- This topic has 3 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
Hello Sir, I hope you’re having a good day, Kindly help me understand why the answer to this MTQ is option 2.
”You are planning the audit of Veryan Co, a new audit client which operates in the oil & gas
exploration industry.
Companies wishing to operate in this industry require a licence which is valid for 20 years. Veryan
Co has been in existence for 30 years and has grown its revenue at an average of 12% per annum.
During your planning meeting you were informed that the forecast profit before tax for this
financial year is $9.5 million (prior year: $6 million) based on revenues of $124 million (prior year:
$100 million).
The audit risk assessment has identified the following areas as significant risks of material
misstatement:
? Overstatement of receivables due to long outstanding debts
? Misstatement of intangible assets (licences) due to incorrect amortisation
? Overstatement of non?current assets due to impairment of exploration areas which have
been decommissionedWhich of the following is the LEAST significant audit risk to be considered when planning
the audit of Veryan Co?
? Non?compliance with laws and regulations
? Understatement of trade payables
? Adequacy of provisions and contingent liabilities
? Reasonableness of estimates of oil and gas reserves”1 is significant risk because industry is a regulated one (e.g. could be requirements to decommission oil rigs).
4 also goes with the territory of the industry (high inherent risk in estimating oil and gas in fields waiting to be extracted)
Choice is not between 2 and 3 – both amount to risk of understatement of liabilities – the fact that there is a mention of decommissioning oil rigs should suggest to you “provision” and there could be contingent liabilities for environmental costs (that would be misstated if not disclosed),There is nothing in the scenario to suggest there is risk of understating trade payable or even that such a business has trade payable – it is not a retailer buying goods for resale on credit.
- The topic ‘Section A ques’ is closed to new replies.