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Hello, I’ve have a problem in responding to the audit risks in the questions. I can identify the risk but I don’t know how to give the audit response to the risk and also the implications of those risk.
So is there a technique that can be used to learn how to respond to audit risk?
Plus i understand the concepts well but have difficulties in applying them to the scenarios, is there a way to improve that?
Thanks,
Zamina.You have to look at the scenario: what factors are there in the scenario that mean the FS have a high probability of containing a material misstatement?
For example, the FD has left 3 months before year end and has not been replaced. High audit risk because there is a ‘ship without a captain’. The preparation of the FS is being done by less experienced people.
Or, a new IT system was introduced during the year. High audit risk because balances might not have been transferred properly and staff are learning how to work teh new system.
You respond by doing more appropriate audit work.
In example 1 above, the auditor would need to look carefully at closing adjustments such bad debt provisions and stock write-downs because there would probably be the areas that the FD would have looked afer.
In example 2, the auditor would have to compare the closing trial balance of the old system and the openging on the new to ensure that balances were transferred properly. The auditor would also have to look carefully at the transactoins in the first couple of months of operatoin of the new system because client staff were still learning.
Am I wrong to think that these responses are not too different if any to audit procedures sir?one of the sources I read has recommended to come back again to the responses section of audit risk after completely audits of individual balances.
I may think of a client whose industry is clothing .There is risk that the value of closing inventory may be overstated.This is manifested by dynamism of fashion industry as people often change tastes and preferences .It is possible and high likely that the NRV is lower than the cost at year end.
My response would be to examine sales made after year end inorder to see whether the sales price and year end is not lower than cost at which the line of clothes were purchased at.
But the problem arises when i check my answers with the ones at the back they use IAS to explain the implications and i give in general implications so i don’t understand if I’m correct or not. Plus there answers are more professional then ours so it’s confusing.
Example: the questions says
During the year the company has spent $2.2m on developing several new products. Some of of these are in the early stages of development while others are nearing completion. The FD has confirmed that all projects are likely successful and so he intends to capitalise the full $2.2m.
Now how should we respond to the audit risk above with its implication?
And could you indicate how should we start when responding like a technique or a guideline of sorts.
Because sir in our study centre no one is there to help us how to answer questions.
Thanks.
@ zamina
This sounds more like a P7 question. FS can contain misstatements because:
1 Amounts are incorrect
2 The FS do not comply with an ISA.Your example is gettin at the IAS dealing with R&D expenditure and there is a risk that amounts have been capitalised rather than written off. That irks has to be countered by seeking evidence that the project will comply with the requirements for capitalisation, such as it will be technically feasible and the copmany has the funds to complete it.
I do think it’s too complex for F8.
@ Tinaboy. You are correct.
HTH
Sir, this from the f8 exam kit of bpp. It’s question number 48-titled abrahams that was tested in December 2011.
Sir, there a step by step approach to answering risk question or the approach mentioned above is the only one?
Cause my answers usually turn out to be very general rather than specific.
Thanks for the information about the question source. That part of the audit risk would have gained 2 marks.
The only step by step approach that I can suggest is to be suspicious about every bit of information that the question provides. These questions have all been through a rigorous editing process and rarely contain any detial that is not significant.
So the paragraph:
“During the year the company has spent $2·2 million on developing several new products. Some of these are in the early stages of development whilst others are nearing completion. The finance director has confirmed that all projects are likely to be successful and so he is intending to capitalise the full $2·2 million” has not been included without a purpose – and the purpose here must be that there is an audit risk attached.
Similarly, the paragraph:
“In September a new accounting package was introduced. This is a bespoke system developed by the information technology (IT) manager. The old and new packages were not run in parallel as it was felt that this would be too onerous for the accounting team. Two months after the system changeover the IT manager left the company; a new
manager has been recruited but is not due to start work until January”contains a number of risks:
How accruate was the transfer of balances part way through the year?
How accurate is the processing on the new system (given we have no comparisons with the old results that would have been obtained) and staffare on a learning curve with the new systemThe IT manager has left and is not yet replaced. Why did he/she leave (problems?). Who is looking after the new system?
So sir, is it must to relate the scenario with a relevant IAS since the first risk does pertain to an IAS?
You have to relate it to what an IAS says but you don’t need to quote the ISA number or its title.
If a material figure in the FS is not in line with the relevant IAS, then there is a material misstatement, so not complying with the IAS is an audit risk.
So sir would be correct if i answered in the following manner:
According to IAS 38, it is permissible to capitalize the R&D cost in full if only the project is feasible and has the funds to complete it. If this is not the case, then the intangible assets in the SFP may be overstated.
And the audit response to it as:
The auditor should obtain sufficient evidence through company’s minutes to ensure that they have sufficient funds to complete the production and it’s feasible in order to be eligible to fully capitalize the R&D cost, if that’s not the case then some of the cost should be written off.
Plus sir is it must that we have to be well acquainted with IAS when it comes to audit risk?
Your answer is fine (though there are some other conditions too, like the project producing an income stream and being able to identify the expenditure. The IASs needed for F8 are those required for F3. (See https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f3/examinable%20documents/f3-ffa-fa2-sep15-aug16-exam-docs.pdf).
Sir would it be correct to say that the full capitalization will only be correct if it meets with the criterion of IAS 38. If that’s not the case then the intangible assets amount is overstated.
If that’s the case then, what would be the correct audit response to it? Because sir we can’t give a vague answer of do this or do that it has to be a specific document that the auditor has to assess or something.
And that’s where i face a major problem when it comes to mention which documents to assess cause i dunno the correct documents to assess.
Your first paragraph is correct.
The audit response yopu are asked for is to do with your planning of the audit. There are only 2 marks per audit risk, so not a lot is needed. THink of the way you can obtain evidence)
Analytical procedures – not much use here
Enquiry – ask mangement to justify their treatment. Obtain a letter of representation stating that the products will succeed.
Inspect – board minutes, technical reports on the products.
Observation – ask to see prototypes.
Recalculation – look at how the figures capitalised have been obtained.
The model answer is very sketchy.
Okay sir thank you!
However, if I do have any further queries I’ll shall post it here.
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