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Hello Gromit
i am trying to attempt some scenario questions where i have to identify audit risk and then recommend a response. at this stage i am finding these questions very difficult so what is the recommended way to do these questions? should i first complete the whole course and then attempt these questions or shall i still attempt them now (note that i haven’t started studying test of controls and audit evidence yet)
please advise
You can start now.
Everything told to you in a scenario is almost certainly there for a reason, and if the question is on risk identification then many of the details can be used to postulate a risk. For example:
Jewellery shop: Risk = inventory as this is high value, portable and easy to confuse
Cash-based business: Risk = cash and ensuring all sales are recorded and banked
New IT system: Risk = accuracy at change-over and then an unfamiliar system where employees are likely to make mistakes.
Resignation of finance director: Risk = Why? (Eg a disagreement over the financial statements, the discovery of a fraud etc) and the accounting team is without a leader in the FS preparation.
Higher receivables than expected: Risk = will we be paid? Should there be an allowance for irrecoverable debts?
Loss of an important customers: Risk = going concern
More inventory than expected: Risk = will it sell? Should it be marked down?
Legal case: Risk = how will it end up? How much? What treatment for any possible liability?Where ever risk is identified more audit work is needed to reduce the audit risk to an acceptable level.
thanks for your reply. but dont you think ill find these risk questions much more easier to do if i first go through the topic of audit evidence?
basically i am following bpp text book and over there the following sequence is given of the topics in the contents section: check out part d. do you think i should go through for example the inventory section in part d first in order to develop understanding of scenarios when a particular matter related to inventory can be classified as risk and what is an appropriate response?
Part A Audit framework and regulation
1 Audit and other assurance engagements
2 Statutory audit and regulation
3 Corporate governance
4 Professional ethics
5 Internal auditPart B Planning and risk assessment
6 Risk assessment
7 Audit planning and documentation (i have studied till here)
8 Introduction to audit evidencePart C Internal control
9 Internal control
10 Tests of controlsPart D Audit evidence
11 Audit procedures and sampling
12 Non-current assets
13 Inventory
14 Receivables
15 Cash and bank
16 Liabilities, capital and directors’ emoluments
17 Not-for-profit organisationsPart E Review and reporting
18 Audit review and finalization
19 Reportsbasically i think that without doing part d first its pointless to attempt risk scenario questions since i wont be having deeper understanding of the elements of financial statements. for example inventory (topic 13 in part d). now we know that in risk questions, emphasis is given where NRV is less than cost but to understand the concept of nrv first, i think i need to understand the topic of inventory under audit evidence first then only i will have a comprehensive idea about the inventory. do you agree?
ok thanks i understand. Please tell me what topics are likely to come in scenario questions. i understand that audit risk, ethics and Corp Gov can come but what other topics have the potential to be tested alone in a big scenario question.
Please someone should help me identify the risk and the audit response.
You are the audit supervisor of Melue & Co and are currently planning the audit of your existing client, Jaspar Heating Co (Jaspar), for the year ending 31 December 2018. Jaspar manufactures and sells heating and plumbing equipment to a number of home improvement stores across the country.
Jaspar has experienced increased competition and as a result, in order to maintain its current levels of sales, it has decreased the selling price of its products significantly since September 2018. The finance director (FD) has informed your audit manager that he expects increased inventory levels at the year end. He also notified your manager that one of Jaspar’s key customers has been experiencing financial difficulties. Therefore, Jaspar has agreed that the customer can take a six-month payment break, after which payments will continue as normal. The FD does not believe that any allowance is required against this receivable.
In October 2018 the financial controller of Jaspar was dismissed. He had been employed by the company for over 20 years, and he has threatened to sue the company for unfair dismissal. The role of financial controller has not yet been filled and so his tasks have been shared between the existing finance department team. In addition, the purchase ledger supervisor left in August and a replacement has been appointed in the last week. However, for this period no supplier statement reconciliations or purchase ledger control account reconciliations were performed.
You have undertaken a preliminary analytical review of the draft year to date statement of profit or loss, and you are surprised to see a significant fall in administration expenses.I am sorry but OpenTuition does not have the resources to write how to answer individual questions. Assuming you have read Chapter 9 of our notes (or something equivalent) so you have a grasp of what is audit risk, I suggest what you do is this.
Choose the “risk Q” from a recent past exam or the specimen exam – say the specimen exam Q Milla. Part (b) asks for 7 risks and responses. Highlight in the scenario where you think there might be misstatements in the financial statements and jot down if you have any idea what the auditor would do about it (i.e. auditor’s response). (See Ken’s post at the top of thread for examples of how you go from words in the scenario to risks.)
Now read the answer carefully – can you see how your ideas are developed into expressions of risk? The model answer together with the examiner’s report (obviously there isn’t one for the specimen but there will be for past exams) should give you a really good feel for what the examiner/marker is looking for.
You may also find this post helpful https://opentuition.com/topic/audit-risk-and-audit-procedures/
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