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  • Aa Answer Base

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    Aastha Shetty
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    This document lists various risks associated with auditing a new client and proposes corresponding responses to address each risk. Key risks include an inexperienced audit team being unfamiliar with the client's accounting policies, incomplete inventory counts, untested reconciliations, and potential manipulation of profits or assets related to an overdraft. The proposed responses focus on obtaining an understanding of the client's business and controls, detailed testing and cut-off procedures, discussions with management, and maintaining professional skepticism.

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    Audit and assurance

    Original Title

    AA ANSWER BASE

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    This document lists various risks associated with auditing a new client and proposes corresponding responses to address each risk. Key risks include an inexperienced audit team being unfamiliar with the client's accounting policies, incomplete inventory counts, untested reconciliations, and potential manipulation of profits or assets related to an overdraft. The proposed responses focus on obtaining an understanding of the client's business and controls, detailed testing and cut-off procedures, discussions with management, and maintaining professional skepticism.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    4 views3 pages

    Aa Answer Base

    Uploaded by

    Aastha Shetty
    This document lists various risks associated with auditing a new client and proposes corresponding responses to address each risk. Key risks include an inexperienced audit team being unfamiliar with the client's accounting policies, incomplete inventory counts, untested reconciliations, and potential manipulation of profits or assets related to an overdraft. The proposed responses focus on obtaining an understanding of the client's business and controls, detailed testing and cut-off procedures, discussions with management, and maintaining professional skepticism.

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    of 3

    RISK RESPONSES

    NEW CLIENT  SUITABLE EXPERIENCED TEAM


     TEAM NOT FAMILIAR WITH ACCOUNTING  ALLOCATE TIME TO OBTAIN UNDERSTANDING OF
    POLICIES COMPANY
     INCREASED DETECTION RISK  PERFORM A THOROGH BACKGROUND CHECK
     DETAILED TEAM BRIEFING TO COVER KEY AREAS OF RISK
    WORK IN PROGRESS  DISCUSS WITH MANAGEMENT THE PROCESS OF
     LEVEL OF WIP NEEDS TO BE ASSESSED AT YEAR VALUATION
    END  REVIEW PROCESS WHILE ATTENDING INVENTORY
     INVENTORY MAY BE OVER OR UNDERSTATED COUNT
    DUE TO MM IN WIP  CONSIDER INDEPENDENT EXPERT
    PURCHASES IN TRANSIT/CONT. PRODUCTION  UNDERTAKE DETAILED CUT OFF TESTING OF
     RISK OF CUT OFF NOT BEING ACCURATE FOR PURCHASES/PRODUCTION AND INCREASE SAMPLE FOR
    PURCHASES AND INVENTORY TESTING TO ENSURE CUT OFF IS COMPLETE AND
    ACCURATE
    INVENTORY COUNT (UNABLE TO ATTEND ALL)  ASSESS AND ATTEND COUNTS WITH MOST MATERIAL
     MAY NOT OBTAIN SUFFICIENT EVIDENCE INVENTORY OR THOSE WITH HIGH RISK OF MS
     INCREASED DETECTION RISK  FOR THOSE NOT VISITED, REVIEW DOCS AND DISCUSS
    WITH MANAGEMENT ANY ISSUES THAT ARISE
    INVENTORY COUNT (PERPETUAL)  COMPLETENESS OF THE COUNT MUST BE REVIEWED
     UNDER THIS SYSTEM, ALL INVENTORY MUST  CONTROLS OVER COUNTS AND ADJUSTMENTS TO
    BE COUNTED AT LEAST ONCE RECORDS SHOULD BE TESTED
     RISK OF OVER OR UNDER STATEMETN OF
    INVENTORY IF THIS IS NOT COMPLETE
    INVENTORY OBSOLETE  REVIEW AGED INVENTORY REPORT AND DISCUSS
     IAS 2 INVENTORIES NATURE OF INVENTORY WITH MANAGEMENT (SLOW
     SHOULD BE AT LOWER OF COST AND NRV MOVING)
     RISK THAT INV. IS OVERSTATED  TEST FOR COST AND NRV CALCULATIONS
    NEW ACCOUNTING SYSTEM  UNDERTAKE DETAILED TESTING TO CONFIRM ALL
     RISK THAT BALANCES MAY BE MISSTATED OR BALANCES WERE TRANSFERRED
    DATA MAY BE LOST DUE TO NOT BEING  DOCUMENT AND TEST THE NEW SYSTEM WITH DUMMY
    TRANSFERRED TRANSACTIONS
     CONTROL RISK WOULD NOT BE IDENTIFIED
    RECONCILIATIONS NOT CARRIED OUT  DISCUSS ISSUE WITH FINANCE DIRECTOR AND ENSURE
     RISK THAT BALANCES MAY BE MISSTATED ALL RECOS ARE PERFORMED
    SINCE SOME RECOS HAVE NOT BEEN CARRIED  TEST AND AGREE SUPPORTING DOCS
    OUT LEADING TO NO CROSS CHECK
    PROVISON  DISCUSS WITH MANAGEMENT THE BASIS OF PROVISION
     IAS 37 PROVISIONS, CL AND CA CALCULATION AND COMPARE WITH POST YEAR END
     REQUIRE JUDGEMENT AS IT IS UNCERTAIN CLAIMS
     PROVISION CAN BE UNDERSTATED  DISCUSS THE RATIONALE BEHIND THE JUDGEMENT
     REDUNDANCY COSTS HAVE TO BE  COMPARE WITH PRIOR YEAR PROVISION WITH ACTUAL
    ANNOUNCED CLAIM TO ASSESS REASONABLENESS
    OVERDRAFT  REVIEW CALCULATIONS AND IDENTIFY IF ANY DEFAULTS
     WITH REPAYMENT TERMS AND PROFIT/ASSET HAVE BEEN MADE
    AGREEMENT  MAINTAIN PROFESSIONAL SCEPTICISM BE ALERT TO
     RISK OF MANIPULATION OF PROFIT THE RISK OF OVERSTATEMENT OF PROFIT/ASSETS
     IF CASH IS NOT SUFFICIENT TO REPAY, GOING
    CONCERN IMPLICATIONS
    INTANGIBLE ASSETS  REVIEW A BREAKDOWN OF THE COSTS
     COSTS INCURRED SHOULD BE CORRECTLY  AGREE INVOICES TO ASSESS NATURE OF EXPENSE
    ALLOCATED BETWEEN REVENUE AND CAPITAL  REVIEW FS TO ENSURE CORRECT TREATMENT IS MADE
    EXPENSE
     MISTATED IF EXPENSES HAVE BEEN TREATED
    INCORRECTLY
    PHYSICAL ASSETS  DISCUSS WITH MANAGEMENT ABOUT PURCHASE AND
     NEAR YEAR END ASSET PURCHASE WHETHER IT WAS PRESENT BEFORE YEAR END
     ONLY ASSETS PRESENT AT YEAR END  INSPECT LEGAL DOCUMENTS AND ENSURE THESE ARE
    PHYSICALLY CAN BE RECORDED DATED PRIOR TO YEAR END AND IN THE COMPANYS
     RISK OF OVERSTATEMENT IF THIS IS NOT NAME
    FOLLOWED
    FINANCE  REVIEW DOCUMENTATION TO CONFIRM ITS NATURE
     RISK OF INCORRECT CLASSIFICATION  CONFIRM CLASSIFICATION IN FS
     SHARES INTO SC AND SP  ENSURE AND REVIEW DISCLOSURES MADE FOR
     LOAN INTO CL AND NCL COMPLIANCE
     IRREDEEMABLE PREF. SHARES AS EQUITY
    RATHER THAN NCL
     RISK OF MM IF THEY ARE CLASSIFIED
    INCORRECTLY
    FINANCE COSTS  RECALCULATE FC AND THE INCREASED AMOUNT DUE TO
     INCREASED DEBT LEADS TO INCREASED FC NEW DEBT
     POSSIBLE RISK THAT FC MAY NOT BE PROPERLY  AGREE INTEREST PAYMENTS IN CASH BOOK
    CHARGED
    DEPRECIATION  DISCUSS RATIONALE BEHIND EXTENSION OF ASSET
     IAS 16 PPE LIVES
     INCREASING LIFE LEADS TO REDUCED DEP  REVIEW PAST DISPOSALS OF SAME CLASS OF ASSETS TO
    CHARGE LEADING TO INCREASED PROFITS ESTIMATE LIFE
     RISK THAT THIS IS DONE TO BOOST PROFIT
    REVALUATION  DISCUSS PROCESS FOR VALUATION AND IF AN EXPERT
     NCA MAY BE INCORRECTLY STATED IF WAS USED.
    REVALUATION IS NOT CARRIED OUT AS PER IAS  REVIEW FOR COMPLIANCE WITH IAS 16
    16 PPE
    DISPOSAL  AGREE THE ASSET HAS BEEN REMOVED, RECALCULATE
     LOSS ON DISPOSAL MAY NOT BE REMOVED LOSS ON DISPOSAL, AGREE SUPPORTING DOCS
    PROPERLY  DISCUSS DEP. POLICY WITH MANAGEMENT AND ASSESS
     INCORRECT DEPRECIATION POLICY REASONABLENESS. REVIEW OTHER DISPOSALS TO
    ASCERTAIN EXTENT OF POLICY ISSUE
    INCREASED CREDIT PERIOD  REVIEW REVISED CREDIT TERMS AND POST YEAR END
     CUSTOMER GRANTED EXTENDED CREDIT REPAYMENTS (IF ANY)
    PERIOD  DISCUSS WITH FINANCE DIRECTOR IF HE INTENDS TO
     INCREASED RISK THAT RECIEVABLE IS NOT MAKE ALLOWANCE FOR REC.
    RECOVERABLE HENCE OVERVALUED  REVIEW EXISTING ALLOWANCES
    SALES RELATED BONUS SCHEME  INCREASE AFTER DATE CASH RECIEPT TESTING FOR NEW
     INCREASED REVENUE DUE TO CREDIT TERMS ACCOUNTS
    GRANTED. RISK OF BAD DEBTS  INCREASE CUT OFF TESTING AND REVIEW POST YEAR
     CUT OFF MS DUE TO SALESMEN TRYING TO END RETURNS
    INCREASE BONUS
    PRODUCT RECALL  DISCUSS WITH FINANCE DIRECTOR ABOUT WRITE OFFS
     RISK OF OVERSTATED INVENTORY IF AND MODIFICATIONS
    PRODUCTS SENT WERE RECALLED  TEST COSTS OF INVENTORY AND VALUATION
     REPAYMENT DEBT TO CUSTOMERS  AGREE SALE REMOVAL FROM REVENUE AND CREATION
    RECOGNITION OF LIABILITY/REPAYMENT EXPENSE
     OVERSTATED REVENUE IF IT IS NOT REVERSED
    LEGAL ACTION  WRITE TO COMPANYS LAWYERS ENQUIRING ABOUT
     LEGAL PROVISION OR CONTINGENT LIABILITY LIKELIHOOD OF SUCCESS
    RECOGNITION MAY NOT BE MADE  ASSESS AND AGREE PROVISION IN FS
    EARLY AUDIT COMPLETION  CONFIRM TIMETABLE WITH FINANCE DIRECTOR
     REDUCTION IN AUDIT TIMETABLE WILL  CONSIDER PERFORMING INTERIM AUDIT OR
    INCREASE DETECTION RISK COMMENCING AUDIT EARLIER
     PLACE ADDITIONAL PRESSURE ON TEA, TO  MAIN PROFESSIONAL SCEPTICISM AND BE ALERT
    OBTAIN SUFFICIENT APPROPRIATE EVIDENCE
     FINANCE TEAM WILL HAVE TO COMPLETE FS
    EARLY INCREASING CHANCES OF MS
    DIVIDEND  DISCUSS ISSUE AND CONFIRM THAT DIVIDEND WILLL
     ONLY DIVIDEND ANNOUNCED CAN BE NOT BE PRESENT IN FS
    RECOGNISED  REVIEW FS TO ENSURE THE SAME
     RISK OF INCORRECT RECOGNITION IF
    ANYTHING ELSE IS DONE
     IAS 10 EVENTS AFTER REPORTING PERIOD,
    DIVIDEND SHOULD BE DISCLOSED
    DIRECTOR NAMES  DISCUSS MATTER WITH MANAGEMENT AND REVIEW
     IFRS ACCEPTABLE BUT IF LOCAL LEGISLATION THE REQUIREMENTS OF LOCAL LEGISLATION TO
    ASKS FOR INDIVIDUAL NAMES, THEY MUST BE DETERMINE IF DISCLOSURE IN FS IS APPROPRIATE
    DISCLOSED
     NOT DOING SO LEADS TO NON COMPLIANCE
    WITH LOCAL LEGISLATION
    GROSS AND NET MARGIN  COMPARE CLASSIFICATION OF COSTS TO PY TO ENSURE
     CHANGES IN GM AND NM MUST BE SIMILAR CONSISTENCY
     IF NOT, POSSIBLE OMMISSION OR  INCREASE CUT OFF TESTING TO ENSURE COSTS ARE
    MISCLASSIFICATION MAY HAVE OCCURRED COMPLETE
    OUTSOURCED FUNCTION  DISCUSS WITH MANAGEMENT THE EXTENT OF RECORDS
     DETECTION RISK INCREASES MAINTAINED WITH THEM
     IF THIRD PARTY FAILS TO PROVIDE SUFF. APPR.  CONSIDER CONTACTING SERVICE ORGS. AUDITOR TO
    EVIDENCE CONFIRM CONTROLS IN PLACE
     THEIR CONTROLS MAY NOT BE TESTED
    FRAUD  DISCUSS WITH FINANCE DIRECTORS PROCEDURES
     PREVIOUS FRAUD MEANS MORE FRAUD CAN ADOPTED TO PREVENT AND DETECT FRAUD
    BE EXISTING IN FS  MAINTAIN PROFESSIONAL SCEPTICISM
     FS COULD INCLUDE ERRORS IF THESE ARE NOT
    UNCOVERED

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