Audit Risk Auditor’s Response

1. New audit client Anti co should ensure a suitably experienced

Centipede Co is a new client for Ant & Co and team is assigned. Also, adequate time should
is a listed company. be allocated for team members to obtain an
As the team is an unknown with the accounting understanding of the company and the risks of
policies, transactions, and balances of the material misstatement , including attendance at
company, there will be an increased detection an audit team briefing
risk on the audit.
2. Perpetually inventory system: The completeness of the perpetual inventory
The company utilizes the perpetual inventory counts should be reviewed and the controls
system as its warehouse rather than a full year over the counts and adjustments to records
end count. should be tested.
Under such a system, all inventories must be
counted at least once a year with adjustments
made to the inventory records at a timely basis.
Inventory could be under or overstated if the
perpetual inventory counts are not complete.
3. Inventory record exceptions: The level of the adjustments made to inventory
During the interim audit, it was noted that there should be considered to assess their
were significant exceptions with the inventory significance. This should be discuss with
records being higher than the inventory in the management as soon as possible as it may not
warehouse. be possible to place reliance on the inventory
As the year-end quantities will be based on the records at the year end, which could result in
records, this is likely to result in overstated the requirement for a full year end inventory
inventory. count.
4. Inventory Valuation: The aged inventory records should be reviewed
During the interim audit, It was noted that and discussed with management to assess if
there some lines of inventory which according certain lines of product are slow-moving.
to the records were at least 90 days old. In Detailed cost and net realizable value testing to
addition, the inventory holding period has be performed to assess whether an allowance
increased from 47 to 54 days. or write down of inventory is required.
It would be appear that there may be an
increase in slow-moving inventory.
The valuation of inventory as per ISA 2
inventories should be at the lower of cost and
net realizable value.
There is a risk that obsolete inventory has not
been appropriately written down and inventory
is overvalued.
5. Branch records: Discuss with management the significance and
Centipede CO maintains accounting records at materiality of the records maintained at the
four additional sites which were not visited four sites. The team should visit some of these
during the interim audit, and records from sites during the final audit to undertake testing
these sites are incorporated monthly to the of the records held there.
general ledger. In addition, automated tools and techniques
Ant & CO need to ensure that it has obtained could be utilized by the team to sample test the
 sufficient appropriate audit evidence over all monthly interface of data from each site to
the accounting records of the company, not just head office to identify any errors.
for those at head office.
There is a detection risk if the team does not
visit or undertake testing of the records at these
sites. Further if the interface does not occur
appropriately, there is a risk that accounting
records incomplete.
6. Disposal of building: Recalculate the loss on disposal and agree to
During 2015 building was disposed of with a supporting documentation.
loss on disposal of 2, 85,000. Discuss the depreciation policy for buildings
Significant profit or losses on disposal are an with the finance director to assess its
indication that the depreciation policy for lank reasonableness.
and building may not be appropriate. Review the level of losses on disposal
Depreciation maybe understated, profit and generated from other asset sales to ascertain if
assets overstated. this is a more widespread issue.
In addition, there is a risk that the disposal has Agree that the asset has been removed from
not been removed appropriately from the the non-current assets register.
accounting records.

7. Legal Action: Ant & Co should write to the company’s

A customer of centipede co has commenced lawyers to enquire of the existence and
legal action against Centipede Co for a loss of likelihood of success of any claim from the
profit claims. wholesale customer. The results of this should
If it is probable that the company will make be used to assess the level of provision or
payment to the customer, a legal provision is disclosure included in the financial statements.
required. If the payment is possible rather than
probable, a contingent liability disclosure
would be necessary.
If Centipede Co has not done this, there is a
risk over the completeness of any provisions
and the necessary disclosure of contingent
liabilities.

Internal control Deficiencies: How to auditor identifies deficiencies, Management report, Timing
of communicating deficiencies.
Sales system:

1. Manual Input of discounts.

2. Risk of incorrect input.
3. Human error associated with manual inputs.
4. Misstatements in sales and receivables balance.
5. Unauthorized and inappropriate discounts.
Cash & Bank:
 Cash not banked regularly.
 Increased temptation of theft.
 Regularly bank money.
 More than one employee with duty rotation.
Payroll System:

Benefits of audits:
- Improves the quality and reliability of information, giving investors faith in and
improving the reputation of the market.
- Independent scrutiny and verification may be valuable to management.
- May reduce the risk of management bias, fraud and error by acting as a deterrent.
- May detect bias, fraud and error.
- Enhances the credibility of the financial statements, e.g. tax authorities or lenders.
- Deficiencies in the internal control system may be highlighted by the auditor.

Limitations of an Audit:
- FS include subjective estimates and other judgmental matters.

Internal Control:
Identify and briefly explain 5 components of an entity’s internal control:
1. Control Environment:
This is the culture, attitude and awareness of management those charged with governance
regarding internal control within an organization.
2. Information system:
This is the business processes related to the financial reporting system. It includes the accounting
used to record, process and report business transactions and events.

1. Unique serial number:

Inspect the non-current asset register to confirm that all recorded serial number are unique.
Select a sample of non-current assets and physically verify they have an asset tag attached. Trace
and agree asset tag numbers back to the non-current asset register.
2. Control expenditure committee:
For a sample of capital purchases inspect the minutes of the committee meeting to ensure they
have been authorized.