考前22年09月冲刺备考复习阶段2209讲义audit risk

GoldenACCAAudit&AssuranceAuditriskAuditrisk& ×Control ×ControlIdentifyingauditROMMROMMatassertionROMMatFSasaFinancialstatementClassesClassestransactions&Account

Examquestion2019Mar/JunYouareanauditsupervisorofDaffodil&CoandarenningtheauditofPeonyCofortheyearending31May20X9. isafoodretailerwithalargenetworkofstoresacrossthecountryandfourwarehouses. hasbeena ofyourfirmforseveralyearsandtheforecastprofitbeforetaxis$28·9m.Theauditmanagerhasattendedanningmeetingwiththefinancedirectorandhasprovidedyouwiththefollowingnotesofthemeeting.PeonyCohasaninternalaudit(IA)departmentwhichundertakescontrolstestingacrossthenetworkofstores.Eachstoreisvisitedatleastonceevery18months.TheauditmanagerhasdiscussedwiththefinancedirectorthattheexternalauditteammayrelyonthecontrolstestingwhichisundertakenbyIA.Examquestion2019Mar/JunDuringthemeeting,thefinancedirectorprovidedsomeforecastfinancialinformation.Revenuefortheyearisexpectedtoincreaseby3%ascomparedto20X8;thegrossmarginisexpectedtoincreasefrom56%to60%;andtheoperatingmarginispredictedtodecreasefrom21%to18%.PeonyCovaluesinventoryinlinewithindustrypractice,whichistousesellingpricelessaveragemargin.Thedirectorsconsiderthistobeacloseapproximationto doesnotundertakeafullyear-endinventorycountandinsteadundertakesmonthlyperpetualinventorycounts,eachofwhichcoversone-twelfthofalllinesinstoresandthewarehouses.AspartoftheinterimauditwhichwascompletedinJanuary,anauditjuniorattendedaperpetualinventorycountatoneofthewarehousesandnotedthattherewerealargenumberofexceptionswheretheinventoryrecordsshowedahigher tythanthephysicalinventorywhichwaspresentinthewarehouse.Whendiscussingtheseexceptionswiththefinancialcontroller,theauditjuniorwasinformedthatthishadbeenarecurringissue.GrossprofitExamquestion2019Mar/JunDuringtheyear,IAperformedareviewofthenon-currentassetsphysicallypresentinaroundone-thirdofthe ’sstores.Anumberofassetswhichhadnotbeenfullydepreciatedwereidentifiedasobsoletebythisreview. launchedasignificantTVadvertising ninJanuary20X9inordertoincreaserevenue.Thedirectorshaveindicatedthatattheyearendacurrentassetof$0·7mwillberecognised,astheybelievethattheadvertisementswillhelptoboostfuturesalesinthenext12months.ThelastadvertisementwillbeshownonTVinearlyMay20X9.PeonyCodecidedtooutsourceitspayrollfunctiontoanexternalserviceorganisation.ThisserviceorganisationhandlesallelementsofthepayrollcycleandsendsmonthlyreportstoPeonyCowhichdetailwagesandsalariesandstatutoryobligations.PeonyComaintaineditsownpayrollrecordsuntil31December20X8,atwhichpointtherecordsweretransferredtotheserviceorganisation.Examquestion2019Mar/JunPeonyCois nningtoexpandthe byopeningthreenewstoresduringJuly20X9andinordertofinancethis,inMarch20X9the obtaineda$3mbankloan.Thisisrepayableinarrearsoverfiveyearsinquarterlyinstalments.Inpreparationfortheexpansion,the lookingtostreamlineoperationsinthewarehousesandis nningtomakeapproxima y60employeesredundantaftertheyearend.Nodecisionhasbeenmadeastowhenthiswillbeannounced,butitislikelytobeinMay20X9.(b)DescribeEIGHTauditrisksand intheauditor’sresponsetoeachrisk nningtheauditNote:PrepareyouranswerusingtwocolumnsheadedAuditriskandAuditor’sresponse(16IdentifyIdentify+Auditrisk&AuditAuditTheexternalauditteammaycerelianceonthecontrolstestingworkundertakenbytheIAdepartment.Ifrelianceiscedonirrelevantorpoorlyperformedtesting,thentheexternalauditteammayformanincorrectconclusiononthestrengthoftheinternalcontrolsatPeonyCo.Thiscouldresultinthemperforminginsufficientlevelsofsubstantivetesting,therebyincreasingdetectionrisk.TheexternalauditteamshouldmeetwithIAstaff,readtheirreportsandreviewtheirfilesrelatingtostorevisitstoascertainthenatureoftheworkBeforeusingtheworkofIA,theauditteamwillneedtoevaluateandperformauditproceduresontheentiretyoftheworkwhichtheyntouse,inordertodetermineitsadequacyforthepurposesoftheaudit.Inaddition,theteamwillneedtore-performsomeofthetestingcarriedoutbyIAtoassessitsadequacy.Auditrisk&AuditAuditForecastratiosfromthefinancedirectorshowthatthegrossmarginisexpectedtoincreasefrom56%to60%andtheoperatingmarginisexpectedtodecreasefrom21%to18%.Thismovementingrossmarginissignificantandinconsistentwiththefallinoperatingmargin.Thereisariskthatcostsmayhavebeenomittedorincludedinoperatingexpensesratherthancostofsales.Misclassificationofexpenseswouldresultinunderstatementofcostofsalesandoverstatementofoperatingexpenses.Theclassificationofcostsbetweencostofsalesandoperatingexpensesshouldbereviewedincomparisontotheprioryearandanyinconsistenciesinvestigated.AuditAuditrisk&AuditAuditPeonyCo’sinventoryvaluation issellingpricelessaverageprofitmargin,asthisisindustrypractice.Inventoryshouldbevaluedatthelowerofcostandnetrealisablevalue(NRV).IAS2Inventoriesallowsthisasacostcalculationmethodaslongasitisacloseapproximationtocost.Ifthisisnotthecase,theninventorycouldbeunderorTestingshouldbeundertakentoconfirmcostandNRVofinventoryandthatonaline-by-linebasisthegoodsarevaluedInaddition,valuationtestingshouldfocusoncomparingthecostofinventorytothesellingpricelessmarginforasampleofitemstoconfirmwhetherthismethodisactuallyacloseapproximationtocost.Auditrisk&AuditAuditTheutilisesaperpetualinventorysystematitswarehouseratherthanafullyear-endcount.Undersuchasystem,allinventorymustbecountedatleastonceayearwithadjustmentsmadetotheinventoryrecordsonatimelybasis.Inventorycouldbeunderoroverstatediftheperpetualinventorycountsarenotallcompleted,suchthatsomeinventorylinesarenotcountedintheyear.Duringtheinterimaudit,itwasnotedthatthereweresignificantexceptionswiththeinventoryrecordsbeinghigherthantheinventoryinthewarehouse.Astheyear-endtieswillbebasedontherecords,thisislikelytoresultinoverstatedinventory.Thetimetableoftheperpetualinventorycountsshouldbereviewedandthecontrolsoverthecountsandadjustmentstorecordsshouldbetested.Inaddition,thelevelofadjustmentsmadetoinventoryshouldbeconsideredtoassesstheirsignificance.Thisshouldbediscussedwithmanagementassoonaspossibleasitmaynotbepossibletocerelianceontheinventoryrecordsattheyearend,whichcouldresultintherequirementforafullyear-endinventoryAuditrisk&AuditAuditAnumberofassetswhichhadnotbeenfullydepreciatedwereidentifiedasbeingThisisanindicationthatthe’sdepreciationofnon-currentassetsmaynotbeappropriate,asdepreciationinthepastappearstohavebeenIfanassetisobsolete,itshouldbewrittenofftothestatementofprofitorloss.Thereforedepreciationmaybeunderstatedandprofitandassetsoverstated.Discussthedepreciationfornon-currentassetswiththefinancedirectorandassessitsreasonableness.Enquireofthefinancedirectoriftheobsoleteassetshavebeenwrittenoff.Ifso,reviewtheadjustmentforcompleteness.Auditrisk&AuditAuditPeonyCoisnningtoincludeacurrentasset$0·7m,whichrelatestoadvertisingcostsincurredandadvertsshownonTVbeforetheyearend.Thecostswereincurredandadvertsshownintheyearending20X9andthereisnobasisforincludingthemasacurrentassetattheyearend.Thecostsshouldberecognisedinoperatingexpensesinthecurrentyearfinancialstatements.Ifthesecostsarenotexpensed,currentassetsandprofitswillbeoverstated.Discusswithmanagementtherationaleforincludingtheadvertisingasacurrentasset.Requestevidencetosupporttheassessmentofprobablefuturecashflows,andreviewforReviewsupportingationfortheadvertisementstoconfirmthatallwereshownbeforethe20X9yearend.Requestthatmanagementremovethecurrentassetandrecordtheamountasanexpenseinthestatementofprofitorloss.Auditrisk&AuditAuditDuringtheyear,PeonyCooutsourceditspayrollfunctiontoanexternalserviceorganisation.AdetectionriskarisesastowhethersufficientandappropriateevidenceisavailableatPeonyCotoconfirmthecompletenessandaccuracyofcontrolsoverthepayrollcycleandliabilitiesattheyearend.DiscusswithmanagementtheextentofrecordsmaintainedatPeonyCofortheperiodsinceJanuary20X9andanymonitoringofcontrolswhichhasbeenundertakenbymanagementoverConsiderationshouldbegiventocontactingtheserviceorganisation’sauditortoconfirmthelevelofcontrolsince,atype1ortype2reportcouldberequested.Auditrisk&AuditAuditThepayrollfunctionwastransferredtotheserviceorganisationfrom1January20X9,whichisfivemonthspriortotheyearend.Ifanyerrorsoccurredduringthetransferprocess,thesecouldresultinwagesandsalariesbeingDiscusswithmanagementthetransferprocessundertakenandanycontrolswhichwereputincetoensurethecompletenessandaccuracyofthedata.Wherepossible,undertaketestsofcontrolstoconfirmtheeffectivenessofthetransfercontrols.Inaddition,performsubstantivetestingonthetransferofinformationfromtheoldtothenewAuditAuditrisk&AuditAuditA$3mloanwasobtainedinMarch20X9.Thisfinanceneedstobeaccountedforcorrectly,withadequatedisclosuremade.Theloanneedstobeallocatedbetweennon-currentandcurrentliabilities.Failuretoclassifytheloancorrectlycouldresultinmisclassifiedliabilities.Re-performthe ’scalculationstoconfirmthatthesplitoftheloannoteiscorrectbetweennon-currentandcurrentliabilitiesandthattotalfinancingproceedsof$3mwerereceived.Inaddition,thedisclosuresforthisloannoteshouldbereviewedindetailtoensurecompliancewithrelevantaccountingstandards.Auditrisk&AuditAuditPeonyCoisnningtomakeapproximay60redundantaftertheyearThetimingofthisannouncementhasnotbeenconfirmed;ifitisannouncedtothestaffbeforetheyearend,thenunderIAS37Provisions,ContingentLiabilitiesandContingentAssets,aredundancyprovisionwillberequiredattheyearendasaconstructiveobligationwillhavebeencreated.FailuretoprovideortoprovideanappropriateamountresultinanunderstatementofprovisionsandDiscusswithmanagementthestatusoftheredundancyannouncement;ifbeforetheyearend,reviewsupportingationtoconfirmthetiming.Inaddition,reviewthebasisofandrecalculatetheredundancyprovision.ROMMatFSasaThereisariksthatthefinancialstatementofAcoismateriallymisstatedasawhole.ROMMatassertionThereisarisk ismateriallymisstatedattheassertion ,whichwilllead Therearisesadetectionriskthattheauditorcouldnotobtainsufficientappropriateauditevidence,Examquestion2019SEPItis1July20X5.YouareanauditsupervisorofBrooklyn&Coandare nningtheauditofHarlemCofortheyearending30September20X5.The hasbeena ofyourfirmforseveralyearsandmanufacturescartyres,sellingitsproductstowholesalersandretailers.Theauditmanagerattendeda nningmeetingwiththefinancedirectorandhasprovidedyouwiththefollowingnotesofthemeetingandfinancialstatementextracts:nningmeetingHarlemCosellsapproxima y40%ofitstyrestowholesalecustomers.Thesecustomerspurchasegoodsonasaleorreturnbasis.Underthetermsoftheagreement,wholesalecustomershave60daysduringwhichanyreturnscanbemadewithoutpenalty.Thefinancedirectorhashistoricallyassumedareturnrateof10%,however,henowfeelsthatthisisexcessiveandintendstochangethisto5%.Examquestion2019SEP purchasedapatenton30September20X4for$800,000,whichwascapitalisedintheprioryearasanintangibleasset.ThispatentgivesHarlemCotheexclusiverighttomanufacturespecialisedwetweathertyresforfouryears.Inpreparationforthemanufactureofthewetweathertyres,thisyearthe conductedareviewofits ntandmachinery.Aspartofthisreview,surplusitemsof ntandmachineryweresold,resultinginalossondisposalof$160,000.InMay20X5,thefinancialcontrollerofHarlemCowasdismissedafteritwasallegedthatshecarriedoutanumberoffraudulenttransactionsagainst .Shehasthreatenedtosueforunfairdismissalasshedisputestheallegations. hasonlyrecentlytoinvestigatetheextentofthefraudinorder fytherequiredAproblemoccurredinJune20X5,duringproductionofasignificantbatchoftyres,whichaffectedtheirquality.Theissuewasidentifiedpriortoanygoodsbeingdispatchedandmanagementisinvestigatingwhethertheissuescanberectifiedandthetyrescansubsequentlybesold.Examquestion2019SEPHarlemCo’sfinancedirectorhasinformedyouthatinMarch20X5asignificantcustomerwasgrantedapaymentbreakofsixmonths,asithasbeenexperiencingfinancialdifficulties.HarlemComaintainsanallowancefortradereceivablesanditisanticipatedthatthiswillremainatthesamelevelastheprioryear.ThereporttomanagementissuedbyBrooklyn&Cofollowinglastyear’sauditThefinancedirectorhasinformedyouthatthe intendstorestructureitsdebtfinanceaftertheyearendandwillbelookingtoconsolidateitsloanstoreducetheoverallcostofborrowing.Asaresultofthe nnedrestructuringofdebt,HarlemCohasnotpaiditsshareholdersadividendthisyear,choosinginsteadtoundertakeabonusissueofits$0.50equityshares.Examquestion2019SEPYouhavebeenaskedbytheauditmanagertocompletethe reviewandshehasprovidedyouwiththefollowingForecast20X5Actual20X4CostofGrossFinanceProfitbeforeIntangibleLongandshort-termExamquestion2019SEPTheauditassistanthasalreadycalculatedsomekeyratiosforHarlemCowhichyouhaveconfirmedasaccurate.Shehasascertainedthatthetradereceivablescollectionperiodhasincreasedfrom38to51days.Describetheauditor’sresponsibilitiesinrelationtothepreventionanddetectionoffraudand(4CalculatetheFOURratioslistedinthetablebelow,forBOTHyears,toassistyou nningtheauditHarlem(4Usingtheinformationprovidedandtheratioscalculated,describeEIGHTauditrisksand inauditor’sresponsetoeachrisk nningtheauditofHarlem (16Note:FormulasareNOTrequiredtobeGrossprofitInventoryholdingInterestAudityticalEnquiryandrecalcUlationandThreesituationsof yticalproceduresinthe yticalreview–riskassessment(requiredbyISA yticalreview(requiredbyISAFinancialProfitabilityReturnoncapital 𝑃+NetprofitAsset𝑃+GrossprofitFinancialLiquidityCurrentQuickratio(Acid 𝑏𝑜𝑏 𝑏𝑏𝑏FinancialGearing𝑃𝑖𝑏InterestAuditrisk&Grossprofit4,500/23,200=4,600/21,900=2,100/18,700*365=411,600/17,300*365=34Gearing13,000/(10,000+13,000)=11,000/(9,500+11,000)=13,000/10,000=11,000/9,500=(450+290)/290=(850+250)/250=Auditrisk&AuditAuditThefinancedirectorisnningonreducingtheestimatedreturnrateforgoodssoldonasaleorreturnbasistowholesalecustomersfrom10%to5%.IFRS®15RevenuefromContractswithCustomersprovidesthatrevenueandcostofsalesshouldonlybeaccountedfortotheextentthattheforeseesthatthegoodswillnotbereturned.Forthegoodswhichmaybereturned,theshouldrecognisearefundliability.If,after60days,thegoodsarenotreturned,thenthisliabilityisreversedandrevenueisrecognised.Byreducingthereturnrate,thereisariskthatrevenuecostofsalesmaybeoverstatedandliabilitiesDiscussthebasisoftherevisedassumptionofa5%returnratewiththefinancedirector.Reviewaperiodof60daystofythelevelsofreturninthespecifiedperiodandcomparethistotheassumedrateof5%.DiscussanysignificantvariationswiththefinancedirectorAuditrisk&AuditAuditThepurchasedapatnt tendoftheprioryearwhichhasausefullifeoffourThecarryingamountintheforecastfinancialstatements$800,000whichisthesameasthepriorInaccordancewithIAS®38IntangibleAssets,thisintangibleassetshouldbeamortisedoveritsfour-yearlife.Itdoesnotappearthatmanagementhascorrectlyaccountedfortheamortisationandasaresult,intangibleassetsandprofitsareoverstated.Agreeteuseful ftepatntfouryearstoation.Theamortisationchargeshouldbecalculatedandtheappropriatejournaladjustmentdiscussedwithmanagement,inordertoensuretheaccuracyofthechargeandthattheintangibleiscorrectlyvaluedattheyearend.Auditrisk&AuditAuditSurplusntandmachinerywassoldduringtheyear,resultinginalossondisposalof$160,000.Significantprofitsorlossesondisposalareanindicationthatthedepreciationofntandmachinerymaynotbeappropriate.ThereforedepreciationmaybeunderstatedandprofitandassetsRecalculatethelossondisposalcalculationsagreeallitemsto Discussthedepreciation forntandmachinerywiththefinancedirectortoassessitsReviewforothersignificantgainsorlossesondisposalofproperty,ntandequipmenttoassessthereasonablenessofthe’sdepreciationpolicies.Auditrisk&AuditAuditHarlemCo’sfinancialcontrollerhasallegedlycarriedoutanumberoffraudulenttransactionsatthe.Theinvestigationintotheextentofthefraudhasonlyrecentlycommenced.Thereisariskthatshemayhaveundertakenasignificantleveloffraudulenttransactionsleadingtoanincreasedcontrolriskwhichhasnotyetbeenidentified.Thesewouldneedtobewrittenofftothestatementofprofitorloss.Ifthesehavenotbeenuncoveredbytheyearend,thefinancialstatementscouldincludeerrorsresultinginthemisstatementofDiscusswiththefinancedirectorthedetailsofthefraudperpetratedbythefinancialcontrollerandwhatprocedureshavebeenadoptedtodatetoidentifyanyadjustmentswhichareneededinthefinancialstatements.Additionalsubstantivetestingshouldbeconductedovertheaffectedareasoftheaccountingrecords.Inaddition,theteamshouldmaintaintheirprofessionalscepticismandbealerttotheriskoffurtherfraudanderrors.Auditrisk&AuditAuditInMay20X5,thefinancialcontrollerwasdismissedandthreateningtosuetheforunfairIfitisprobablethatHarlemCowillmakepaymenttothefinancialcontroller,aprovisionforunfairdismissalisrequiredtocomplywithIAS37Provisions,ContingentLiabilitiesandContingentAssets.Ifthepaymentispossibleratherthanprobable,acontingentliabilitydisclosurewouldbenecessary.IfHarlemCohasnotdonethis,thereisariskoverthecompletenessofanyprovisionsorcontingentliabilitiesdisclosures.Theauditteamshoulddiscusswithmanagementandrequestconfirmationfromthe’slawyersoftheexistenceandlikelihoodofsuccessofanyclaimfromtheformerfinancialAuditrisk&AuditAuditHarlemCohashadproductionproblemswhichhaveaffectedthequalityofasignificantbatchoftyres.Inaddition,theinventoryholdingperiodhasincreasedfrom34to41days.Inventorymaybeovervaluedasitsnetrealisablevalue(NRV)maybebelowitscost.Ifthetyrescanberectified,therectificationcostsmaymeanthatcostexceedsnetrealisablevalue.Ifthetyrescannotberectified,theinventorymayneedtobewrittenoffDiscusswiththefinancedirectorwhetheranywritedownswillbemadetotheaffectedtyres,andwhat,ifany,modificationsmayberequiredwithregardstothequality.TestingshouldbeundertakentoconfirmcostandNRVoftheaffectedproductsininventoryandthatallinventoryonaline-by-linebasisisvaluedAuditrisk&AuditAuditAsignificantcustomerhasbeengrantedasix-monthpaymentbreakandthereceivablescollectionperiodhasincreasedfrom38to51days.Anallowanceforreceivableshashistoricallybeenmaintained,anditisanticipatedthatitwillremainattheprioryearlevel.Thereisariskthatreceivableswillbeovervalued;somebalancesmaynotberecoverableandsowillbeoverstatedifnotadequaprovidedfor.ReviewandtestthecontrolssurroundinghowthefinancedirectoridentifiesoldorpotentiallyirrecoverablereceivablesbalancesandcreditcontroltoensurethattheyareoperatingDiscusswiththedirectortherationaleformaintainingtheallowanceforreceivablesatthesamelevelastheprioryear,despitetheincreaseinreceivablescollectionperiodandthepaymentbreakgrantedtoalargecustomer.Extendedpostyear-endcashreceiptstestingandaoftheagedreceivablesledgertobeperformedtoassessvaluationandtheneedforanincreasedlevelofallowanceforreceivables.Auditrisk&AuditAuditThereporttomanagementissuedaftertheprioryearaudithighlightedsignificantdeficienciesrelatingtothepurchasescycle.Ifthesedeficiencieshavenotbeenrectified,thecontrolsoverpurchasesandpayablesmaycontinuetobeweakleadingtoincreasedcontrolriskandriskofmisstatementsarising.Costofsales,expensesandtradepayablesmaynotbecompleteoraccurate.DiscusswithmanagementwhetherthepurchasescyclemendationssuggestedbyBrooklyn&Cowereimplementedsuccessfullythisyear.Ifso,undertaketestsofthesecontrolstoassessiftheyareoperatingefficiently.Ifthecontrolsarenotinceoroperatingefficiently,adoptafullysubstantiveapproachforconfirmingthecompletenessandaccuracyofcostofsalesandotherexpensesandtradepayables.Auditrisk&AuditAuditHarlemCointendstorestructureitsdebtfinanceaftertheyearend.However,theinterestcoverhasdeclinedfrom4·4to2·6andthelevelofgearinghasincreasedfrom53·7%to56·5%.Inordertoisethechancesofsecuringthedebtfinancerestructure,HarlemCowillneedtopresentfinancialstatementswhichshowthebestpossiblepositionandperformance.Theworseninginterestcoverandgearingratioincreasestheriskthatthedirectorsmaymanipul