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Hello
Does a weak control environment always give rise to an audit risk in that situation, for instance, lack of participation of directors or poor assignment of authority and responsibilities?There’s a question where a company manufacturing ladies’ shoes has expanded into retail operations. It estimated revenue from these new operations to be 15% of revenue for the current year despite the retail section being open for part of the year. The co. has increased its volume of business as well as interest payments and its overdraft limit has been extended.
I was thinking that there was a risk that the revenue estimate has been misstated so as to show the bank a healthy financial position in order to be in position to get for future finance.
Is that a valid audit risk?
If the revenue has increased in a way that is unexpected or difficult to explain, then that is certainly an indicator of audit risk. The risk is greater if therd is incentive to show good results eg to keep the bank happy or to create bonuses for directors.
Independent contractors were employed to construct a new hotel on land already owned by Plaza plc. Work commenced in January 20X7 and the new hotel began trading in November 20X7.
From the above scenario, isn’t there a risk that revenue due to the contractors may not be recorded in the correct accounting period?
Assuming the accounting year end is 31/12/2007, I would think the risk of misrecording constructiin expenses is small. Ifmthe year end were, say, 30/6/2007, the risk is greater.
Of,course, as with any expense there is always some risk of incorrect treatment such as failing to accrue properly.
A company is requesting for extension of its overdraft facility.
Besides the cashflow problems and a going concern risk that may result if the overdraft is not approved, is there a risk that it may create an incentive for mgmt to manipulate profits and hence profits may be misstated?
Hello
In the BPP Kit no. 37(MASON), why is it that the option below(auditor’s response) was not recognised as correct?
Contact the police force directly and request confirmation as to whether the contract is to be renewed.Q1: yes, that risk is there. Itmis known as ‘management bias’.
Q2: I do not have the BPP kit just now. However, reading between the lines, I assume that the police force is a cusromer. Auditors will never interfere, without their client’s permission in the relationship between the client and a client’s customer. The customer might resent it or the customer might think the information is confidential. So, for example, in a receivables circularisation, the request for balance confirmation is always made by the client (with the replies going directly to the auditor).
Does the direction of testing matter regarding auditor’s responses?
Like in the June 2015 exam, where some surplus PPE was sold and therefore at risk of being overstated.
Is it appropriate to review the NCA register and inspect schedule of surplus assets to verify that they have been removed
OR to inspect a schedule of disposed surplus PPE and agree a sample of these items to the NCA register?Direction of testing is vital.
Eg Imspecting NCA and tracing these to the NCA register tests for completeness of the NCA register. Testing the other way will not test for completeness because an item missing from the reguister will never be picked,because it is not on the register.
Tracing from registrr to physical NCA tests for existence. Tracing the other way will not because you cannot pick a non-existemt NCA for tracing to the register.
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