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I’m currently trying to do part b which is to ‘evaluate the audit risk’ but I’m not sure if the way I’m answering is correct .. Are you able to help?
There are many audit risks in the final audit of ted. An audit risk is a risk that the auditor does not detect misstatement.
The fact that Ted are largely sold through retail outlets and that 25% of revenue is generated through the company website, this could cause a misstatement in Teds revenue. The risk is that once sales are made via the website and funds have been cleared we need to record the revenue if not the revenue in Ted will be understated causing a misstatement in the accounts which will affect the overall audit opinion.
The standard on revenue states that the revenue should only be recorded once the obligation has been transferred, if not then Ted are recording the revenue too soon which will lead to an overstatement.
Another risk is that Ted need to make sure the website is linked to the stock control and purchase ledger system. Once a sale has been made the stock would need to be up dated if not the inventory will be overstated which could lead to the SOFP being overstated causing a misstatement to the accounts.Is my answer following correctly or am I repeating myself too much?
You are along the right lines but you could be more precise. For example “The fact that Ted are largely sold through retail outlets …” is not a source of the risk that you describe – it is only the “25% of revenue generated through the company website” that could cause a misstatement. But is it over or under? – don’t wait to elaborate. The 46.3% increase (given in the Q) points to overstatement – so this is what you should focus on – and it really invalidates your suggestion of understatement. “… which will affect the audit opinion” is superfluous to the requirement to “evaluate the risks”.
If you can’t remember a specific standard simply state the treatment using IFRS words “Revenue should only be RECOGNISED once the PERFORMANCE obligation has been SATISFIED”. What you are really identifying is a risk of incorrect CUT-OFF (recognition of revenue before the goods have been delivered to customers) – so make sure you get this word in too.
There is no specific mention of inventory at all in the scenario – so if you are looking to identify a risk about it – look for clues (overseas manufacture of products – in 60 countries) – that is a much better basis for suggesting risk of misstatement since inventory should be measured based on physical count and not what is recorded in the stock records (as suggested by your sentence).
Audit risk is the risk that an inappropriate audit opinion is given. It is not the risk that a misstatement is not detected.
As an example, for a materiality of CU 100, the auditor does not identify receivables of CU 105 and payables of CU 104 which have been neglected from the accounts. While the overall impact on the audit is CU 1 which would be below a trivial level and hence the opinion would technically still be valid (true and fair), it would be a detection failure (would also indicate that there are potentially inherent and control risks with the client).
Have to be careful with terminology used in the exam as at the P7 level, the examiner is looking for your ability to articulate audit concepts.
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