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You are planning audit of Veryan co, a new audit client. Veryan operates in the oil and gas exploration industry
It has been n existence for 30 years and has grown its revenue at an average of 12% per annum. During your planning
meeting you were informed that the forecast profit before tax for this financial year is $9.5m based on revenues of $124mWhich of the follwing is the least significant audit risk to be considered when planning audit of Veryan?
a)Non compliance with laws and regulations
b)Understatment of trade payables
C)Adequacy of provisions and contingent liabilities for events such as oil spills or personal injury
d) Reasonableness of estimates of oil and gas reservesSir correct ans is B but please can you explain
Sir actually I did not understand this question at all. Audit risk is concerned with expressing an inappropriate opinion on financial statements. But here what option a, c and d has to do with audit risk. I did not understand at all, please explain me. Also why B is correct answer? understatements of trade payables is also a significant audit risk.
a and c are risks, difficult to assess, that mean the company might not set up adequate provisions in the FS, so can cause a material misstatement.
d means major assets might be very badly represented in the FS.
b could cause misstatements, but if the company has been successfully trading for 30 years and presumably handling itspayables correctly, there is no reason to think it will start to get this routine accounting wrong now.
But Sir
Non compliance with laws and regulations and adequacy of provisions and contingent liabilities for events such as oil spills or personal injury, aren’t these business risk instead of audit risk?
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