You are on page 1of 8

September/December 2015 Audit Risk

Audit Risk ( Identify)
1. The auditor had reviewed the asset lives and
depreciation rates of plant and machinery,
resulting in reducing of depreciation charge.

2. Full inventory count will be held days before
year end with adjustment of movement to the
year ends.

3. There is a fire damaged one of the warehouse.

4. An insurance claim of 0.7m had been included
in the statement of profit or loss.

5. The bank reconciliations for October and
November contained unreconciled differences,
and directors believe that the overall differences
to be immaterial.

6. Directors' bonus scheme was introduced which
is based on achieving a target profit before tax.

Sycamore's previous finance director left the company after it was discovered that he had been commiting fraud.8m on developing several new products and these are at different development stages and total amount being capitalised in intangible asset. During S year-end inventory count. Eagle has decreased the selling price significantly .7. 2. The new finance director was previously a financial controller of bank. 3. 4. 5. S borrowed 2m from the bank via a ten-year loan. June 2015-Audit Risk Audit Risk ( Identify) 1.Audit risk 1. Finance director requested that the audit commence earlier than normal as he wishes to report reselts earlier. December 2014. S had spent 1. there were movement of inventory in and out the warehouse. During the year.

9m should be written down to its scrap value of 0. this should not be recognised until the receipt is virtually certain. In addition. unreconciled amounts in bank could have arisen due to fraud. Errors in bank reconciliation could represents large errors which net off to the small amounts. There is a risk that management feel under pressure to manipulate the profit. There is a risk that this reduction in depreciation charge has occurred in order to achive profit targets. There is a risk that the inventory may be incorrectly recorded and not completely accurate.Explanation Under IAS 16 Property. To comply with IAS 37 Provisions. Plant and Equipment. due to introduction of new bonus scheme. the company has not received the reply from insurance company and this would therefore be treated as contingent asset.2m. . Contingent liabilities and Contingent Assets. The inventory value of 0. asset lives should be reviewed annually. This written down value should have been charged to profit or loss. However.

There is a risk that the inventory may be incorrectly recorded or being omitted. IAS 38 Intangible assets must be complied.This would place additional pressure on audit team in obtaining sufficient appropriate audit evidence. Sycamore is a pharmaceutical company which is very different to a bank. There is a risk that new finance director is not sufficiently competent to prepare the financial statements. This loan need to be spilt correctly into current and non current liabilities. Explanation There is a risk that he may undertaken other fraudulent transaction and these would need to be written down in the SOPL. . There is a risk that some project may not reach final development stage and hence should be expensed off.

. If the inventory remain unsold after the year end. there is a risk that the scrap value overvalud and inventory may be overstated. Profit may be overstated through the judgements taken.Implication Plant and Machinery mayb ne overstated and profit overstated. Year-end inventory could be overstated or understated. There is a risk that the receivable and profit would be overstated. It could results in bank balances being under or overstated.

This may lead to errors in financaial statements. . financial statement may be materially misstated. Intangible assets may be overstated. profit overstated.Finance team will have less time to prepare the financial statement leading to an increased risk of errors arising in financial statement. Inventory value could be over or understated. Implication If these have not been uncovered.

Discuss with management whether the response has been received from the insurance company and review the related correspondence. .2m scrap value attributed. If receipt is a probable.Audit responses Discuss with the directors the rationale for any extensions of asset livesand reduction in depreciation charges. Remain alert to the risk of fraud and maintain professional scepticism. Maintain professional scepticism and be alert to risk of fraud. Test in details and agreed to supporting documentation. Review whether any goods had sold pre or post year end and at what value. Discuss the issue with finance director and request that December reconciliation is fully reconciled. should include a contingent asset and disclose in note to financial statement. If virtually certain. this should assess whether the attributed scrap value is reasonable. If not. Inspect the goods despatched notes and goods received notes for both days and confirm the inventory records are updated accurately. Discuss with management the basis of the 0. Audit team should increase the extent of inventory cut-off testing at the year end. the treatment adopted is correct. management should be requested to remove it from the profit and receivables.

During the audit. careful attention should be applied to any changes of accouting policies and any key judmental decision made by finance director. During the course of audit. The team should maintain professional scepticism and remain alert to the risk of fraud. . During audit. A breakdown of the development expenditure should be reviewed and tested in detail to ensure the only projects meet the capitalisation criteria are inculded as as intangible assets.0m of loan had been received. the team would need to confirm that the 2. Audit responses Discuss with the new finance director what procedures they should adopt to identify any further frauds by the previous director.Written representation should be obtained from management confirming the basis of any significant judgement. The timetable should be confirmed with the finance director. GRN and GDN should be reviewed and follow through into the inventory count record as correctly included or not. Spilt between current and non current liabilities should be reviewed in detail to ensure compliance with relevent accounting standards.