Management bias aiming to achieve a stock market listing within

five years. & Ambitious Expansion plans

significant pressure on management to report

strong financial performance, and the risk of
earnings management is high

lead to a range of inappropriate accounting

treatments including early recognition of
revenue and other income and deferral of
expenses.
Corporate governance and internal controls There is a high scope for errors in financial
reporting processes and for deliberate
manipulation of balances and transactions, as
the internal audit team does not have sufficient
resources for thorough monitoring and reporting.

Audit committee=failure =fulfil its

resposnibiliites= with regards to internal audit.
1= Materiality Calculate
Examiner 2= Relevant accpounting rule
3= apply to the scenario= where is the risk

Comment 4= F/S=impact=understated or overstated

Government grant Def:

government grants are recognised in profit or
loss on a systematic basis over the periods in
which the entity recognises expenses for the
related costs for which the grants are intended to
compensate.

there is a risk that the company has recognised

the income too early, and a proportion of it
should be deferred. This leads to overstated
profit and understated liabilities.

May require complete or partial payment so

recognize a provision or disclose a contingent
liability. = understated liabilities or inadequate
discosure = not per IAS 37.

Grants related to the Capital Expenditure will be

recognized as deferred in SFP and assuming that
grant will be used to upgrade the PPE, grant=
recognize P/L in the period in which dep expense
is recognized.
Bank loan 30 million=received, maturity= 34 million return
 Deep discount bond, should be amortised over
the term of the loan.

Risk is that finance costs and non‐current

liabilities will be understated.
Asset (capital) expenditure and maintenance Asset expenditure is recorded at $32 million this
costs year compared to $20 million in the previous yea

audit work will need to focus on the possible

overstatement of non‐current assets.
Related party transaction material by nature.

there is a risk that the disclosures are

incomplete.

Disclosures includes = nature of the related party

transaction, its amount, and the relevant terms
and conditions of the loan.
Data management system Not all staff may yet have been trained in
operating the system, leading to a higher risk of
error, and controls may not yet have been fully
implemented.
Financial Analysis staff costs increase by 7% , maintenance and
repair costs which have increased by 3.8%. Given
the increase in revenue of 17.8%,

expenses would be expected to increase by a

larger amount this year

expenses have been omitted in error, or have

been deliberately excluded, thereby understating
expenses and overstating profit.

Increase in revene consistent with increase in

proifit but fire in warehouse= should result in
decrease in assets= overly optimistic=
overstatement of assets= not written down

Receivable’s increased by 91% & Current

Ratio=86% = not been explained= not give
sufficient detail= motivation for directors to
overstate to get the loan

Revenue recognition there is a risk that revenue is recognised

incorrectly
 free access to the unemployed should not result
in revenue recognition.
Overtime vs point in time
Recording upon invoice rather than upon delivery
New Client First year=increases detection risk
Does not have experience with this client
More difficult = detect material; misstatements.
Risk= o/p =not correct= not audited by our firm

As per ISA audit friom should ensure that

opening balanacen and comparative information
both free from material msistatmetn

Focus on obtainiang a detailed knowledge and

understanding of the group= will Minimize
this risk
Going Covern Several indicators = despite rev and profit
increased C faces GC problems.

Examples:

Destroyed Timber planation,industrial

Action,reputational damage by legal
claim,financial problems caused by lack of cash.

Action:
MAangment= should provide note to F/S=
material uncertainity over GC ,
If no note= significant audit risk.
Reduction in Fair value of Timber Plantation 90.9% of Total assets
Risk = management not record full loss
Risk= Expert valuation is not appropriate
Expert=considered only affect on trees not on
roads and buildings= then tested for impairment.
Risk= loss not fully recognized in this year
Inventory Tailroed= not exported= Risk= not as per IAS 2 on
NRV
Overstated Currernt assets and overstated Profit
Warehouse Fire 1st= Materility=calculate
IAS 36 impairment= R.A= Higher of fair value –
cost to sell and value in use = failure to use V.I.U
calaultion=overstate,nt of asssets = understated
impairment cost
Risk must be mitigated by aduit team= Proper
verification of insurance claim
Legal Provsions Fact = legal claim npt discussed during
meeting=integrity of senior management is
questionable & Credidbility of F/S
Mgt Representaion= subject to Profesional
skepticism.
Eco Friendly Vans Risk of impairment= deluivery capacity=reduced
Classification and measurement of acquired Refitted=PPE
proeperties Sold=IFRS 5, IAS 40 depending
12 month expected, actively marketed=IFRS 5
Longer term. Not for future use=IAS 40
Measuremnet and disclosure implications if IFRS
5= lower of C.V & F.V-Cost to sell, IAS 40= F.V=
assets understated or overstated if classification
is not appropriate.

Group Audit Risks

Planned Disposal and acquisition of another C IAS 10= diclsoure= nature of event and estimate
of its financial effect= audit risk=incompelete or
inaccurate disclosure.
Disposal of Primal Burgers Co IFRS 5= conditions= SALE=assets reclassified= at
FV-Cost to sell, should not depreciated .
IFRS 5 require that priori to classifiying as held for
sale, impairment is measured and recongiszed
Projected Revenue = falls by 3.9% indicates
impairment= risk of missttamnet
Risk= W.R.T disclosure as held for sale should be
recognized seperatley.
Risk= it is not treated as discontinued operation.
Definition= componenet of an entity….
`Diposal For primal burgers co- Potential for Results of cusbisdary could be manilultated in
manipulation order to look ir more favorable to any potential
purchaser.
[Link]= shows revenue is declining so
manipulation….
Cost could be shifted to other group C to look this
C more attractive.

Investment in Peppers Co: 1st= Materiality

IFRS 11= 50%,50% share & right to net assets of
an entity=joint venture
 Audit Risk= equity accounting not applied as per
IAS 28
Capital Expenditures: Audit Risk= classification b/w PPE and intangible
assets= liccences =IAS 38= PPE=overstated and
Intangibles =understated
Reportable operating Segment Total Company Revenue= 14% of Monday coffee
shops
Operating Segment:
 which engages in business activities from which
it may earn revenues and incur expenses
 whose operating results are reviewed regularly
by the entity’s chief operating decision maker to
make decisions about resources to be allocated
to the segment and assess its performance,
 for which discrete financial information is
available.
Risk= disclosures are not provided or incomplete
Analytical Review-heading Revenue increased by 11.5%
Gross profit increase
Operating Profit= increase
Cash fallen by =
Invenory increased by =
Recevables increased by=

Gross Profit Margin 2015 , 2014

Operating Profit Margin
Interst Cover
Current rAtio
Gearing
Revenue There could be valid business reasons to explain
the trends, however, the audit team should be
alert for possible overstatement of revenue and
understatement of expenses.
Management biasness= bonus on revenue
Management manipulation= renogitaiton of the
lending faciliites.

Timing difference = 40% advance should record

on satisfaction of performance obligations=
should records as deferred revenue/ contract
liability

Current Assets Cash=-54%, inv=+100%, rec=+59%,rev=+11%

These increases appear very large and could
indicate potential overstatement.
PPE Value=constant for two years.
 Unlikely to be reasonable= purchasing, disposal ,
dep= incurred
Overstated and also dep=operating exenses so
those are understated.

Recognized at its orignainal cost.

Brand name- lack of amortization IAS 38= asset definite life= chare amortization
Risk= assumption brand have indefinite life is
incorrect= asset overstated and operating
expenses are understated.
Beand name- Potential Impairment Bad publicity= indicator of impairtment
Fact= inventory doubled = indicate problems in
selling some of the group products.
Associate- lack of group knowledge of associate Materiality
First time=purchase=inherent risk = group lack
knowledge
Rirsk= IAS 28 not correctly applied.
Increase in 0.5million is a presumably =share of
profit risk= not correctly calculated, not based on
correct share of profit = over,understated.
Asociate- possible impairment Risk= possible impairment= overstated in SFP.

Should test for impairment as it is a group

accounting policy also
As all subsidiaries are profitable in the past so
group management may lack experience in
accounting with loss making subsidiaries as a part
of their impairment testing.
ASscoiate- disclosure of income Disclosure= one line item as profit from associate
But = SPL= not show it as a separate=
omitted,netted again operating expenses= risk=
inappropriate classification, recgntiion and
maeasuremnt of this investment.
ASsoaciate – classification Risk= if it is not an associate.
IAS 28= 20% holding= significant influence= if
25% investment does not ggive voting risghts of
significant influence= should be classified as an
investment= inappropriate classification,
recognition and measurement
Inventory in multiple locations Risk= controls not sufficientlty strong in
movement and counting of inventory= hard for C
that all loacations = robust inventory counting
Procedures= control risk= potential over or
understatement.
Investment Property Materiality
IAS 40 criteria = FV model
Gain = recorded in OCI rather than inP/L
Gain is not presented as per IAS 40.
SFP= value increase=2.5m, OCI increase=1m
Risk= gain underated and part of it classified in
P/L
Possible error= also relevant= comparative
infomarion= prior years= materially misstated=
risk = other balance and trqansactions in prior
years are also misstated.
Use of Professional skepticism should be stressed
and further procedures on O/P and comparative
info.
Bonus Scheme Bonus based = increase in rev
Rev is increased during year but where is the
accrual???
Potential understated of liabilities and
overstatement of Profit.
Systems and Controls
Foreign Exchange $20million of different currency= IAS 21=
monetary amounts should be retranslated at year
end= exchange difference = P/L
Appropaorite exchange rate= no used, no
retransalation= CA or profit are overstated.
Impairment of NCA due to political instability and 1= Materiality
regulatiory issues 2= none used by group in line with the principal
actiivties= R.A= less than C.V= assets may never
generate value in use= F.V falls below than cost

Management should carry out imparment reviw

as per IAS 36
P= +
A= +
Effect of Hurricance Impairment + IAS 16
IAs 16= impairment and derecognition of PPE and
any subsequent compensation claims to be
treated as separate economic events and
accounted for separately in the period they
occur. The standard specifically states that it is
not appropriate to net the events off and not
record an impairment loss because there is an
insurance claim in relation to the same assets
Ratios shows no significant movemnets however, more detail is needed to fully conclude
on the liquidity and solvency position of the
Group, and whether there are any hidden trends
which are obscured by the high‐level analysis
 which has been performed with the information
provided.
Consolidation of Foreign Subsidaries Net Assets Vs group net assets, total assets=
materiality calculate
IAS 21= income and expenses= translate at
average rate or spot rate, liabilities and asset= at
closing rate.
Part way consolidation= risk k full year kr diya
hoga
Reliance on component auditor First materiality calualted = material so audit
team needs to consider extent of reliance plance
on component auditor
Independence and competence needs to be
evaluated but given that it is an existing audit
client = this evaluation had already performed
but provision of anon assurance service by
component auditor results in ethical threats.
Legal case of Provisoin alag se He appears to have dismissed the accounting
implications of the legal case and relucatanc to
Second, discuss = wants to hide something , deliberately
Group Finance director attitude obstructing the work
Limitaiton on the scope of audit = group audit
strategy should consider this issue and Audiot
enagagment partner should discss with the aduit
committee.
Audit team= heightened degree of professional
skepticism
Recognition of 50% equity shareholding in WTC Pehle debate kr lo k yeh joint venture ha bhi ya
nahi
Agr equal no of board memebrs nai rakh sake to
means k ye joint venute nahi ha or control jo ha
wo equally shre nahi hua dono ma
Assuming k ab joint venture ha to phir bhi sae
tara sa equity accounting nahi ki hogi.
Revenue REcnognition- grpoup Range of services including mobile network, fixed
landline, and broadband service so revenue
should be allocated to eac performance
obligation
Should have robust system= ensure= contracts
are unbundled
Record in correct period= [Link] satisfied
financial info shows= financial info shows = rev
increased by 35% = could be due to early
recognition of revenue.

Righ to use network capacity Prepayment = charged as straight line basis and
asset in SFP.
 Furhter Risk= payment is for specified amount of
use= if C exceed allocated allowance= additional
payments for excess usage= not recognized in
financial statments.

Amoristaion of license According to IAS 38 Intangible Assets, the

amortisation method should reflect the pattern
of benefits, or if the pattern cannot be
determined reliably, the straight‐line method of
amortisation should be used.

Should charge when asset is available for use

capable of operating in the manner which
management intends

Missing Parts
Planned Disposal and acquisition of another C IAS 10= diclsoure= nature of event and estimate
of its financial effect= audit risk=incompelete or
inaccurate disclosure.
Disposal of Primal Burgers Co IFRS 5= conditions= SALE=assets reclassified= at
FV-Cost to sell, should not depreciated .
IFRS 5 require that priori to classifiying as held for
sale, impairment is measured and recongiszed
Projected Revenue = falls by 3.9% indicates
impairment= risk of missttamnet
Risk= W.R.T disclosure as held for sale should be
recognized seperatley.
Risk= it is not treated as discontinued operation.
Definition= componenet of an entity….
`Diposal For primal burgers co- Potential for Results of cusbisdary could be manilultated in
manipulation order to look ir more favorable to any potential
purchaser.
[Link]= shows revenue is declining so
manipulation….
Cost could be shifted to other group C to look this
C more attractive.

Investment in Peppers Co: 1st= Materiality

IFRS 11= 50%,50% share & right to net assets of
an entity=joint venture
Audit Risk= equity accounting not applied as per
IAS 28
Capital Expenditures: Audit Risk= classification b/w PPE and intangible
assets= liccences =IAS 38= PPE=overstated and
Intangibles =understated
Reportable operating Segment Total Company Revenue= 14% of Monday coffee
shops
 Operating Segment:
 which engages in business activities from which
it may earn revenues and incur expenses
 whose operating results are reviewed regularly
by the entity’s chief operating decision maker to
make decisions about resources to be allocated
to the segment and assess its performance,
 for which discrete financial information is
available.
Risk= disclosures are not provided or incomplete

Analytical Review-heading Revenue increased by 11.5%

Gross profit increase
Operating Profit= increase
Cash fallen by =
Invenory increased by =
Recevables increased by=

Gross Profit Margin 2015 , 2014

Operating Profit Margin
Interst Cover
Current rAtio
Gearing
Revenue There could be valid business reasons to explain
the trends, however, the audit team should be
alert for possible overstatement of revenue and
understatement of expenses.
Management biasness= bonus on revenue
Management manipulation= renogitaiton of the
lending faciliites.

Current Assets Cash=-54%, inv=+100%, rec=+59%,rev=+11%

These increases appear very large and could
indicate potential overstatement.
PPE Value=constant for two years.
Unlikely to be reasonable= purchasing, disposal ,
dep= incurred
Overstated and also dep=operating exenses so
those are understated.

Recognized at its orignainal cost.

Brand name- lack of amortization IAS 38= asset definite life= chare amortization
Risk= assumption brand have indefinite life is
incorrect= asset overstated and operating
expenses are understated.
Beand name- Potential Impairment Bad publicity= indicator of impairtment
 Fact= inventory doubled = indicate problems in
selling some of the group products.
Associate- lack of group knowledge of associate Materiality
First time=purchase=inherent risk = group lack
knowledge
Rirsk= IAS 28 not correctly applied.
Increase in 0.5million is a presumably =share of
profit risk= not correctly calculated, not based on
correct share of profit = over,understated.
Asociate- possible impairment Risk= possible impairment= overstated in SFP.
ASscoiate- disclosure of income Disclosure= one line item as profit from associate
But = SPL= not show it as a separate=
omitted,netted again operating expenses= risk=
inappropriate classification, recgntiion and
maeasuremnt of this investment.
ASsoaciate – classification Risk= if it is not an associate.
IAS 28= 20% holding= significant influence= if
25% investment does not ggive voting risghts of
significant influence= should be classified as an
investment= inappropriate classification,
recognition and measurement
Inventory in multiple locations Risk= controls not sufficientlty strong in
movement and counting of inventory= hard for C
that all loacations = robust inventory counting
Procedures= control risk= potential over or
understatement.
Investment Property Materiality
IAS 40 criteria = FV model
Gain = recorded in OCI rather than inP/L
Gain is not presented as per IAS 40.
SFP= value increase=2.5m, OCI increase=1m
Risk= gain underated and part of it classified in
P/L
Possible error= also relevant= comparative
infomarion= prior years= materially misstated=
risk = other balance and trqansactions in prior
years are also misstated.
Use of Professional skepticism should be stressed
and further procedures on O/P and comparative
info.
Bonus Scheme Bonus based = increase in rev
Rev is increased during year but where is the
accrual???
Potential understated of liabilities and
overstatement of Profit.
Product withdrawn from sale because of harmful Impairment charge= is $30million is appropriate?
ingredients
 Using financial ratios= total 35million have been
charged so $5million is unexplained may be
related to other brands impairment

Highly material may warrant separate disclosure

Harmful ingredients may have been used in other
brands = managmnet biasness may not charge
impairment.
Risk= inventory is overstated= if included in
inventory = NRV has been zero
Assets = ned top be measures as per IAS 38 or
IFRS 5 .
Customers suffered health problems = risk=
Provision is not been recorded.
Development Cost $20 million loan taken out but increase in D.C is
15milloin
Remainng 5million may not be spent so D.C is
underststaed.
5million=research cost= movement in operating
expenses does not suggest it.
Or 5 million has been kept as current assets
because C.A are increased by a signiifant amount.
Retained Earnings Increase of 8 million
Prokected profit= +25million
o/pR.A+Profit=c/d R.A
May be due to the dividend paid in the year but
require more information such as ssttsment of
changes in equity.
Management Charges Intra group transaction
should record in individual statemnets but should
not in consolidated.
Liabilities and reciavables are overstated
Though no net impact they have.
Inventory doubles in statements Obsolescence of inventory
write down is required
Profit or inventory is overstated.
Intra group Transfers Obsolete inventory is transferred to other
subsidiary= intra group = eliminate
If tranffered on profit= operating profits would
be overstated if provision for unrealized prifts
have not made.
See the Next Page:

Conclusion:

If requirement starts with “Discuss” or Evaluate and Prioritize:

In conclusion, Winberry Co faces several high-risk areas that carry a potential risk of material
misstatement, which have been ranked based on the magnitude of potential misstatements and their
likelihood of occurrence. The warehouse fire and the joint venture with Durian Co carry the highest
risks. It's recommended that Quince & Co reassesses planning materiality and implements appropriate
audit procedures and assigns highly competent staff to address the risks effectively.