March-June 2024 (Audit Risk)
Audit Risk Auditor’s Respond
Green Co is a new client for the firm. Appropriate time should be used to
understand the business and assign the
As we have no prior year experience on experienced staff who audited in a
the accounting policies and nature of retailer of garden supplies.
business, we may fail to detect the
material misstatement. This increased
the detection risk.
Aidan White is planning to sell his Assign more experienced staff to the
shares in the company. audit.
There is a risk that he may manipulate Brief all audit staff to remain alert and
the financial statements to boost the apply professional scepticism,
company's performance and raise his especially in judge-ment areas
share value. Profit and assets are may impacting profit and asset valua-tions.
be overstated.
$14.2m was used to refurbish its stores. Obtain the breakdown of expenditures
All of this expenditure has been and
recognised as property, plant and review the supporting document to
equipment. assess
whether there are capital or revenue
There is risk that some of the natures.
expenditures may not meet IAS-16 PPE
criteria to be capatilised. Therefore, PPE
and profit will be overstated.
Green Co has taken out a loan, which is Review the draft financial statements
to be repaid in five annual instalments and agree the amounts disclosed as
commencing in September 20X5. current and non-current liabilities to the
loan documen-tation.
There is a risk that the outstanding
amount may not be correctly classified
between current and non-current
liabilities. Therefore, loan may be
misstated.
$400,000 was spent on advertising. All Obtain the breakdown of expenditures
of this expenditure has been recognized and review the supporting document to
as intangible assets and amortized over assess whether there are research or
24 months. development natures.
There is risk that advertising
expenditures may not meet IAS-38
intangible assets criteria to be
capatilised. Therefore, intangible assets
and profit will be overstated.
The building authority is investigating Review correspondence with the
whether building authority to understand the
Green Co has breached building alleged non-compliance and assess the
regulations. Green Co could be required likelihood of fines.
to remedy deficiencies and pay a fine.
If costs are probable, a provision is
required. If there is a failure, provisions
will be understated. If costs are
possible, disclosure is needed. If there
is a failure, disclosure will be
inadequate.
In August 20X4, a project began to Discuss the project with management
develop new technology to maintain the and review the project files to establish
temperature and humidity in Green Co’s at what date the criteria were met.
greenhouses and
$350,000 was included in intangible
assets.
There is risk that project may not meet
IAS38 intangible assets criteria to be
capatilised. Therefore, intangible assets
and profit will be overstated.
A flood caused water damage to Review invoices and other sales records
inventory and the sales price may need to establish the sales prices of the
to be reduced. affected plants
from May until the end of the final
There is a risk that the net realisable audit.
value (NRV) is lower than cost and, if
the inventory is valued at cost,
inventory will be overstated.
Operating margin has decreased from Obtain the breakdown of both CGS and
11% to operating expenses and compare these
7% while gross profit margin has to prior years breakdown.
increased
from 20% to 26%. Discuss with management for any
significant differences.
There is risk that some cost of sale
items may be misclassified as operating
expenses in order to show higher gross
profit margin. Operating expenses is
understated and cost of sale is
overstated.
The receivable collection period has Review the trade receivable ageing
increased from 40 days to 67 days. report for
old balance and extend the after date
There is risk that some these balance cash
may not be recoverable. Therefore, receipt testing from the customer.
receivable may be overvalue.
