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Morning Sir,
I was going through the June 2013 Q1 and it required to point out audit risk. Is Audit Risk only Risk Of MM & Detection risk or does it also include control Risk?
Worried because answers have also included Business Risk. Please Advice. Thanks In Advance
Asking this question because am seeing answers such as ;
The bank balance of 900 at the end of 20X2 is projected to have become an overdraft of 1,000 by the end of 20X3. The current ratio has nearly halved, from 1.8 to 0.96, meaning that current assets do not cover current liabilities.
Receivables days have risen from 34 to 42. This could be down to poor credit control; we already know that Parker’s internal controls may not be entirely reliable. Alternatively, it could indicate the presence of irrecoverable receivables not provided for, which would further reduce assets and profit were provision to be made for them.
Inventory days have risen from 136 to 167. This could be a sign of inventory obsolescence; this is particularly likely given the competition that Parker is facing. If net realisable value is lower than inventory cost then write-downs may be required, which would affect both assets and profit.
Payables days have risen from 63 to 86. This is a sign of cash flow difficulties, with Parker struggling to pay its suppliers (a feat made difficult by its slow debt collection from its customers). This could damage supplier relationships, leading to interest charges or lost discounts, or to the breakdown of relationships. This could make trading very difficult for Parker.
“Risk Of MM & Detection risk or does it also include control Risk?”
Risk of material misstatement is a combination of what used to be called “inherent risk” and “control risk”
“Worried because answers have also included Business Risk”
Business risk (the risk associated with carrying on the business in, for example, a new venture, a rapidly changing technology industry, a highly competitive market, ….) has an affect on audit risk as the temptation to distort / manipulate the results increases
The paragraphs you have quoted to me raise questions:
going concern
poor credit control over receivables – reliability of accounting records, risk of overstatement of receivables
overvaluation of inventory, and
going concern
Of course these are areas of concern for the auditor – individually they raise concerns about the reliability of the figures in the financial statements and collectively they … well, it’s not good news is it!
a)Perform preliminary analytical procedures and evaluate the audit risks to be considered in planning the audit
of the financial statements, and identify and explain any additional information that would be relevant to your
evaluation;
Mike this is the requirement of the question about which gulam007 is asking. i think answer use inventory days payble days receivable days and current ratio due to analytical procedures. is it correct?“i think answer use inventory days payble days receivable days and current ratio due to analytical procedures. is it correct?”
YES! Analytical procedures are there to point you in the direction of potential material misstatement
If inventory days has shot up compared with last year, isn’t there a potential risk that old inventory is being accumulated, or it’s out of fashion, or the client can no longer sell it because of government intervention, or competitors have opened up in the vicinity and started a price war, or …….
The use of analytical procedures is VITAL in the planning of an audit
Does that help?
Mike. How we should write audit risk question? simply making three headings of
Control
Detection
Inherent
OR by simply make headings of particular risk whatever is in the scenario?I wouldn’t write an audit risk question – unless you are some college professor writing an exam for your students
I would concentrate at this stage of my ACCA experiences on getting answers sorted out
I wouldn’t write headings of “Control” and “Inherent” – they are now sub-sets of “Material Misstatement risk” so my two headings for risk would be “Material Misstatement” and “Detection” (if the question is an audit risk question!)
I would always make sure that I tied the answer into the scenario within the question using the names of the characters and sometimes even quoting a phrase from the question within the answer point that I was trying to make
I would make sure that my answer plan was complete in that I had addressed all the various sub-parts of the question and that I had recognised and covered that little word “and” in requirements such as “identify and comment on”
I would pay attention to the style and content of printed answers to previous exam questions – ideally the printed answers of the examiner him / herself
OK?
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