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Hi
In this question part c asks for audit risks and responses.
One of the solutions says:
”Management were disappointed with 2009 results and hence undertook strategies to improve the 2010 trading results. There is a risk that management might feel under pressure to manipulate the results through the judgements taken or through the use of provisions”Can you please tell me example of ‘judgements taken’ and ‘use of provisions’ to manipulate the results so i can understand it?
Regards,
MartaJudgement- These relate to management bias ie. management being too optimistic and not exercising enough
Prudence thereby overstating assets and understating liabilities
Eg. Unwillingness to write down debtors to what is actually recoverableWith provisions there is a danger that they put through false provisions in one year where there is
High profit and release the provision in another year where the results are bad.
This is called profit smoothing.Or, for provisions, not creating one where an outflow of funds is probable.
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