Audit Risk Qns

Is there a problem with identifying the possible overstated and understated accounts?

If you don’t feel confident, then don’t do it. I doubt that it would cost you many (if any) marks if you miss that detail off …. but why would you if you know the accounts that are likely to be over- / under-stated?

Over-estimation in any context is not acceptable – it’s encouraging manipulation and distortion

The “normal” tendency would be for directors to massage the figures by over-estimating incomes and assets and under-estimating expenses and liabilities, so that’s where the auditor would feel greatest risk

But over-estimating expenses and liabilities and under-estimating incomes and assets is equally unacceptable

I mentioned that in my post above!

Here’s what I wrote:

“But over-estimating expenses and liabilities and under-estimating incomes and assets is equally unacceptable”

Do you want more?

You’re welcome

Here’s an extract from the examiner’s report following the June 2010 exam, question 1

It’s quite long, but I believe that it’s very insightful and therefore potentially very helpful

It doesn’t directly answer your post, but I shall add some comments after the examiner’s report, at the end of this post

“Question One
This question was for 36 marks, and focussed on the planning of a group audit engagement. Requirements related to an evaluation of audit risk, reliance on the work of a component auditor, and audit procedures with respect to investments in associates and a grant received.
Overall performance on this question varied considerably. Candidates who answered the specific question requirements scored well. However, despite the requirements of (a) and (c) covering familiar issues seen in many previous papers, a significant proportion of candidates did not answer the specific question requirements, leading to largely irrelevant answers scoring very few marks.
Requirement (a) asked for an evaluation of principal audit risks, for 18 marks. Two professional marks were also available for the briefing notes required. The scenario provided plenty of indicators of potential audit risks, and many candidates produced sound answers which identified the risk and explained it in sufficient detail. Most candidates dealt well with the more obvious risks such as a profit-related bonus, a provision for decommissioning costs and the realignment of a foreign subsidiary’s accounting policies. The majority of candidates managed to identify at least some of the audit risks specific to a group which acquired a foreign subsidiary during the year, and it was pleasing to see so many answers referring to goodwill, fair values, retranslation to group currency and alignment to group accounting policies. However, some of the explanations of audit risks identified were weak, amounting to little more than a statement of the correct accounting treatment, and not the risk to the auditor. Many scripts contained the following errors:
Examiner’s report – P7 June 2010 1
• Discussion of business risk without linking the business risk to financial statement risk (e.g. ‘there is a risk of failing to comply with relevant laws and regulations’, or ‘there is a risk that inventories are obsolete’),
• Including audit procedures (which were not asked for), • Long description of the components of audit risk (inherent, control and detection risks) with no
application to the scenario, • Explanations too vague to earn marks (e.g. ‘the risk is it is not accounted for properly’ or ‘the risk is that
the accounting standard is not follwed’), and • Discussing reliance on the component auditor (which the requirement explicitly said should not be
considered).
Many candidates included the inevitable references to going concern problems, even though there was no hint in the scenario that the group faced operational or financial difficulties. Also, some candidates misread the scenario, leading to inappropriate comments. The most commonly seen example of this appeared in answers explaining that a change in accounting policy had occurred (the question stated ‘changes in accounting estimates’). Candidates must read the scenario carefully to avoid this type of error.
Candidates who structured their answers under three heading of inherent risk, control risk and detection risk tended not to score very well. Those who worked through the scenario and discussed the audit risks associated with each of the group companies in turn, and then the audit risk of the consolidation process performed well.
A significant minority of candidates did not attempt to earn the 2 professional marks available for this requirement. Candidates are reminded that resources are available on ACCA’s website providing guidance on the importance of professional marks.”

Principal audit risks is simply the examiner adding an adjective to the question asking for audit risks. It’s tricky because what you consider to be a principal risk may not be principal in the mind of any one else

For example, if you were asked “What do you think is the capital city of England?” and you reply “Sheffield” …. is that wrong?

NO! It’s not wrong. If you think that Sheffield is the capital city of England, then your answer to the question is correct.

When a question asks you for “the principal audit risks” where do you stop? define “principal”

You can’t so, in my opinion, the inclusion of the word “principal” is misplaced and should not be there

As for “key audit risks” the above comments relating to “principal audit risks” applies to the expression “key audit risks”

Both expressions would have been perfectly acceptable as, simply, “audit risks”

Hope that helps

That’s good! Matters are now building up aren’t they. Not long to go now 🙂