracts; assess going concern; enquire of management about contingency plans; review post year-end orders

Lease arrangements — new service

Leased assets may need to be recognised on balance sheet (IFRS 16); income recognition on operating leases complex

auditors response - Review lease agreements; assess IFRS 16 treatment; test revenue recognition against contract milestones