Question SEP-DEC 2019 Haris hanif
Audit risk
The company make sale on return basis.
It should be initial recorded as deferred income (liability)
Finance director had reduced Assumption of sale return from 10%-5%
there is risk his Assumption can be wrong as liability can be understated
Company had purchase patent for four year amounted 800000 and should
be amortized over 4 year since from financial figure, the reported
intangible asset is at same $800000 means not amortized as results
expense understated and profit and asset are overstated
The company sold surplus plant and machinery
It should remove from NCA register
There is risk that after disposing it off, it is still in NCA register as result NCA
can be overstated
Its was alleged that finance controller had carried out fraudulent
transaction.
If the was fraud then it should written off to profit /loss , there is risk of
omitting fraud from Fstmt and that profit can be overstated and
undertested expense
The finance controller threatened to sue the company against unfair
dismissal
I she will file the case and if chance are possible the contingent liability
should be made , if probable then provision is required IAS37 ,
There is risk that neither disclosure nor provision made , resulting in lack of
disclosure and understand provision
The was quality issue with batch tyres and inventory holding period was
also increased from 34day to 41 days showing slowing trading IAS 2 say
that inventory should be value at lower cost or NRV , there is risk of high
valuation and results inventory and profit can be overstated
Audit response
The audit team should discission with finance director asking the reason of
lowering the sale return estimate to ensure the Assumption are reasonable
and reliable
The audit team ask management why they had not amortised and through
legal purchase document to verify useful life of 4 year should ask
management to book amortization to ensure correct value intangible asset
at year end
NCA register should be inspected to ensure that disposed surplus plant and
machinery is removed to ensure completeness record of NCA as per the
existence.
Discussion should be held with management that how they had
responded toward the control improvement and audit team should be
scepticism all the time to find possible of other kind of fraud , in addition
review the profit or los to ensure that fraud if any had been written off as
expense
Discussion should be held with management regading their response
related to legal case if filed also discussion with lawyer of the company
about chance OF LOSING THE CASE AND SEE THE TREAMTMENT according
under IAs 37 , that is making sure disclosure if possible or agreeing the
provision ( if probable to lose )
The audit team should inspect cost schedule to verify cost and confirm the
NRV from the market, then inspect inventory valuation sheet to make sure
that inventory is valued at lower cost or NRV as per IAs 2
Extended time period was granted to customer and this increase risk of
bad debt , the doubtful debt provision should be increase Accordingly ,
since they had not increased , as results receivable are overstated and
understated provision
There was deficiency highlighted in the last year audit related to purchase
cycle , it should have been improved if the deficiency was not improved
then purchase figure can be over or understated due to system not
improved
The company is intending to restructure its debt finance after the year end
and their gearing ratio is increased and interest cover ratio decreased ,
there is pressure in the management to present healthy results to
maintain the chance to secure debt finance and FS can be overstated
Discussion should be held with management why they had not increased
the doubtful provision, in addition, post year end cash receipt should be
inspected to know if any payment is received and ensuring that value of
receivable is reasonable
Discussion should be held with management whether the suggested
control was applied and improved the system purchase cycle and using
CAATs, undertaken system testing over the purchase cycle to ascertain that
system is operating effectively and purchase figure can be relied upon
The audit team should spend more time on the audit and using sceptical
Attitude should inspect the financial statement in detailed manner and
should specially focus on the risk area where there are high chance of
misstatement and ensure that Fs are in accordance with Applicable
Accounting standard