Audit risk Auditor’s Response

A new accounting system was Introduced via changeover in March 20X5. Auditor should review all the transactions
There might be seen risk of misstatement of several previous balances the help of the old system.
while transferring transactions retrospectively, in this instance these kinds The auditor should discuss and communica
of act would not comply with IAS 8. deficiency is seen in the new system.

Capitalization of $0.8m as Intangible asset. The auditor should communicate with man
Out of the total amount, some might had been used for the initial research capitalize the development expenses.
for the development. As per IAS 38 only development cost with special A detailed review of the cost capitalization
criteria fulfilled should be recorded as Intangible asset. In this case be carried out to determine the nature of t
Intangible asset might get overstated and expense might get understated. 38.

Inventory costing $227000 can no longer be sold in home market and it is The auditor should discuss about the belie
believed to be sold at the international market. international market to know probability o
As the inventory are set to be sold at price higher than the cost but the Auditor should ask for supporting documen
cost to sell internationally are obviously more due to delivery and with management about the appliance of I
shipping. This might cause NRV lower than cost of the drinks. Which can
create a risk of overstatement of Inventory and understatement of cost to
sell as per IAS 10 which implies inventory are recorded lower of NRV or
cost.
Extension of the useful life of plant and machinery. The Auditor should discuss with managem
There is a risk that the value of plant and machinery can get overstated Useful life of Plant and Machinery. Auditor
and the depreciation charge on the plant and machinery can get reperform depreciation calculation to confi
understated.

The directors have not accounted any amount of new supplier until the The auditor should review the terms of the
year end. payable and terms of payment. Auditor sho
There is a risk that the cost incurred during the year not being recorded invoiced or recorded to ensure payables to
which cause an increase in the profit and a decrease in the expense.

Peach company obtained a loan which is repayable over three years. The auditor should undertake a review of t
There is a risk that the obtained loan is distributed between Non-current correct amount to be classified between Cu
liability and Current liability. Which may cause increase in non-current The finance cost should also be calculated.
liability and decrease in current liability or vice versa.

Previous supplier has launched a legal claim and the payable amount is The auditor should communicate with the
estimated to be $0.3m. to lose the case. The auditor should comm
As it is seen Peach co is probable to lose the case, Peach co has to create a a provision worth $0.3m.
provision as per IAS 37. In this instance the provision liability might get
understated.
Peach co has included the staff cost which is directly attributable to
operating a machine is included as wages and salaries.
As per IAS 16 the directly attributable cost should be capitalized as an
asset which caused understatement of PPE and overstatement of
operating expenses.
Auditor should discuss with management a
Auditor should discuss whether the cost is
cost is directly attributable then the audito
capitalize the cost.