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in question redsmith an audit risk is given that a generous sales related bonus scheme has been introduced in the year this may lead to sales cut off errors with employees aiming to maximise current year bonus …cabn u please explain this audit risk how can sales related bonus lead to sales cut off errors and employees aiming to maximise current year bonus and whAT WILL BE the relevant audit response to this ??
2 .in the same question one more audit risk that gross margin has increased by 7.8% whereas operating margin has decreased by 2.4% cost of sales may have been omitted and included in the operating expenses…how this is an audit risk..???
3.audit risk…the finance director has made a change to the inventory valuation in the year with additional overheads being included. in addition inventory days have increased from 58 to 70 days . there is a risk that inventory is over valued.. explain please??….
Audit risk is the risk that the wrong audit opinion is given eg that FS are T&F when they in fact contain a material misstatement.
Sales staff might try to process January sales in December. Remember, the FS are usually prepared for a few weeks after the period end, so there is opportunity to back date invoices. The relevant audit response would be to ask management to reverse those sales and put them into the right period. If the amounts were material and no adjustments were made, there would be a modified audit opinion.
The second point is audit risk because the amounts reported for GP and NP could be materially incorrect.
Additional overheads includes in stock will increase the value of manufactured stock and so could increase profit. Inventory days increasing form 58 to 70 might indicate that some of the stock cannot be sold (it’s sticking in inventory) and might need to be written down form cost to NRV.
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