Audit risk
1. Scarlet co, is the new audit client for The orange co should assign more sutaibly
orange & co.
The audit team may not be familiar with
the scarlet co accounting policies,
transaction and balances which increases
the detection risk
The audit team are not assure in the
opening balances of scarlet co as last
year audit was not performed by them.
2. The yearend financial statement need to
be finalized quickly as the company is
looking finance through a bank.
Some accounting adjustment may be
missed or overlooked in rush of
preparing financial statement as quick as
possible
Here, the risk of being some item of
financial statement being misstated
increases.
3. The training cost have been capitalized as
part of the cost of the asset.
Training cost does not meet the basis of being
capitalize as noncurrent asset and is not
permitted by conceptual framework instead it
should be classify as administrated expenses
The risk of noncurrent asset being overstated and
administrative cost being understated increases.
4. The receivable collection period has
increased from 38 to 52 days. Some
customer are currently taking longer
period to pay.
Irrecoverable debt should debited to increase the
receivable allowance for the year if not than risk
of being receivables overstated and irrecoverable
debt expenses being understated increases
5. Termination cost associated with
redundancy of four staff has been
calculated and will be paid in post year
end.
As per IAS 37 provision , congitent asset and
libility there should be an present obligation in
order to recognized provision in financial
statement
Audit response
experience people in the audit team in order to
understand the business nature of new client to
determine the risk associated with it.
more time should be assign to team member to
be assure in scarlet co accounting policies,
transaction and balances.
Copy of last year audit report should be obtained
to review the accuracy of opening balance of
scarlet co.
The audit team should obtain an book of account
to access the journal entries and should
determine whether any abjustment is missed to
adjust in financial statement.
Review of all journal entries are not possible so
sample method should be used in such a way
that represent all the journal entries.
The auditor should discuss with the management
the correct accounting treatment of training cost
and should ask management to reclassify the
treatment of training cost in administrative
expenses and remove the training cost from
noncurrent asset.
The auditor should obtain a list of credit
customer form finance department and conform
the receivable amount by contracting with
individual credit customer and should ask the
management to extend the receivable allowance
if needed.
The audit team should perform more analytical
procedures of ratio of payable days and inventory
holding days to review the credit cycle of the
entity.
The auditor should obtain an break down of
provision recognized in financial statement and
review whether provision related to redundancy
cost has been recognized or not and should ask
management to remove the redundancy
provision if have been recognized
Also an accuracy of redundancy cost should be
assure by reviewing supporting documentation or
As the paying obligation is in post year the
provision related to redundancy cost should not
be recognized in yearend 31may x5 otherwise the
risk of being provision and expenses in profit and
loss overstated increases
6. Local legislation required separate
disclosure of director’s bonuses in the
financial statement.
The local legislation is more comprehensive than
any other standard and it is likely that
requirement of local legislation should be
fulfilled.
there is an risk of disclosure being incomplete in
accordance with local legislation.
7. A credit note is yet to be issued to the
customer and chemical have been
written down to their scrap value within
inventory.
The credit customer should be removed from the
list of receivables as credit not is issued and
according to IAS 2 inventory should be valued at
lower of cost or NRV.
As credit note has not been issued yet the risk of
being receivables overstated increases
And also the risk of being inventory misstated
increases as it is written down to scrap value
which is not permitted by IAS 2
8. The payment run is shown as an
unpresented item on the year end bank
reconciliation in order to show consistent
result with the prior year.
This is possible evidence of window dressing
which result in understated payables and bank
balances.
by comparing with past redundancy cost of same
nature if any have made.
The auditor should discuss with the management
the local legislation requirement related to
disclosure of director bonuses and should review
to determine whether the disclosure made is
complete and satisfy the requirement of local
legislation
And should ask to management to disclose
further information related to director bonuses
consistent with local legislation if required.
The auditor discuss with the management the
reason of not issuing the credit note and should
ask the management to issue it as soon as
practicable and should also remove the credit
customer from list of receivables if not have
removed.
the auditor should ask the management to
calculate the NRV of the chemical and compare
with cost as to whichever is lower that amount to
value as closing inventory.