KnS School of Business Studies
ACCA F8 - Audit & Assurance
Audit made easy – by SK
Audit Risk and Responses
Audit Auditor’s Response
Risk
1) Damage of inventory / assets due to Discuss with Mgmnt the basis for calculating /
fire/ natural disaster. Writing down of determining the amount of write-down
inventory / Assets not charged to Inquire if any goods were sold after B/S date,
P&L. this would provide evidence ofreasonableness of
There is risk of fixed assets and written down amount and ensure treatment as
inventory being over-valued in the per relevant accounting framework.
F/S
2) Insurance claims / OR any other
receivable (as a result of lawsuit) are Discuss with mgmt. the basis of the same and
recorded as receivables in the current verify correspondence from insurance company to
assess reasonableness of treatment, if receipt is
assets in the F/S before receiving /
not virtually certain, than treatment is not correct
hearing from insurance company. as per the relevant accounting framework.
Receivables only included as current
assets when virtually certain under For other receivable :
IAS 37 otherwise there is Risk of The audit team should obtain written
receivables and profits being over- confirmation from the party to ensure that
stated in the F/S. amount receivable will be settled.
3) F.D/F.C/CEO requires commencing More experienced audit staff to be assigned to
and finishing external audit early this such audit.
year. This will increase detection risk More substantive procedures testing will be
that the auditor will not be able to required due to the increased risk of error and
obtain SAAE and also increase detection risk.
inherent & control risk due to Other Valid Responses:
pressure on finance team of the Consideration should be given to performing an
company to complete the F/S for the interim Audit to reduce pressure on final audit
auditors which may lead to increased so that quality of audit is not compromised and
errors. due time is given to complete the external audit
4) No bank reconciliations were Discuss with management reasons for the same.
performed which might contain Auditor should also be alert to the risk of fraud
unreconciled items & could include throughout the Audit in case of non-
large errors, which if not corrected reconciliations.
will result in under or overstatement
of bank balances in the F/S
1 Prepared by M.Sajid Kapadia ( FCA,FCCA)
KnS School of Business Studies
ACCA F8 - Audit & Assurance
Audit made easy – by SK
5) Key customer facing financial Review subsequent receipts and discuss with
difficulties during the year. There is an management/ directors the need for an
increased risk with regards to the allowance of bad debts and the adequacy of any
recoverability of receivables and an allowance for receivables should be assessed.
allowance may be required.
If adequate provision is not made Other valid Response :
than there is a risk of Receivables
being over-valued in the F/S Review of aged receivables to be performed to
assess the valuation of debtors.
6) Decrease in the selling price of inventory Conduct detailed cost and NRV testing
during the year. OR questions states subsequent to year end and assess accurate
that because of competition prices are valuation of inventory as per IAS-2.
reduced.
Risk of NRV being lower than its
cost and if treatment is done as per
IAS 2 than Risk of inventory being
overvalued in the F/S
7) Ex-employee threatening to sue for Write to company lawyers to enquire of the
unfair dismissal. If payment is possible existence and likelihood of Charges being
contingent liability disclosure is successful or not.
required. If payment is probable
provision for unfair dismissal is required Review disclosures and recalculate the amount
if above treatment is not done than of provision.
there is a Risk of inadequate or non-
disclosure or provision being over/
under valued in the F/S.
8) Increase work load on finance Audit team should remain alert throughout the
department team due to absence of F.C/ audit for significant errors in the F/S and
F.D/CFO in the company. exercise professional skepticism throughout the
There is an inherent and control risk audit. More experienced audit team should be
that the F/S will contain errors / posted on such audit client.
misstatements in the absence of
supervisory body /personnel in the
finance department.
2 Prepared by M.Sajid Kapadia ( FCA,FCCA)
KnS School of Business Studies
ACCA F8 - Audit & Assurance
Audit made easy – by SK
9) Company planning to make Discuss with Mgt the announcement time, if
employees, redundant because of made before year end than review and
branch closure. If announced prior recalculate basis for provision made at the B/S
year end provision for redundancy as date
per IAS 37 to be made. Verify subsequent payments made after the B/S
There is a risk of provision being over / date to verify the completeness of provision
under valued and also risk of no made at the year end.
provision resulting in overstatement of
profits in the F/S.
10) Special disclosure required by IFRS / Discuss the matter with mgmt. and review
local laws for a specific expense or asset disclosure in the F/S to ensure compliance with
in the F.S. IFRS and local laws.
Risk of inadequate or non-disclosure in
the F/S
11) PPE has been revalued by management Audit team should discuss with directors the
during the year. basis on which the revaluation has taken place.
There is a Risk that revaluation has Audit team should also review the methods and
not been carried out on an the assumptions made and should also verify
appropriate basis resulting in an that the treatment of revaluation is made as per
overstatement of PPE in the F/S IAS 16
12) During the year fraud took pace and Discuss with management / director finance the
was discovered during the year ( this details of the fraud perpetrated by the employee
fraud can take place in any department and what procedures have been adopted to
and by any employee ) identify any adjustments needed in the F/S.
Audit team should maintain their professional
There is a risk that other frauds might skepticism and be alert to the risk of further
have taken place which have not yet fraud.
been identified and if these have not Other Valid Responses:
been uncovered than profits could be Additional substantive testing should be
overstated. undertaken over the affected areas where fraud
took place.
3 Prepared by M.Sajid Kapadia ( FCA,FCCA)
