audit risk and respond

Audit risk and respond

Risk : the finance director is intending to capitalize the full amount of all the projects .
Impact : there is a risk that some of the projects may not reach the final development stage and still they are capitalized rather than being expensed out .
Respond : obtain a breakdown of expenditure , review it , and test in detail to ensure only those projects that meet the capitalization criteria ( IAS 38 ) are capitalized , while the balance being expensed out .

Risk : the directors need to achieve certain target to gain bonuses .
Impact : they may manipulate the results through the judgment taken .
Respond : the need to carefully review the judgments and comparison with prior years . Obtain written representations of management confirming the basis of any significant decisions.

Risk : the directors has extended useful lives of PPE .
Impact : it may not be according to IAS 16 , PPE may be overstated  and profit understated.
Respond : discuss with the directors the rationale for extending useful lives . Comparison with the past record to know how often assets are replaced.

Risk : The inventory method used by the client is Std.Costing and is not updated.
Impact : The std.cost could be out of date resulting in over-undervalued inventory.
Respond : std cost to be tested in detail and comparison with actual cost , significant variations to be discussed with the management , ensuring valuation is appropriate and on line by line basis goods are valued correctly .

Risk : The WIP is material at the year end .
Impact : audit team may not be qualified enough to value WIP , leading to misstated WIP.
Respond : Consideration should be given as to whether an independent valuer / expert is required for valuation , discussions with the management.

Risk : Client will be undertaking stock count at various locations/warehouses.
Impact : it is not practical for the auditor to attend all these counts , difficulty in obtaining SAAE ( sufficient appropriate audit evidence ) over inventory counts .
Respond : the audit team should select a sample of sites to visit only those warehouses containing more stock , material balances and error prone items.

Risk : New accounting system is being introduced . More over , the key personnel of relevant department has left the company .
Impact : The juniors may encounter problems due to increase in workload and no head support , lack of knowledge and experience will be resulting in significant errors in F.S.

Respond : The engagement team to remain alert and maintain professional skepticism throughout the audit work for errors within the department.

Risk :  An asset have been disposed off
Impact : The asset may not have been removed from the asset register and profit/loss may be wrongly recorded in income statement.
Respond : To review the NCA register & recalculate the profit/loss on disposal.

Risk : Client intimidating to do audit work quickly.
Impact : Additional pressure built upon audit team to obtain SAAE sufficient and appropriate audit evidences in short time resulting in increased detection risk.
Respond : Concerned thoughts to be given on confirming the timetable with the management.

Risk : The current , quick ratios , N.P/G.P margin , ROCE etc has fallen down.
Impact : Company’s ability to continue / going concern assumption may become invalid.
Respond : Detailed going concern review to be performed and discussions with the management. 

Risk : Increase in number of warranty claims by the customer.
Impact : If director has not increased the level of provisions , there is a risk that provision would be understated.
Respond : Review the level of warranty provisions in light of increased level of claims to ensure completeness of provisions.

Risk : Client has restructured its finance. By issuing shares as well as taking some loans. Covenants are attached to loans . If they are breached then loans will become immediately payable.
Impact : The equity finance need to be correctly allocated between Shares Capital and Shares Premium and long term loan should be presented as Non Current Liability. If covenants are breached then loan shall be recorded as Current Liability and arrangement of payments if not made, then going concern assumption may become in doubt/invalid.
Respond  : Review of F/S , disclosures , ensuring compliance with relevant accounting standards.
Recalculate the calculations of covenants; determine the effect of default on the company.

Risk : Land and Building are to be revalued.
Impact : Revaluation not carried out according to IAS 16 ,  Non Current Assets may be valued incorrectly.
Respond : Review the reasonableness of  valuation , Recalculate the revaluation surplus. Ensure that it is recorded at revalued amount with correct depreciation.

Risk : Inventory days has increased & inventory turnover has fallen.
Impact : There is a risk that inventory is over-valued.
Respond : Detailed cost and NRV testing to be performed , Aged inventory report to be reviewed , assess whether any inventory requires writing down.

Risk : Receivable days have increased and management has extended credit limits/terms.
Impact : This lead to increased risk of recoverability of receivables as they may be over valued.
Respond : Extended post year end receipts testing & review of aged receivable ledger to be performed to assess valuation.
Refer : http://www.accaonlinestudy.blogspot.com