Audit Risk

This is the first time Wimble & Co being the auditor of Murray Co. As
the first time audit, may have lack of audit experience and
1 knowledge regarding audit of Murray. Since this is the first time,
detection risk also increased. There is a risk of the opening balance
being misstated since Wimble did not conduct the audit last year.

Murray uses 3rd party warehouse. Due to this may be difficult to

collect sufficient audit evidence, quantity and condition of the
2 inventory being stored. Hence there will be an increase in the
detection risk as auditor may not be able to ascertain the
completeness, existence and valuation of inventory.

Ergometers (Rowing Machine) took 1 week to complete where as

other equipements take less than 1 day. There is a possibility of
3 work-in-progress (WIP) balances at year end. It is very difficult to
ascertain the value of WIP which may cause material misstatement
to occur.

Some of Murray's customer are struggling to pay outstanding

4 balances. This may result bad debts but also can distrupt the cash
flow.
 The website is a new website that directly links to the finance
system and sales system. This may be a risk since it is a new system,
possible misstatement may occur in the software. Transactions may
5 go undetected. The website has been capitalised. However it is not
certain that the development cost has fulfilled the criteria under
IAS38. And of it metts the criteria, has the development cost been
capitalised. There is a risk of overstatement of profit.

6 Several of the sales team were made redundant last month as a

result of falling retailer sales.
Auditor's Response

Auditor may need more time and resources to understand the new
client business operation and operating procedures. More audit
testing and sample needed as evidence. Auditor need to agree the
opening balances to the last year financial statements. To obtained
the last year financial statements to ascertain the opening balance.

Auditor enquire client where are the warehouse located and

procedure to store the inventory. Get a list of inventory that are
stored in each warehouse. Attend inventory stock count and obtain
the inventory count report to verify the count. Visit the warehouse
to ascertain the existence and the condition of the warehouse.

Calculation of WIP should be based on the % of completion which is

determined by the client based on resonableness and agree to
supporting document such as purchase invoice or supplier invoice as
well as labour records. Overhead calculation should be calculated to
ensure that there is no overstatement of overhead.

Review the client collection procedures. Inquire the client on the

provision for bad debts.
To review SOP on the new website and check the audit trail of
transaction to ensure the completeness of the records. There is a
risk that the development cost has not fulfilled all the criteria. To
check whether the client has armotise the development cost or not
according to the standard.

To check with the management on the procedures of redundant

sales. To recalculate the redundant amount and make necessary
adjustments.