GOOD LUCK

SUBSTANTIVE PROCEDURE INTERNAL CONTROL AUDIT RISK

1 Sub sales, AR 1 Control deficiency 1 Audit risk 2 1
2 Sub Payroll 2 Test of contrl 2 Audit risk 1 2
3 Sub inventory 3 IC 1 3
4 Sub R&D exp 4 IC 3 (Narrative note) 4
5 Sub provision 5
6 Sub PPE x Full control deficiency 6
7 Sub AP 7
8 Sub Tax
9 Sub Loan, Claim
10 Sub bank
OTHERS
Audit report
Audit planning
Subsequent event, Safeguard
Safeguard
Going concern
Coperate governance
Others
2020 - Dec, Sep
(c) Substantive procedures for directors’ bonuses
• Obtain a schedule of the directors’ bonus and cast the schedule to ensure its accuracy. Agree the
amount to that disclosed in the financial statements.
• Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end
liability.
• Agree the individual bonus payments to the post year-end payroll records.
• Recalculate the bonus payments and agree the criteria to supporting documentation and the
percentage rates to be paid to the directors’ service contracts.
• Confirm the amount of each bonus paid by agreeing to the post year-end cash book and bank
statements.
• Compare the profit before tax used in the bonus calculation to the final profit before tax figure to
confirm whether any adjustment is required to the bonus paid and discuss any differences with
management.
• Agree the amounts paid to each director to board minutes and contracts to ensure the amounts
included in the current year financial statements are fully accrued and disclosed.
• Review the board minutes to identify whether any additional payments relating to this year have
been agreed for any directors.
• Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
• Review the disclosures made regarding the bonus paid to directors and assess whether these are in
compliance with local legislation

(a) Substantive procedures for Vega Vista Co’s income

– Obtain a schedule of all Vega Vista Co’s income and cast to confirm completeness and accuracy of
the balance and agree to the trial balance.
– Compare the individual categories of income of festival ticket sales, sundry sales and donations
against prior years and investigate any significant differences.
– For the annual festival, construct a proof-in-total calculation of the number of tickets sold,
approximately 15,000, multiplied by the ticket price of $35. Compare this to the income recorded
and discuss any significant differences with management.
– For tickets sold on the day of the festival reconcile from ticket stubs the number of tickets sold
multiplied by $35 and agree these sales to cash banked in the bank statement.
– Discuss with management their procedures for ensuring advance ticket sales for the September
20X5 festival are excluded from income and instead recognised as deferred income in the statement
of financial position.
– Select a sample of advance ticket sales made online, agree that the transaction has been excluded
from current year income and follow through to inclusion in deferred income.
– Agree journal entry to transfer prior year deferred income relating to the 20X4 festival to current
year income to the ledger and agree figures to prior year financial statements.
– For sundry sales, obtain a breakdown of the income received per stall and agree to supporting
documentation provided by each stall holder. Recalculate the fixed percentage received is as per the
agreement/contract made with Vega Vista Co.
– Compare sundry sales per stall holder to prior year sales data and investigate any significant
differences.

– For monthly donations, trace a sample of donations from sign up documentation to the bank
statements, cash book and income listing to ensure that they are recorded completely and accurately.
– For a sample of new donors in the year, agree the monthly sum and start date from their completed
forms and trace to the monthly donations received account and agree to the cash book and bank
statements.
(b) Substantive procedures for Canopus Co’s restructuring provision
– Cast the breakdown of the restructuring provision to ensure it is correctly calculated and agree the
total to the trial balance.
– Review the board minutes where the decision to restructure the production process was taken and
confirm the decision was made in March 20X5.
– Review the announcement to shareholders and employees in late March, to confirm
that this was announced before the year end.
– Obtain a breakdown of the restructuring provision and confirm that only direct expenditure relating
to the restructuring is included

– Review the expenditure to confirm that there are no retraining costs of existing staff included.
– For the costs included within the provision, including acquisitions of plant and machinery, agree to
supporting documentation, such as purchase invoices, to confirm validity and value of items
included.

– Review post year end payments/invoices relating to the expenditure and compare the actual costs
incurred to the amounts provided to assess whether the amount of the provision is reasonable.
– Obtain a written representation confirming management discussions in relation to the
announcement of the restructuring and to confirm the completeness of the provision.
– Review the adequacy of the disclosures of the restructuring provision in the financial statements
and assess whether these are in accordance with IAS® 37 Provisions, Contingent Liabilities and
Contingent Assets

(c) Substantive procedures for Canopus Co’s bank loans

- Obtain a schedule of opening and closing loans detailing any changes during the year. Cast the
schedule to confirm its accuracy and agree the closing balances to the trial balance and draft
financial statements.
- For the new loan taken out in the year, review the loan agreement to confirm the amount borrowed,
the repayment terms and the interest rate applicable.
- For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan
agreement to the cash book and bank statements.
- For loans repaid, agree the final settlement amount per bank correspondence to payments out
during the year in the cash book and bank statements.
- Agree the quarterly repayment of the new loan of $150,000 paid on 31 March 20X5 to the cash
book and bank statement.
- Recalculate the split of the loan repayment made on 31 March 20X5 between interest and principal,
recalculate interest and agree to inclusion in statement of profit or loss, and outstanding loan balance
reduced by principal amount repaid.
- Review the bank correspondence and loan agreements for confirmation of any early settlement
charges incurred on the loans repaid. Agree that these were charged to the statement of profit or loss
as a finance charge.
- Obtain direct confirmation at the year-end from the loan provider of the outstanding balances and
any security provided. Agree confirmed amounts to the loans schedule.
- review all loan agreements For details of covenants and Recalculate all covenants to identify any
potential or actual breaches.

- review the disclosure of non-current liabilities in the draft financial statements, including any
security provided and assess whether these are in accordance with accounting standards and local
legislation. Additionally, confirm that the split of current and non-current loans in the financial
statements is correct
2021 - Mar, Jun
(d) Substantive procedures on payroll expense
– Cast a sample of payroll records to confirm completeness and accuracy and agree the total wages
and salaries expense per the payroll system to the trial balance.
– Recalculate the gross and net pay figures for a sample of employees and agree to the payroll
records.
– For a sample of wage payments, agree the total net pay per the payroll records to the bank transfer
listing and to the cash book.
– Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay
increase/bonuses. Compare this to the actual wages and salaries expense in the financial statements
and investigate any significant differences.
– Compare the total payroll figure this year to the prior year, identify any significant differences and
discuss with management.
– Review monthly payroll charges, compare this to the prior year and budgets and discuss any
significant differences with management.
– Calculate overtime costs as a percentage of total wages. Compare this to the prior year and discuss
any significant differences with management.
– Agree a sample of individual wages and salaries per the payroll to personnel records and records of
hours worked per the clocking-in system.

– Reperform the calculation of statutory deductions and agree to supporting documentation to

confirm whether correct deductions for this year have been made in the payroll.
– Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation,
recalculate their first/last salary to ensure it is accurate.
– Recalculate holiday pay for a sample of employees and agree to holiday records and daily rate
applied.
– Select a sample of employees from HR records and agree salaries per HR records to the payroll
records to confirm the accuracy of the payroll expense.
– Agree the payroll control account reconciliation to accounting records and investigate any
differences.

2021 - Mar, Jun

a) Substantive procedure for Inventory - (a) Inventory of Vego Dog
1 – Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2·4m to
inventory records.
2 – Agree the quantity of Vego Dog products shown as held at the year end to the year-end inventory
count records.
3 – Request a breakdown of the cost calculation of each unit of this product and discuss with
management how the standard cost was derived.
4 – Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost is
$2·4m.
5
– For a sample of finished goods items, obtain standard cost cards and agree:
raw material costs to recent purchase invoices;
labour costs to time sheets or wage records;
overheads allocated to invoices and that they are of a production nature.
6 - Compare sales prices over time to establish if the price has been reduced because of falling demand
to determine whether an allowance is required.
7
– Compare actual sales units per month to budgeted sales per month from before and after the year
end to establish how much lower actual sales are than expected and discuss with management.
 8
– Select a sample of items included in inventory of Vego Dog and review post year-end sales
invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

b) Substantive procedure for Receivable - Receivable due from Ellah Co

– Review correspondence with Ellah Co to establish if there was a discussion about payment
difficulties and whether Ellah Co intends to fully settle the outstanding amount.
– Review the age of the outstanding debt with Ellah Co and discuss the circumstances with the credit
controller to establish if it has exceeded the agreed credit terms and consider if an allowance is
required.

– Review post year-end receipts from Ellah Co to establish how much of the debt was recovered by
the audit completion date and to assess how much of the year-end balance remains outstanding.
– Inspect board minutes to identify whether there are any significant concerns in relation to
payments by Ellah Co.
– Discuss with management of Purrfect Co why no allowance has been made in respect of this debt
and assess the justification.

C) Substantive procedure - Contamination – legal claims

– Review customer correspondence to establish the details of the claims and the amounts being
claimed.
– Review correspondence with Purrfect Co’s lawyers or, with the client’s permission, contact the
lawyers to establish the likely outcome of the customer claims made to date.
– Discuss with the lawyers the likelihood and amount of potential future claims.
– Inspect board minutes to establish details of the circumstances of the contamination and to
ascertain management’s view as to the likelihood that the existing claims will be successful and the
extent of possible future claims.
– Compare levels of returns and claims to date against sales volumes of the product to assess the
potential level of future claims.
– Review post-year end payments for damage settlements and compare with any amounts provided
at the year end to assess the reasonableness of the provision.
– Obtain written representations from management that there have been no other contamination
incidents and no other product liability claims of which management are aware and for which
provision may be required.
– Review the draft financial statements to establish that the legal claims have been appropriately
provided for or disclosed in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.

2020 - Mar, Jun

(d) Substantive procedures for the redundancy costs
 Review the board minutes for evidence of the decision to discontinue the brand of chemicals prior
to the year-end.
 Review supporting documentation to confirm that the decision to discontinue the brand was
notified to the four members of staff prior to the year end.
 Obtain details of the redundancy calculated by employee, cast the schedule and agree to the trial
balance/financial statements.
 Recalculate the redundancy provision to confirm completeness and agree components of the cost
to supporting documentation such as employee contracts.
 Agree the redundancy payments made in July 20X5 to the cash book/payroll records and compare
these to the provision in the financial statements.
  Obtain a written representation from management confirming the completeness of the costs.

 Review the disclosures included in the financial statements to verify they are in compliance with
requirements of IAS 37 Provisions, Contingent Assets and Contingent Liabilities.

2020 - Mar, Jun

(a) Substantive procedure for Vehicles additions and disposals

 Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note for
property, plant and equipment. Agree the cost of the vehicles given in part-exchange to the
disclosure note to confirm that they have been removed from cost carried forward.
 For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice,
ensuring that the recorded cost includes the cash amount paid plus the trade-in allowance for the old
vehicle. Confirm that the invoice is made out to Encore Co.
 Physically inspect a sample of additions, confirming that the registration number of the vehicle
agrees to that on the non-current assets register.
 Review the non-current assets register to confirm that the 20 old vehicles were removed and that
the 20 new vehicles were included.
 Recalculate the loss on disposal of $1.1m ($1.8 - ($4.6m - $3.9m) and agree to the trial balance
and statement of profit or loss.
 Agree the cash payment of $3.9m to the cash book and bank statement.

 Recalculate the depreciation expense, confirming that the depreciation expense was based on the
old vehicles until 1 February and on the cost of the new vehicles after that date.
 Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been
removed from accumulated depreciation carried forward.
 In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the
carrying amount of other vehicles may be overstated.
 Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles are
being used for the entire period of their estimated useful life.

 Discuss with management why trade-in allowances were so much lower than the carrying amounts
of the vehicles to provide further evidence as to whether depreciation policies are reasonable.
 Review the notes to the financial statements to ensure that disclosure of the additions and
disposals is in accordance with IAS 16 Property, Plant and Equipment.

(b) Substantive procefure for Valuation of trade receivables

 Review the aged receivables listing to identify slow moving or old balances. Discuss the status of
these balances with the credit controller to assess whether the customers are likely to pay or if an
allowance for receivables is required.

 Review whether there are any after-date cash receipts for slow moving/old receivable balances.

 Review correspondence with customers in order to identify any balances which are in dispute or
unlikely to be paid and discuss with management whether any allowance is required.
 Review board minutes to identify whether there are any significant concerns in relation to
outstanding receivables balances and assess whether the allowance is reasonable.
 Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any
potentially irrecoverable balances to assess if the allowance is adequate.
  Review the payment history for evidence of slow paying by any customers who were granted
credit in the period when there was no credit controller and who may not, therefore, have been
properly scrutinised.

 Discuss with the finance director the rationale for maintaining the allowance at the same level in
light of the increase in the receivables collection period and the absence of a credit controller.
 Inspect post year-end sales returns/credit notes and consider whether an additional allowance
against receivables is required.

(c) Substantive procedure for Potential breach of transport regulations

 Review correspondence with the transport authority to establish details of the complaint and the
number of times the breach has allegedly occurred.
 Enquire of the directors why they are unwilling to provide or make disclosure, whether they
accept that any breaches took place but believe that the effect is immaterial or whether they dispute
their occurrence.

 Review Encore Co’s policies and procedures to record driving hours and rest periods and compare
to the regulations to determine the likelihood that breaches have occurred and how frequently.
 Review correspondence with the transport authority to establish if there have been discussions
about other instances of potential non-compliance.
 Review correspondence with Encore Co’s legal advisers or, with the client’s permission, contact
the lawyers to establish their assessment of the likelihood of the breach being proven and any fines
that would be payable.
 Review the board minutes to ascertain management’s view as to the likelihood of payment to the
transport authority.

 Obtain a written representation to the effect that the directors are not aware of any other breaches
of laws or regulations that would require a provision or disclosure in the financial statements.
 Inspect the post year-end cash book and bank statements to identify whether any fines have been
paid.

2019 - Sep, Dec

(d) Substantive procedures for valuation of trade receivables
– Discuss with the finance director the rationale for not increasing the allowance for trade
receivables and review its overall adequacy.

– Obtain a breakdown of the opening allowance and consider if the receivables provided for in the
prior year have been recovered to assess the reasonableness of the prior levels of allowances.
– Review the aged trade receivables ledger to identify any slow moving or old receivable balances
and discuss the status of these balances with the credit controllers to assess whether they are likely to
be received.

– Review whether there are any after-date cash receipts for slow moving/old receivable balances.
– Review customer correspondence with the significant customer and others to identify any balances
which are in dispute or are unlikely to be paid.
– Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.
– Calculate the potential level of trade receivables which are not recoverable and assess whether this
is material or not and discuss with management.

2019 - Sep, Dec

 (e) Substantive procedures for disposals of plant and machinery
– Obtain a breakdown of disposals, cast the list and review the non-current assets register to confirm
that all assets have been removed.
– Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry
sales invoices.

– Recalculate the profit/loss on disposal and agree to the trial balance and statement of profit or loss.
– Recalculate the depreciation charge for a sample of disposals to confirm the calculations are
correctly applied as per the company policy of a pro rata basis or a full year in the year of acquisition
and none in the year of disposal.
– Review the disclosure of the disposals in the draft financial statements and ensure it is in line with
IAS 16 Property, Plant and Equipment.

2019Procedures
- Sep, Dec the auditor should perrform to resolve the exxceptions noted for each customer during
the positive receivable circularisation

Albacore Co
– For the non-response from Albacore Co, with the client’s permission, the team should arrange to
send a follow-up circularisation.
– If Albacore Co does not respond to the follow up, then with the client’s permission, the auditor
should telephone the customer and ask whether they are able to respond in writing to the
circularisation request.
– If there is still no response, then the auditor should undertake alternative procedures to confirm the
balance owing from Albacore Co. Such as detailed testing of the balance by agreeing to sales
invoices and goods dispatched notes (GDN).

Flounder Co
– For the response from Flounder Co, with a difference of $5,850 the auditor should identify any
disputed amounts, and identify whether these relate to timing differences or whether there are
possible errors in the records of Triggerfish.
– If the difference is due to timing, such as cash in transit, this should be agreed to post year-end
cash receipts in the cash book.

– If the difference relates to goods in transit, then this should be agreed to a pre year-end GDN.

Menhaden Co
– The reason for the credit balance with Menhaden should be discussed with the credit controller or
finance department to understand how a credit balance has arisen.

– Review the payables ledger to identify if Menhaden is a supplier as well as a customer; if so, a
purchase invoice may have been posted in error to the receivables rather than payables ledger.
– If the difference is due to credit notes, this should be agreed to pre year-end credit notes dispatched
around the year-end date.
– The receivables ledger should be reviewed to identify any possible mis-postings as this could be a
reason for the difference with Menhaden Co.

2019 - Sep, Dec

(b) Substantive procedures for allowance for trade receivables
– Discuss with the finance director the rationale for not providing against any receivables and
consider the reasonableness of the allowance.
 – Obtain a breakdown of the opening allowance of $125,000 and consider if the receivables provided
for in the prior year have been fully recovered as a result of the additional credit control procedures
or if they have now been fully written off.
– Inspect the aged trade receivables ledger to identify any slow moving or old receivable balances
and discuss the status of these balances with the credit controllers to assess whether they are likely to
be received.
– Review whether there are any after-date cash receipts for identified slow moving/old receivable
balances.

– Review customer correspondence to identify any balances which are in dispute or are unlikely to
be paid and confirm if these have been considered when determining the allowance.

– Inspect board minutes to identify whether there are any significant concerns in relation to
payments by customers and assess if these have been considered when determining the allowance.
– Recalculate the potential level of trade receivables which are not recoverable and compare to
allowance and discuss differences with management.

2019 - Mar, Jun

(c) Substantive for Accrual for employment tax payable
Substantive procedures the auditor should adopt in respect of auditing this accrual include:
– Compare the accrual for employment tax payable to the prior year, investigate any significant
differences.

– Agree the year-end employment tax payable accrual to the payroll records to confirm accuracy.

– Re-perform the calculation of the accrual for a sample of employees to confirm the accuracy.
– Undertake a proof in total test for the employment tax accrual by multiplying the payroll cost for
June 20X9 with the appropriate tax rate. Compare this expectation to the actual accrual and
investigate any significant differences.
– Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.

– Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due. If so, confirm they are included in the year-end accrual.
– Review any disclosures made of the employment tax accrual and assess whether these are in
compliance with accounting standards and legislation.

2019 - Mar, Jun

(a) Substantive procedure for Inventory valuation

– Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to
the WIP schedule, agreeing the percentage completion to that recorded at the inventory count.
– For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and
agree raw material costs to recent purchase invoices, labour costs to time sheets or payroll records
and confirm overheads allocated are of a production related nature.
– Examine post year-end credit notes to determine whether there have been returns which could
signify that a write down is required.

– Select a sample of year-end finished goods and compare cost with post year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
– Discuss the basis of WIP valuation with management and assess its reasonableness.
 – Select a sample of items included in WIP at the year end and ascertain the final unit cost price by
verifying costs to be incurred to completion to relevant supporting documentation. Compare to the
unit sales price included in sales invoices post year-end to assess NRV.
– Review aged inventory reports and identify any slow moving goods, discuss with management
why these items have not been written down or if an allowance is required.

– For the defective batch of product Crocus, review board minutes and discuss with management
their plans for selling these goods, and why they believe these goods have a NRV of $90,000.

– If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
– Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw
material cost, labour cost and any overheads attributed to the cost.
– Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and
discuss with management if this adjustment has been made. If so, follow through the write down to
confirm

2019(a)
- Mar, Jun substantive procedures the auditor should perform to obtain sufficient and
Describe
appropriate audit evidence in relation to the VALUATION of Hyacinth Co’s inventory.

– Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to
the WIP schedule, agreeing the percentage completion to that recorded at the inventory count.
– For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and
agree raw material costs to recent purchase invoices, labour costs to time sheets or payroll records
and confirm overheads allocated are of a production related nature.
– Examine post year-end credit notes to determine whether there have been returns which could
signify that a write down is required.

– Select a sample of year-end finished goods and compare cost with post year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
– Discuss the basis of WIP valuation with management and assess its reasonableness.

– Select a sample of items included in WIP at the year end and ascertain the final unit cost price by
verifying costs to be incurred to completion to relevant supporting documentation. Compare to the
unit sales price included in sales invoices post year-end to assess NRV.
– Review aged inventory reports and identify any slow moving goods, discuss with management
why these items have not been written down or if an allowance is required.

– For the defective batch of product Crocus, review board minutes and discuss with management
their plans for selling these goods, and why they believe these goods have a NRV of $90,000.

– If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
– Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw
material cost, labour cost and any overheads attributed to the cost.
– Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and
discuss with management if this adjustment has been made. If so, follow through the write down to
confirm.
(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Hyacinth Co’s research and development expenditure.
– Obtain and cast a schedule of intangible assets, agree the closing balances to the general ledger,
trial balance and draft financial statements.
 – Discuss with the finance director the rationale for the four-year useful life and consider its
reasonableness.
– Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm that it is in line with the amortisation policy of straight line over four years
and that amortisation only commenced from the point of production.

– For the three new computing software projects, discuss with management the details of each
project along with the stage of development and whether it has been capitalised or expensed.
– For those expensed as research, agree the costs incurred to invoices and supporting documentation
and to inclusion in profit or loss.
– For those capitalised as development, agree costs incurred to invoices.
– Confirm technically feasible and intention to complete the project by discussion with development
managers or review of feasibility reports.
– Review market research reports to confirm Hyacinth Co has the ability to sell the product once
complete and probable future economic benefits will arise.

– Review the costs, projected revenue and cash flow budgets for the each of the three projects to
confirm Hyacinth Co has adequate resources to complete the development stage and that probable
future economic benefits exist. Agree the budgets to supporting documentation.
– Review the disclosures for intangible assets in the draft financial statements to verify that they are
in accordance with IAS 38 Intangible Assets.
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Hyacinth Co’s year-end sales tax liability.
– Agree the year-end sales tax liability in the trial balance to the tax return/reconciliation submitted
to the tax authority and cast the return/reconciliation.
– Agree the quarterly sales tax charged equates to 15% of the last quarter’s sales as per the sales day
book.
– Recalculate the sales tax incurred as per the reconciliation is equal to 15% of the final quarter’s
purchases and expenses as per the purchase day book.
– Recalculate the amount payable to the tax authority as being sales tax charged less sales tax
incurred.
– Compare the year-end sales tax liability to the prior year balance or budget and investigate any
significant differences.
– Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness and that it has been paid in line with the terms of the tax authority.
– Review any current and post year-end correspondence with the tax authority to assess whether
there are any additional outstanding payments due. If so, confirm they are included in the year-end
liability.

– Review any disclosures made of the sales tax liability to ensure that it is shown as a current
liability and assess whether disclosures are in compliance with accounting standards and legislation.

2018(d)
- Sep, Dec substantive procedures the auditor should perform in relation to the faulty paint
Describe
products held in inventory at the year end.
– Obtain a breakdown of the damaged goods held in inventory and returned from customers and cast
to confirm its accuracy.
– From the breakdown, agree the damaged goods quantities manufactured since June to production
records; and agree to sales records the quantities sold.
– Agree on a sample basis the returns from customers as per the breakdown back to sales returns
documentation to confirm the existence of the returns quantities.
 – Discuss with management the current status of their plans for this product line and whether they
are able to rectify the damage and then sell the goods on. If so, agree the costs of rectification to
supporting documentation.
– If the damaged inventory has been rectified and sold post year end, agree to the sales invoice to
assess NRV in line with the new cost of the product.
– Agree the cost of damaged goods to supporting documentation to confirm the raw material cost,
labour cost and any overheads attributed to the cost.
– Discuss with management if the goods have been written down; if so, follow through the write
down to the inventory valuation to confirm.
– Inspect monthly board meeting minutes from June 20X8 onwards to obtain further information
regarding the faulty paint and its possible resale value.
(e) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
evidence in relation to Darjeeling Co’s revenue.
1 – Compare the overall level of revenue against prior years and budget for the year and investigate
any significant fluctuations.
2
– Obtain a schedule of sales for the year broken down into the main product categories and compare
this to the prior year breakdown and for any unusual movements, discuss with management.
3 – Calculate the final gross profit margin for Darjeeling Co and compare this to the prior year and
investigate any significant fluctuations.
4 – Select a sample of sales invoices for customers and agree the sales prices back to the price list or
customer master data information to ensure the accuracy of invoices.
5 – For a sample of invoices, recalculate invoice totals including discounts and sales tax.
6
– Select a sample of customer orders and agree these to the despatch notes and sales invoices
through to inclusion in the sales ledger and revenue general ledger accounts to ensure completeness
of revenue.
7
– Select a sample of despatch notes both pre and post year end and follow these through to sales
invoices in the correct accounting period to ensure that cut-off has been correctly applied.
8
– Perform a proof in total calculation for revenue, creating an expectation of the average price for
the main paint products multiplied by the increased sales volumes for this year. This expectation
should be compared to actual revenue and any significant fluctuations should be investigated.
9 – Select a sample of credit notes raised, trace through to the original invoice and ensure the invoice
has been correctly removed from sales.
10 – For sales made under the price promise, compare the level of claims made to date with the refund
liability recognised and assess whether it is reasonable.
11 – For a sample of sales invoices issued between June and the product recall, trace to subsequent
credit notes to confirm that the sale has been removed from revenue.

2018 - Sep, Dec

18(a) Substantive procedures for trade receivables
– Obtain the aged receivables listing and agree to the balance on the sales ledger control account and
1 trial balance.

– Review the aged trade receivables ledger to identify any slow moving or old balances, discuss the
2 status of these balances with the credit controller to assess whether they are likely to pay.
– Select a representative sample of trade receivables and review for any after-date cash receipts.
3 Ensure that a sample of slow moving/old receivable balances is also selected.
– Review customer correspondence to identify any balances which are in dispute or unlikely to be
4 paid and discuss with management.
 – Review board minutes to identify whether there are any significant concerns in relation to
5 payments by customers.
– Calculate the average receivables collection period and compare this to the prior year and
6 investigate any significant differences.
– Inspect post year-end sales returns/credit notes and consider whether an additional allowance
7 against receivables is required.
– Obtain a breakdown of the allowance for trade receivables, recalculate and compare to any
8 potentially irrecoverable balances to assess if the allowance is adequate.
– Select a sample of goods despatched notes (GDN) immediately before and after the year end to
9 ensure they are recorded in the correct accounting period in the receivables ledger
– Select a sample of year-end receivables balances and agree back to valid supporting
10 documentation of sales invoices, GDNs and sales orders to ensure existence.

(b) Substantive procedures for bank balances

– Obtain a bank confirmation letter from Jasmine Co’s bankers for all of its accounts.
– Agree all accounts listed on the bank confirmation letter to the company’s bank reconciliations or
the trial balance/general ledger to ensure completeness of bank balances.
– For the current account, obtain Jasmine Co’s bank reconciliation and cast to check the additions to
ensure arithmetical accuracy.
– Agree the balance per the bank reconciliation to an original year-end bank statement and to the
bank confirmation letter.
– Agree the reconciliation’s balance per the cash book to the year-end cash book.
– Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank statement
and also to the paying-in book pre year end.

– Trace all unpresented cheques through to a pre year-end cash book and post year-end bank
statement. For any unusual amounts or significant delays, obtain explanations from management.
– Examine any old unpresented cheques to assess whether they need to be written back.
– Review the cash book and bank statements for any unusual items or large transfers around the
year end, as this could be evidence of window dressing.

– Examine the bank confirmation letter for details of any security provided by Jasmine Co, with
regards to the bank overdraft or any legal right of set-off as this may require disclosure.
– For the savings bank accounts, review any reconciling items on the year-end bank reconciliations
and agree to supporting documentation.

– Review the financial statements to ensure that the disclosure of bank balances is complete and
accurate and classified appropriately between current assets and current liabilities.

2018 - Mar, Jun

16(d) Substantive procefure for Accrual for income tax payable on employment income
Procedures the auditor should adopt in respect of auditing this accrual include:
– Compare the accrual for income tax payable to the prior year, investigate any significant
differences.
– Agree the year-end income tax payable accrual to the general ledger and payroll records to
confirm accuracy.
– Re-perform the calculation of the accrual to confirm accuracy and discuss any unexpected
variances with management.
– Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.
 – Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due; if so, agree they are included in the year-end accrual.
– Review any disclosures made of the income tax accrual and assess whether these are in
compliance with accounting standards and legislation.

2018 - Mar, Jun

18 (a) Substantive procedures for research and development
– Obtain and cast a schedule of intangible assets, detailing opening balances, amounts capitalised in
the current year, amortisation and closing balances.

– Agree the closing balances to the general ledger, trial balance and draft financial statements.
– Discuss with the finance director the rationale for the three-year useful life and consider its
reasonableness.
– Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is in line with the amortisation policy of straight line over three years and
that amortisation only commenced from the point of production.
– For the nine new projects, discuss with management the details of each project along with the
stage of development and whether it has been capitalised or expensed.
– For those expensed as research, agree the costs incurred to invoices and supporting documentation
and to inclusion in profit or loss.

– For those capitalised as development, agree costs incurred to invoices and confirm technically
feasible by discussion with development managers or review of feasibility reports.
– Review market research reports to confirm Gooseberry Co has the ability to sell the product once
complete and probable future economic benefits will arise.
– Review the disclosures for intangible assets in the draft financial statements to verify that they are
in accordance with IAS 38 Intangible Assets.

(b) Substantive procedures for depreciation

– Discuss with management the rationale for the changes to property, plant and equipment (PPE)
depreciation rates, useful lives, residual values and depreciation methods and ascertain how these
changes were arrived at.

– Confirm the reasonableness of these changes, by comparing the revised depreciation rates, useful
lives and methods applied to PPE to industry averages and knowledge of the business.

– Review the capital expenditure budgets for the next few years to assess whether the revised asset
lives correspond with the planned period until replacement of the relevant asset categories.

– Review the non-current asset register to assess if the revised depreciation rates have been applied.
– Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to assess
the reasonableness of the revised depreciation rates.

– Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current
assets register is correct and ensure that new depreciation rates have been appropriately applied.

– Obtain a breakdown of depreciation by asset categories, compare to prior year; where significant
changes have occurred, discuss with management and assess whether this change is reasonable.
 – For asset categories where there have been a minimal number of additions and disposals, perform
a proof in total calculation for the depreciation charged on PPE, discuss with management if
significant fluctuations arise.
– Review the disclosure of the depreciation charges and policies in the draft financial statements and
ensure it is in line with IAS 16 Property, Plant and Equipment.

(c) Substantive procedures for directors’ bonuses

– Obtain a schedule of the directors’ bonus paid in February 20X8 and cast the schedule to ensure
accuracy and agree amount disclosed in the financial statements.
– Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end
liability.
– Agree the individual bonus payments to the payroll records.
– Recalculate the bonus payments and agree the criteria, including the exclusion of intangible
assets, to supporting documentation and the percentage rates to be paid to the directors’ service
contracts.
– Confirm the amount of each bonus paid post year end by agreeing to the cash book and bank
statements.
– Agree the amounts paid per director to board minutes to ensure the sums included in the current
year financial statements are fully accrued and disclosed.
– Review the board minutes to identify whether any additional payments relating to this year have
been agreed for any directors.
– Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
– Review the disclosures made regarding the bonus paid to directors and assess whether these are in
compliance with local legislation.

2017 SD
Substantive procedures for purchases and other expenses
– Calculate the operating profit and gross profit margins and compare them to last year and budget
and investigate any significant differences.
– Review monthly purchases and other expenses to identify any significant fluctuations and discuss
with management.

– Discuss with management whether there have been any changes in the key suppliers used and
compare this to the purchase ledger to assess completeness and accuracy of purchases.
– Recalculate the accuracy of a sample of purchase invoice totals and related taxes and ensure
expense has been included in the correct nominal code.
– Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the
expense charge included in the statement of profit or loss.
– Select a sample of post year-end expense invoices and ensure that any expenses relating to the
current year have been included.
– Select a sample of payments from the cash book and trace to expense account to ensure the
expense has been included and classified correctly.
– Select a sample of goods received notes (GRNs) from throughout the year; agree them to purchase
invoices and the purchase day book to ensure the completeness of purchases.
– Select a sample of GRNs just before and after the year end; agree to the purchase day book to
ensure the expense is recorded in the correct accounting period.

(b) Receivables substantive procedures

Accuracy, valuation and allocation
 – Review the after date cash receipts and follow through to pre year-end receivable balances.
– Inspect the aged receivables report to identify any slow moving balances, discuss these with the
credit control manager to assess whether an allowance or write down is necessary.
– For any slow moving/aged balances review customer correspondence to assess whether there are
any invoices in dispute.

– Review board minutes of Dashing Co to assess whether there are any material disputed receivables.
Completeness
– Select a sample of goods despatched notes from before the year end, agree to sales invoices and to
inclusion in the sales ledger and year-end receivables ledger.
– Agree the total of individual sales ledger accounts to the aged receivables listing and to the trial
balance.
– Obtain the prior year aged receivables listing and for significant balances compare to the current
year receivables listing for inclusion and amount due. Discuss with management any missing
receivables or significantly lower balances.
– Review the sales ledger for any credit balances and discuss with management whether these should
be reclassified as payables.

Rights and obligations

– Review bank confirmations and loan agreements for any evidence that receivables have been
assigned as security for amounts owed by Dashing Co.
– Review board minutes for evidence that legal title to receivables has been sold onto a third party
such as a factor.
– For a sample of receivables, agree the balance recorded on the sales ledger to the original name of
the customer on a sales order or a contract.
Tutorial note: Marks will be awarded for any other relevant receivables tests.

(c) Substantive procedures to confirm the redundancy provision

– Discuss with the directors of Dashing Co as to whether they have formally announced their
intention to close the production site and make their employees redundant, to confirm that a present
obligation exists at the year end.
– If announced before the year end, review supporting documentation to verify that the decision has
been formally announced.
– Review the board minutes to ascertain whether it is probable that the redundancy payments will be
paid.
– Obtain a breakdown of the redundancy calculations by employee and cast it to ensure
completeness and agree to trial balance.
– Recalculate the redundancy provision to confirm completeness and agree components of the
calculation to supporting documentation such as employee contracts.
– Review the post year-end cash book to identify whether any redundancy payments have been
made, compare actual payments to the amounts provided to assess whether the provision is
reasonable.

– Obtain a written representation from management to confirm the completeness of the provision.
– Review the disclosure of the redundancy provision to ensure compliance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

2017sufficient
MJ and appropriate audit evidence in relation to the COMPLETENESS
of Airsoft Co’s trade payables and accruals.
 – Compare the total trade payables and list of accruals against prior year and investigate any
significant differences
current year, follow through to the purchase ledger or accruals listing to ensure they
are recorded in the correct period.
– Obtain supplier statements and reconcile these to the purchase ledger balances, and
investigate any reconciling
– Select a sample of payableitems.
balances and perform a trade payables’ circularisation,
–follow up after
Review any non-replies andand
date invoices anycredit
reconciling
notes toitems between
ensure the balance
no further confirmed
items need to be
accrued
– Enquire of management their process for identifying goods received but not invoiced or
logged in the purchase ledger and ensure that it is reasonable to ensure completeness of
(c) Substantive procedures for bank balances
– Obtain a bank confirmation letter from Airsoft Co’s bankers for all of its bank accounts.
– Agree all accounts listed on the bank confirmation letter to Airsoft Co’s bank reconciliations and
the trial balance to ensure completeness of bank balances.
– For all bank accounts, obtain Airsoft Co’s bank account reconciliation and cast to ensure
arithmetical accuracy.
– Agree the balance per the bank reconciliation to an original year-end bank statement and to the
bank confirmation letter.
– Agree the reconciliations balance per the cash book to the year-end cash book.
– Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank statement
and also to the paying-in-book pre year end.
– Trace all unpresented cheques through to a pre year-end cash book and post year-end statement.
For any unusual amounts or significant delays, obtain explanations from management.
– Examine any old unpresented cheques to assess if they need to be written back into the purchase
ledger as they are no longer valid to be presented.
– Review the cash book and bank statements for any unusual items or large transfers around the year
end, as this could be evidence of window dressing.
– Examine the bank confirmation letter for details of any security provided by Airsoft Co or any
legal right of set-off as this may require disclosure.
– Review the financial statements to ensure that the disclosure of bank balances is complete and
accurate.

(d) Substantive procedures for directors’ remuneration

– Obtain a schedule of the directors’ remuneration, split by salary and bonus paid in December and
cast the schedule to ensure accuracy.
– Agree a sample of the individual monthly salary payments and the bonus payment in December to
the payroll records.
– Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.
– Review the board minutes to identify whether any additional payments relating to this year have
been agreed for any directors.
– Agree the amounts paid per director to board minutes to ensure the sums included are genuine.
– Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
– Review the disclosures made regarding the directors’ remuneration and assess whether these are in
compliance with local legislation.
 SUBSTANTIVE PROCEDURE FOR SALES - AR
(a) Substantive procedures for Vega Vista Co’s income
1 – Obtain a schedule of all Vega Vista Co’s income and cast to confirm completeness and accuracy of the
balance and agree to the trial balance.
2 – Compare the individual categories of income of festival ticket sales, sundry sales and donations against
prior years and investigate any significant differences.
3
– For the annual festival, construct a proof-in-total calculation of the number of tickets sold, approximately
15,000, multiplied by the ticket price of $35. Compare this to the income recorded and discuss any
significant differences with management.
4 – For tickets sold on the day of the festival reconcile from ticket stubs the number of tickets sold multiplied
by $35 and agree these sales to cash banked in the bank statement.
5
– Discuss with management their procedures for ensuring advance ticket sales for the September 20X5
festival are excluded from income and instead recognised as deferred income in the statement of financial
position.
6 – Select a sample of advance ticket sales made online, agree that the transaction has been excluded from
current year income and follow through to inclusion in deferred income.
7 – Agree journal entry to transfer prior year deferred income relating to the 20X4 festival to current year
income to the ledger and agree figures to prior year financial statements.
8
– For sundry sales, obtain a breakdown of the income received per stall and agree to supporting
documentation provided by each stall holder. Recalculate the fixed percentage received is as per the
agreement/contract made with Vega Vista Co.
9
– Compare sundry sales per stall holder to prior year sales data and investigate any significant differences.
10
– For monthly donations, trace a sample of donations from sign up documentation to the bank statements,
cash book and income listing to ensure that they are recorded completely and accurately.
11
– For a sample of new donors in the year, agree the monthly sum and start date from their completed forms
and trace to the monthly donations received account and agree to the cash book and bank statements.

(e) ...obtain sufficient and appropriate evidence in relation to Darjeeling Co’s revenue.
1 – Compare the overall level of revenue against prior years and budget for the year and investigate any
significant fluctuations.
2 – Obtain a schedule of sales for the year broken down into the main product categories and compare this to
the prior year breakdown and for any unusual movements, discuss with management.
3 – Calculate the final gross profit margin for Darjeeling Co and compare this to the prior year and investigate
any significant fluctuations.
4 – Select a sample of sales invoices for customers and agree the sales prices back to the price list or
customer master data information to ensure the accuracy of invoices.
5 – For a sample of invoices, recalculate invoice totals including discounts and sales tax.
6
– Select a sample of customer orders and agree these to the despatch notes and sales invoices through to
inclusion in the sales ledger and revenue general ledger accounts to ensure completeness of revenue.
7 – Select a sample of despatch notes both pre and post year end and follow these through to sales invoices in
the correct accounting period to ensure that cut-off has been correctly applied.
8
– Perform a proof in total calculation for revenue, creating an expectation of the average price for the main
paint products multiplied by the increased sales volumes for this year. This expectation should be compared
to actual revenue and any significant fluctuations should be investigated.
9 – Select a sample of credit notes raised, trace through to the original invoice and ensure the invoice has
been correctly removed from sales.
10 – For sales made under the price promise, compare the level of claims made to date with the refund liability
recognised and assess whether it is reasonable.
 11 – For a sample of sales invoices issued between June and the product recall, trace to subsequent credit notes
to confirm that the sale has been removed from revenue.

18(a) Substantive procedures for trade receivables

1
– Obtain the AR aging report and agree to the balance on the sales ledger control account and trial balance.
2 – Review the AR aging report to identify any slow moving or old balances, discuss the status of these
balances with the credit controller to assess whether they are likely to pay.
3 – Review customer correspondence to identify any balances which are in dispute or unlikely to be paid and
discuss with management.
4 – Review board minutes to identify whether there are any significant concerns in relation to payments by
customers.
5 – Calculate the average receivables collection period and compare this to the prior year and investigate any
significant differences.
6 – Inspect post year-end sales returns/credit notes and consider whether an additional allowance against
receivables is required.
7 – Obtain a breakdown of the allowance for trade receivables, recalculate and compare to any potentially
irrecoverable balances to assess if the allowance is adequate.
8 – Select a sample of goods despatched notes (GDN) immediately before and after the year end to ensure
they are recorded in the correct accounting period in the receivables ledger
9 – Select a sample of year-end receivables balances and agree back to valid supporting documentation of
sales invoices, GDNs and sales orders to ensure existence.
10
- Select a sample of goods despatch note and sales invoice to ensure they are recoded into trade receivable

b) Substantive procedure for Receivable - Receivable due from Ellah Co

1 – Review correspondence with Ellah Co to establish if there was a discussion about payment difficulties and
whether Ellah Co intends to fully settle the outstanding amount.
2
– Review the age of the outstanding debt with Ellah Co and discuss the circumstances with the credit
controller to establish if it has exceeded the agreed credit terms and consider if an allowance is required.
3 – Review post year-end receipts from Ellah Co to establish how much of the debt was recovered by the audit
completion date and to assess how much of the year-end balance remains outstanding.
4 – Inspect board minutes to identify whether there are any significant concerns in relation to payments by
Ellah Co.
5 – Discuss with management of Purrfect Co why no allowance has been made in respect of this debt and
assess the justification.

(b) Substantive procefure for Valuation of trade receivables

1
Review the aged receivables listing to identify slow moving or old balances. Discuss the status of these
balances with the credit controller to assess whether the customers are likely to pay or if an allowance for
receivables is required.
2 Review whether there are any after-date cash receipts for slow moving/old receivable balances.
3 Review correspondence with customers in order to identify any balances which are in dispute or unlikely to
be paid and discuss with management whether any allowance is required.
4 Review board minutes to identify whether there are any significant concerns in relation to outstanding
receivables balances and assess whether the allowance is reasonable.
5 Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any potentially
irrecoverable balances to assess if the allowance is adequate.
6
Review the payment history for evidence of slow paying by any customers who were granted credit in the
period when there was no credit controller and who may not, therefore, have been properly scrutinised.
 7 Discuss with the finance director the rationale for maintaining the allowance at the same level in light of the
increase in the receivables collection period and the absence of a credit controller.
8 Inspect post year-end sales returns/credit notes and consider whether an additional allowance against
receivables is required.

(d) Substantive procedures for valuation of trade receivables

1 – Discuss with the finance director the rationale for not increasing the allowance for trade receivables and
review its overall adequacy.
2 – Obtain a breakdown of the opening allowance and consider if the receivables provided for in the prior year
have been recovered to assess the reasonableness of the prior levels of allowances.
3
– Review the aged trade receivables ledger to identify any slow moving or old receivable balances and
discuss the status of these balances with the credit controllers to assess whether they are likely to be
received.
4 – Review whether there are any after-date cash receipts for slow moving/old receivable balances.
5 – Review customer correspondence with the significant customer and others to identify any balances which
are in dispute or are unlikely to be paid.
6 – Review board minutes to identify whether there are any significant concerns in relation to payments by
customers.
7 – Calculate the potential level of trade receivables which are not recoverable and assess whether this is
material or not and discuss with management.

Procedures the auditor should perrform to resolve the exxceptions noted for each customer during the
positive receivable circularisation
Albacore Co
1 – For the non-response from Albacore Co, with the client’s permission, the team should arrange to send a
follow-up circularisation.
2
– If Albacore Co does not respond to the follow up, then with the client’s permission, the auditor should
telephone the customer and ask whether they are able to respond in writing to the circularisation request.
3
– If there is still no response, then the auditor should undertake alternative procedures to confirm the balance
owing from Albacore Co. Such as detailed testing of the balance by agreeing to sales invoices and goods
dispatched notes (GDN).

Flounder Co
1
– For the response from Flounder Co, with a difference of $5,850 the auditor should identify any disputed
amounts, and identify whether these relate to timing differences or whether there are possible errors in the
records of Triggerfish.
2 – If the difference is due to timing, such as cash in transit, this should be agreed to post year-end cash
receipts in the cash book.
3 – If the difference relates to goods in transit, then this should be agreed to a pre year-end GDN.

Menhaden Co
1 – The reason for the credit balance with Menhaden should be discussed with the credit controller or finance
department to understand how a credit balance has arisen.
2 – Review the payables ledger to identify if Menhaden is a supplier as well as a customer; if so, a purchase
invoice may have been posted in error to the receivables rather than payables ledger.
3 – If the difference is due to credit notes, this should be agreed to pre year-end credit notes dispatched around
the year-end date.
4 – The receivables ledger should be reviewed to identify any possible mis-postings as this could be a reason
for the difference with Menhaden Co.

(b) Substantive procedures for allowance for trade receivables

 1 – Discuss with the finance director the rationale for not providing against any receivables and consider the
reasonableness of the allowance.
2
– Obtain a breakdown of the opening allowance of $125,000 and consider if the receivables provided for in
the prior year have been fully recovered as a result of the additional credit control procedures or if they have
now been fully written off.
3
– Inspect the aged trade receivables ledger to identify any slow moving or old receivable balances and
discuss the status of these balances with the credit controllers to assess whether they are likely to be
received.
4
– Review whether there are any after-date cash receipts for identified slow moving/old receivable balances.
5 – Review customer correspondence to identify any balances which are in dispute or are unlikely to be paid
and confirm if these have been considered when determining the allowance.
6
– Inspect board minutes to identify whether there are any significant concerns in relation to payments by
customers and assess if these have been considered when determining the allowance.
7 – Recalculate the potential level of trade receivables which are not recoverable and compare to allowance
and discuss differences with management.

(b) Receivables substantive procedures

Accuracy, valuation and allocation
1 – Review the after date cash receipts and follow through to pre year-end receivable balances.
2 – Inspect the aged receivables report to identify any slow moving balances, discuss these with the credit
control manager to assess whether an allowance or write down is necessary.
3 – For any slow moving/aged balances review customer correspondence to assess whether there are any
invoices in dispute.
4 – Review board minutes of Dashing Co to assess whether there are any material disputed receivables.
Completeness
1 – Select a sample of goods despatched notes from before the year end, agree to sales invoices and to
inclusion in the sales ledger and year-end receivables ledger.
2
– Agree the total of individual sales ledger accounts to the aged receivables listing and to the trial balance.
3
– Obtain the prior year aged receivables listing and for significant balances compare to the current year
receivables listing for inclusion and amount due. Discuss with management any missing receivables or
significantly lower balances.
4 – Review the sales ledger for any credit balances and discuss with management whether these should be
reclassified as payables.

Rights and obligations

1 – Review bank confirmations and loan agreements for any evidence that receivables have been assigned as
security for amounts owed by Dashing Co.
2 – Review board minutes for evidence that legal title to receivables has been sold onto a third party such as a
factor.
3 – For a sample of receivables, agree the balance recorded on the sales ledger to the original name of the
customer on a sales order or a contract.
PAYROLL, BONUS, REMUNERTATION
(c) Substantive procedures for directors’ bonuses
1 Obtain a schedule of the directors’ bonus and cast the schedule to ensure its accuracy. Agree the amount to that disclosed in the
financial statements.
2 Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end liability.
3 Recalculate the bonus payments and agree the criteria to supporting documentation and the percentage rates to be paid to the
directors’ service contracts.
4 Confirm the amount of each bonus paid by agreeing to the post year-end cash book and bank statements.
5 Agree the amounts paid to each director to board minutes and contracts to ensure the amounts included in the current year
financial statements are fully accrued and disclosed.
6
Review the board minutes to identify whether any additional payments relating to this year have been agreed for any directors.
7 Review the disclosures made regarding the bonus paid to directors and assess whether these are in compliance with local
legislation
8 Agree the individual bonus payments to the post year-end payroll records.
9 Compare the profit before tax used in the bonus calculation to the final profit before tax figure to confirm whether any adjustment
is required to the bonus paid and discuss any differences with management.
10
Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus.

(d) Substantive procedures for directors’ remuneration

1 – Obtain a schedule of the directors’ remuneration, split by salary and bonus paid in December and cast the schedule to ensure
accuracy.
2
– Agree a sample of the individual monthly salary payments and the bonus payment in December to the payroll records.
3 – Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.
4
– Review the board minutes to identify whether any additional payments relating to this year have been agreed for any directors.
5 – Agree the amounts paid per director to board minutes to ensure the sums included are genuine.
6
– Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus.
7 – Review the disclosures made regarding the directors’ remuneration and assess whether these are in compliance with local
legislation.

(d) Substantive procedures on payroll expense

1 – Cast a sample of payroll records to confirm completeness and accuracy and agree the total wages and salaries expense per the
payroll system to the trial balance.
2 – Recalculate the gross and net pay figures for a sample of employees and agree to the payroll records.
3
– For a sample of wage payments, agree the total net pay per the payroll records to the bank transfer listing and to the cash book.
4
– Compare the total payroll figure this year to the prior year, identify any significant differences and discuss with management.
5 – Review monthly payroll charges, compare this to the prior year and budgets and discuss any significant differences with
management.
6 – Calculate overtime costs as a percentage of total wages. Compare this to the prior year and discuss any significant differences
with management.
7 – Agree a sample of individual wages and salaries per the payroll to personnel records and records of hours worked per the
clocking-in system.
8 – Reperform the calculation of statutory deductions and agree to supporting documentation to confirm whether correct deductions
for this year have been made in the payroll.
9 – Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation, recalculate their first/last
salary to ensure it is accurate.
10 – Recalculate holiday pay for a sample of employees and agree to holiday records and daily rate applied.
11 – Select a sample of employees from HR records and agree salaries per HR records to the payroll records to confirm the accuracy
of the payroll expense.
12
– Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay increase/bonuses. Compare this to
the actual wages and salaries expense in the financial statements and investigate any significant differences.
13 – Agree the payroll control account reconciliation to accounting records and investigate any differences.
INVENTORY
a) Substantive procedure for Inventory - (a) Inventory of Vego Dog
1 – Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2·4m to inventory records.
2 – Agree the quantity of Vego Dog products shown as held at the year end to the year-end inventory count records.
3 – Request a breakdown of the cost calculation of each unit of this product and discuss with management how the standard cost was
derived.
4 – Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost is $2·4m.
5
– For a sample of finished goods items, obtain standard cost cards and agree:
raw material costs to recent purchase invoices;
labour costs to time sheets or wage records;
overheads allocated to invoices and that they are of a production nature.
6 - Compare sales prices over time to establish if the price has been reduced because of falling demand to determine whether an
allowance is required.
7 – Compare actual sales units per month to budgeted sales per month from before and after the year end to establish how much lower
actual sales are than expected and discuss with management.
8 – Select a sample of items included in inventory of Vego Dog and review post year-end sales invoices to ascertain if net realisable
value (NRV) is above cost or if an adjustment is required.

(a) Substantive procedure for Inventory valuation

1 – Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to the WIP schedule, agreeing the
percentage completion to that recorded at the inventory count.
2
– For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and agree raw material costs to recent
purchase invoices, labour costs to time sheets or payroll records and confirm overheads allocated are of a production related nature.
3 – Select a sample of year-end finished goods and compare cost with post year-end sales invoices to ascertain if net realisable value
(NRV) is above cost or if an adjustment is required.
4 – Discuss the basis of WIP valuation with management and assess its reasonableness.
5 – Review aged inventory reports and identify any slow moving goods, discuss with management why these items have not been
written down or if an allowance is required.
6 – For the defective batch of product Crocus, review board minutes and discuss with management their plans for selling these goods,
and why they believe these goods have a NRV of $90,000.
7 – If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
8 – Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw material cost, labour cost and any
overheads attributed to the cost.
9 – Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and discuss with management if this
adjustment has been made. If so, follow through the write down to confirm
10 – Examine post year-end credit notes to determine whether there have been returns which could signify that a write down is
required.
11
– Select a sample of items included in WIP at the year end and ascertain the final unit cost price by verifying costs to be incurred to
completion to relevant supporting documentation. Compare to the unit sales price included in sales invoices post year-end to assess
NRV.

(d) Describe substantive procedures the auditor should perform in relation to the faulty paint products held in inventory at the
year end.
1
– Obtain a breakdown of the damaged goods held in inventory and returned from customers and cast to confirm its accuracy.
2 – From the breakdown, agree the damaged goods quantities manufactured since June to production records; and agree to sales
records the quantities sold.
3 – Agree on a sample basis the returns from customers as per the breakdown back to sales returns documentation to confirm the
existence of the returns quantities.
4 – Discuss with management the current status of their plans for this product line and whether they are able to rectify the damage and
then sell the goods on. If so, agree the costs of rectification to supporting documentation.
5 – If the damaged inventory has been rectified and sold post year end, agree to the sales invoice to assess NRV in line with the new
cost of the product.
6 – Agree the cost of damaged goods to supporting documentation to confirm the raw material cost, labour cost and any overheads
attributed to the cost.
7 – Discuss with management if the goods have been written down; if so, follow through the write down to the inventory valuation to
confirm.
8 – Inspect monthly board meeting minutes from June 20X8 onwards to obtain further information regarding the faulty paint and its
possible resale value.
R&D EXPENDITURE

(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Hyacinth Co’s research and development expenditure.
1 – Obtain and cast a schedule of intangible assets, agree the closing balances to the general ledger, trial balance
and draft financial statements.
2
– Discuss with the finance director the rationale for the four-year useful life and consider its reasonableness.
3
– Recalculate the amortisation charge for a sample of intangible assets which have commenced production
and confirm that it is in line with the amortisation policy of straight line over four years and that amortisation
only commenced from the point of production.
4 – For those expensed as research, agree the costs incurred to invoices and supporting documentation and to
inclusion in profit or loss.
5 – For those capitalised as development, agree costs incurred to invoices.
6 – Review the disclosures for intangible assets in the draft financial statements to verify that they are in
accordance with IAS 38 Intangible Assets.
7 – For the three new computing software projects, discuss with management the details of each project along
with the stage of development and whether it has been capitalised or expensed.
8 – Confirm technically feasible and intention to complete the project by discussion with development
managers or review of feasibility reports.
9 – Review market research reports to confirm Hyacinth Co has the ability to sell the product once complete
and probable future economic benefits will arise.
10
– Review the costs, projected revenue and cash flow budgets for the each of the three projects to confirm
Hyacinth Co has adequate resources to complete the development stage and that probable future economic
benefits exist. Agree the budgets to supporting documentation.

18 (a) Substantive procedures for research and development

1 – Obtain and cast a schedule of intangible assets, detailing opening balances, amounts capitalised in the
current year, amortisation and closing balances.
2 – Agree the closing balances to the general ledger, trial balance and draft financial statements.
3
– Discuss with the finance director the rationale for the three-year useful life and consider its reasonableness.
4
– Recalculate the amortisation charge for a sample of intangible assets which have commenced production
and confirm it is in line with the amortisation policy of straight line over three years and that amortisation
only commenced from the point of production.
5 – For the nine new projects, discuss with management the details of each project along with the stage of
development and whether it has been capitalised or expensed.
6 – For those expensed as research, agree the costs incurred to invoices and supporting documentation and to
inclusion in profit or loss.
7 – Review the disclosures for intangible assets in the draft financial statements to verify that they are in
accordance with IAS 38 Intangible Assets.
8 – For those capitalised as development, agree costs incurred to invoices and confirm technically feasible by
discussion with development managers or review of feasibility reports.
9 – Review market research reports to confirm Gooseberry Co has the ability to sell the product once complete
and probable future economic benefits will arise.
PROVISION
(b) Substantive procedures for Canopus Co’s restructuring provision
1 – Cast the breakdown of the restructuring provision to ensure it is correctly calculated and agree the
total to the trial balance.
2 – Review the board minutes where the decision to restructure the production process was taken and
confirm the decision was made in March 20X5.
3 – Review the announcement to shareholders and employees in late March, to confirm that this was
announced before the year end.
4 – Obtain a breakdown of the restructuring provision and confirm that only direct expenditure relating
to the restructuring is included
5
– Review the adequacy of the disclosures of the restructuring provision in the financial statements
and assess whether these are in accordance with IAS® 37 Provisions, Contingent Liabilities and
Contingent Assets
6 – Review the expenditure to confirm that there are no retraining costs of existing staff included.
7
– For the costs included within the provision, including acquisitions of plant and machinery, agree to
supporting documentation, such as purchase invoices, to confirm validity and value of items
included.
8
– Review post year end payments/invoices relating to the expenditure and compare the actual costs
incurred to the amounts provided to assess whether the amount of the provision is reasonable.
9 – Obtain a written representation confirming management discussions in relation to the
announcement of the restructuring and to confirm the completeness of the provision.

(d) Substantive procedures for the redundancy costs

1 Review the board minutes for evidence of the decision to discontinue the brand of chemicals prior to
the year-end.
2 Review supporting documentation to confirm that the decision to discontinue the brand was notified
to the four members of staff prior to the year end.
3 Obtain details of the redundancy calculated by employee, cast the schedule and agree to the trial
balance/financial statements.
4 Recalculate the redundancy provision to confirm completeness and agree components of the cost to
supporting documentation such as employee contracts.
5 Agree the redundancy payments made in July 20X5 to the cash book/payroll records and compare
these to the provision in the financial statements.
6
Obtain a written representation from management confirming the completeness of the costs.
7 Review the disclosures included in the financial statements to verify they are in compliance with
requirements of IAS 37 Provisions, Contingent Assets and Contingent Liabilities.

(c) Substantive procedure for Potential breach of transport regulations

1 Review correspondence with the transport authority to establish details of the complaint and the
number of times the breach has allegedly occurred.
2
Enquire of the directors why they are unwilling to provide or make disclosure, whether they accept
that any breaches took place but believe that the effect is immaterial or whether they dispute their
occurrence.
3
Review Encore Co’s policies and procedures to record driving hours and rest periods and compare to
the regulations to determine the likelihood that breaches have occurred and how frequently.
4 Review correspondence with the transport authority to establish if there have been discussions about
other instances of potential non-compliance.
 5
Obtain a written representation to the effect that the directors are not aware of any other breaches of
laws or regulations that would require a provision or disclosure in the financial statements.
6
Review correspondence with Encore Co’s legal advisers or, with the client’s permission, contact the
lawyers to establish their assessment of the likelihood of the breach being proven and any fines that
would be payable.
7 Review the board minutes to ascertain management’s view as to the likelihood of payment to the
transport authority.
8
Obtain a written representation to the effect that the directors are not aware of any other breaches of
laws or regulations that would require a provision or disclosure in the financial statements.
9 Inspect the post year-end cash book and bank statements to identify whether any fines have been
paid.

(c) Substantive procedures to confirm the redundancy provision

1
Discuss with the directors of Dashing Co as to whether they have formally announced their intention
to close the production site and make their employees redundant, to confirm that a present obligation
exists at the year end.
2 If announced before the year end, review supporting documentation to verify that the decision has
been formally announced.
3 Review the board minutes to ascertain whether it is probable that the redundancy payments will be
paid.
4 Obtain a breakdown of the redundancy calculations by employee and cast it to ensure completeness
and agree to trial balance.
5 Recalculate the redundancy provision to confirm completeness and agree components of the
calculation to supporting documentation such as employee contracts.
6
Review the post year-end cash book to identify whether any redundancy payments have been made,
compare actual payments to the amounts provided to assess whether the provision is reasonable.
7
Obtain a written representation from management to confirm the completeness of the provision.
8 Review the disclosure of the redundancy provision to ensure compliance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

C) Substantive procedure - Contamination – legal claims

1 – Review customer correspondence to establish the details of the claims and the amounts being
claimed.
2 – Review correspondence with Purrfect Co’s lawyers or, with the client’s permission, contact the
lawyers to establish the likely outcome of the customer claims made to date.
3 – Discuss with the lawyers the likelihood and amount of potential future claims.
4
– Inspect board minutes to establish details of the circumstances of the contamination and to ascertain
management’s view as to the likelihood that the existing claims will be successful and the extent of
possible future claims.
– Review the draft financial statements to establish that the legal claims have been appropriately
5 provided for or disclosed in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.
6 – Compare levels of returns and claims to date against sales volumes of the product to assess the
potential level of future claims.
7 – Review post-year end payments for damage settlements and compare with any amounts provided at
the year end to assess the reasonableness of the provision.
8
– Obtain written representations from management that there have been no other contamination
incidents and no other product liability claims of which management are aware and for which
provision may be required.
PPE
(b) Substantive procedures for depreciation
1 – Discuss with management the rationale for the changes to property, plant and equipment (PPE) depreciation rates, useful
lives, residual values and depreciation methods and ascertain how these changes were arrived at.
2 – Confirm the reasonableness of these changes, by comparing the revised depreciation rates, useful lives and methods applied
to PPE to industry averages and knowledge of the business.
3 – Review the non-current asset register to assess if the revised depreciation rates have been applied.
4 – Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to assess the reasonableness of the
revised depreciation rates.
5 – Obtain a breakdown of depreciation by asset categories, compare to prior year; where significant changes have occurred,
discuss with management and assess whether this change is reasonable.
6 – Review the disclosure of the depreciation charges and policies in the draft financial statements and ensure it is in line with
IAS 16 Property, Plant and Equipment.
7 – Review the capital expenditure budgets for the next few years to assess whether the revised asset lives correspond with the
planned period until replacement of the relevant asset categories.
8 – Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current assets register is correct and
ensure that new depreciation rates have been appropriately applied.
9 – For asset categories where there have been a minimal number of additions and disposals, perform a proof in total
calculation for the depreciation charged on PPE, discuss with management if significant fluctuations arise.

(e) Substantive procedures for disposals of plant and machinery

1 – Obtain a breakdown of disposals, cast the list and review the non-current assets register to confirm that all assets have been
removed.
2 – Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry sales invoices.
3 – Recalculate the profit/loss on disposal and agree to the trial balance and statement of profit or loss.
4 – Recalculate the depreciation charge for a sample of disposals to confirm the calculations are correctly applied as per the
company policy of a pro rata basis or a full year in the year of acquisition and none in the year of disposal.
5 – Review the disclosure of the disposals in the draft financial statements and ensure it is in line with IAS 16 Property, Plant
and Equipment.

(a) Substantive procedure for Vehicles additions and disposals

1
Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note for property, plant and equipment.
Agree the cost of the vehicles given in part-exchange to the disclosure note to confirm that they have been removed from cost
carried forward.
2
For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice, ensuring that the recorded
cost includes the cash amount paid plus the trade-in allowance for the old vehicle. Confirm that the invoice is made out to
Encore Co.
3 Physically inspect a sample of additions, confirming that the registration number of the vehicle agrees to that on the non-
current assets register.
4 Review the non-current assets register to confirm that the 20 old vehicles were removed and that the 20 new vehicles were
included.
5
Recalculate the loss on disposal of $1.1m ($1.8 - ($4.6m - $3.9m) and agree to the trial balance and statement of profit or loss.
6 Agree the cash payment of $3.9m to the cash book and bank statement.
7 Recalculate the depreciation expense, confirming that the depreciation expense was based on the old vehicles until 1 February
and on the cost of the new vehicles after that date.
8 Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been removed from accumulated
depreciation carried forward.
9 In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the carrying amount of other
vehicles may be overstated.
10 Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles are being used for the entire
period of their estimated useful life.
11 Discuss with management why trade-in allowances were so much lower than the carrying amounts of the vehicles to provide
further evidence as to whether depreciation policies are reasonable.
12 Review the notes to the financial statements to ensure that disclosure of the additions and disposals is in accordance with IAS
16 Property, Plant and Equipment.
AP
(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to the COMPLETENESS of Airsoft Co’s trade payables and accruals.
1 – Compare the total trade payables and list of accruals against prior year and investigate any significant
differences
2
– Select a sample of post year-end payments from the cash book; if they relate to the current year, follow
through to the purchase ledger or accruals listing to ensure they are recorded in the correct period.
3 – Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any
reconciling items.
4 – Select a sample of payable balances and perform a trade payables’ circularisation, follow up any non-
replies and any reconciling items between the balance confirmed and the trade payables’ balance.

5 – Review after date invoices and credit notes to ensure no further items need to be accrued
6 – Enquire of management their process for identifying goods received but not invoiced or logged in the
purchase ledger and ensure that it is reasonable to ensure completeness of payables.

Substantive procedures for purchases and other expenses

1 – Calculate the operating profit and gross profit margins and compare them to last year and budget and
investigate any significant differences.
2 – Review monthly purchases and other expenses to identify any significant fluctuations and discuss with
management.
3 – Recalculate the accuracy of a sample of purchase invoice totals and related taxes and ensure expense
has been included in the correct nominal code.
4 – Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the expense
charge included in the statement of profit or loss.
5 – Select a sample of goods received notes (GRNs) from throughout the year; agree them to purchase
invoices and the purchase day book to ensure the completeness of purchases.
6 – Select a sample of GRNs just before and after the year end; agree to the purchase day book to ensure
the expense is recorded in the correct accounting period.
7 – Discuss with management whether there have been any changes in the key suppliers used and compare
this to the purchase ledger to assess completeness and accuracy of purchases.
8 – Select a sample of post year-end expense invoices and ensure that any expenses relating to the current
year have been included.
9 – Select a sample of payments from the cash book and trace to expense account to ensure the expense has
been included and classified correctly.

Substantive procedures for additions PPE

1 Obtain a breakdown of additions, cast the list and agree to the non-current asset register to confirm
completeness of plat and equipment
2 Select a sample of additions and agree cost to supplier invoice to confirm valuation
3 Verify rights and obligations by agreeing the addition of plant and equipment to a supplier invoice in the
name of Baggio
4 Review the list of additions and confirm that they relate to captial expenditure items rather than repairs
and maintenance
5 Review board minutes to ensure that significant capital expenditure purchases have been authorised by
the board
 6
For a sample of additions recored in PE, phisically verify them on the factory floor to confirm existense

Substantive procedures for revaluation of land and buildings

1 Obtain a schedule of land and buildings revalued this year and cast to confirm completeness and
accuracy of the revaluation adjustment
2
On a sample basis agree the revalued amounts to the valuation statement provided by the valuer
3
Agree the revalued amounts for these assets are included correctly in the non-current assets register
4
Recalculate the total revaluation adjustment and agree correctly recorded in the ravaluation surplus
5 Agree the initial cost for the warehoused addition to supporting documentation such as invoices to
confirm cost
6 Confirm through a review of the title deeds that the warehouse is owned by Vieri
7
Recalculate the depreciation charge for the year to ensure that for assets revalued during the year, the
depreciation was based on the correct valuation and for the warehouse addition that the charge was for 6
months only
8 Review the FS disclosures of the revaluation to ensure they comply with IAS 16
AP

Compare

Select

Obtain

Select
Review

Enquire

Purchase and other exp

BANK LOAN
(c) Substantive procedures for Canopus Co’s bank loans
1
- Obtain a schedule of opening and closing loans detailing any changes during the year. Cast the schedule
to confirm its accuracy and agree the closing balances to the trial balance and draft financial statements.
2 - For the new loan taken out in the year, review the loan agreement to confirm the amount borrowed, the
repayment terms and the interest rate applicable.
3 - For loans repaid, agree the final settlement amount per bank correspondence to payments out during the
year in the cash book and bank statements.
4
- Recalculate the split of the loan repayment made on 31 March 20X5 between interest and principal,
recalculate interest and agree to inclusion in statement of profit or loss, and outstanding loan balance
reduced by principal amount repaid.
5 - Obtain direct confirmation at the year-end from the loan provider of the outstanding balances and any
security provided. Agree confirmed amounts to the loans schedule.
6 - Obtain direct confirmation at the year-end from the loan provider of the outstanding balances and any
security provided. Agree confirmed amounts to the loans schedule.
7
- review the disclosure of non-current liabilities in the draft financial statements, including any security
provided and assess whether these are in accordance with accounting standards and local legislation.
Additionally, confirm that the split of current and non-current loans in the financial statements is correct
8 - For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan agreement to
the cash book and bank statements.
9 - Agree the quarterly repayment of the new loan of $150,000 paid on 31 March 20X5 to the cash book and
bank statement.
10
- Review the bank correspondence and loan agreements for confirmation of any early settlement charges
incurred on the loans repaid. Agree that these were charged to the statement of profit or loss as a finance
charge.
11 - review all loan agreements For details of covenants and Recalculate all covenants to identify any
potential or actual breaches.
TAX
(c) Substantive for Accrual for employment tax payable
1 – Compare the accrual for employment tax payable to the prior year, investigate any significant
differences.
2
– Agree the year-end employment tax payable accrual to the payroll records to confirm accuracy.
3
– Re-perform the calculation of the accrual for a sample of employees to confirm the accuracy.
4
– Undertake a proof in total test for the employment tax accrual by multiplying the payroll cost for
June 20X9 with the appropriate tax rate. Compare this expectation to the actual accrual and
investigate any significant differences.
5 – Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.
6
– Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due. If so, confirm they are included in the year-end accrual.
7 – Review any disclosures made of the employment tax accrual and assess whether these are in
compliance with accounting standards and legislation.

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Hyacinth Co’s year-end sales tax liability.
1 Agree the year-end sales tax liability in the trial balance to the tax return/reconciliation submitted
to the tax authority and cast the return/reconciliation.
2 Agree the quarterly sales tax charged equates to 15% of the last quarter’s sales as per the sales day
book.
3 Recalculate the sales tax incurred as per the reconciliation is equal to 15% of the final quarter’s
purchases and expenses as per the purchase day book.
4 Recalculate the amount payable to the tax authority as being sales tax charged less sales tax
incurred.
5 Compare the year-end sales tax liability to the prior year balance or budget and investigate any
significant differences.
6
Review any disclosures made of the sales tax liability to ensure that it is shown as a current
liability and assess whether disclosures are in compliance with accounting standards and
legislation.
7 Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness and that it has been paid in line with the terms of the tax authority.
8
Review any current and post year-end correspondence with the tax authority to assess whether
there are any additional outstanding payments due. If so, confirm they are included in the year-end
liability.
 The fact
Lily Shah, a finance clerk, is responsible for
several elements of the cash receipts system
as she posts the bank transfer receipts from
the bank statements to the cash book,
updates the sales ledger and performs the
bank reconciliations.
The purchase ordering clerk, Oliver Dancer,
has responsibility for ordering goods below
$1,000 and for processing all purchase
invoices for payment.
This could result in delays in suppliers being
paid as the purchase invoices could not be
agreed to a GRN and also recorded liabilities
Goods received notes (GRNs) are sent to the
being understated.
accounts department every two weeks.
GRNs are only sent to the accounts
department.
Customer credit limits are set by sales ledger
clerks.
Control deficiency Control recommendation Test of control
Review the file of completed bank
reconciliations to identify who prepared them.
The key roles of posting bank receipts,
updating the sales ledger and performing bank Review the log of IDs of individuals who have
reconciliations should be split between posted bank receipts and updated the sales
There is a lack of segregation of duties and different individuals. ledger to assess whether these are different
errors will not be identified on a timely basis. individuals.
There is also an increased risk of fraud. If this is not practical, then as a minimum, the
bank reconciliations should be undertaken by Discuss with the financial controller which
another member of the finance team. members of staff undertake the roles of
processing of bank receipts and updating of
the cash book and sales ledger
Observe which member of staff undertakes the
processing of purchase invoices and confirm
this is not the purchase ordering clerk, Oliver
There is a lack of segregation of duties and The roles of purchase ordering and processing
Dancer.
this increases the risk of fraud and non- of the related supplier invoices should be
business related purchases being made. allocated to separate members of staff.
Inspect a copy of the company’s organisation
chart to identify if these tasks have now been
allocated to different roles.
A copy of the GRNs should be sent to the Enquire of the accounts clerk as to the
accounts department on a more regular basis, frequency of when GRNs are received to
such as daily. assess if they are being sent promptly.
The accounts department should undertake a Undertake a sequence check of GRNs held by
Additionally, any prompt payment discounts
sequence check of the GRNs to ensure none the accounts department, discuss any missing
offered by suppliers may be missed due to
are missing for processing. items with the accounts clerk.
delayed payments.
Review the file of copy GRNs held by the
The GRN should be created in three parts and
purchase ordering clerk, Oliver Dancer, and
a copy of the GRN should be sent to the
Failing to send a copy to the ordering review for evidence that these are matched to
purchase order clerk, Oliver Dancer, who
department could result in a significant level of orders and flagged as complete.
should agree this to the order and change the
unfulfilled orders leading to a loss of sales and
order status to complete. On a regular basis
stock-outs. Review the file of unfulfilled purchase orders
he should then review for all unfulfilled orders
for any overdue items and discuss their status
and chase these with the relevant supplier.
with Oliver Dancer.
For a sample of new customers accepted in
the year, review the authorisation of the credit
Sales ledger clerks are not sufficiently senior Credit limits should be set by a senior member
limit, and ensure that this was performed by a
and so may set limits too high, leading to of the sales department and not by sales
responsible official.
irrecoverable debts, or too low, leading to a ledger clerks. These limits should be regularly
loss of sales reviewed by a responsible official.
Enquire of sales ledger clerks as to who can
set credit limits
 The fact Control deficiency
These numbers are not sequential. Without
sequential numbers, it is difficult for Freesia
Customer orders are given a number based on Co to identify missing orders and to monitor if
the sales person’s own identification number. all orders are being dispatched in a timely
manner. If they are not, this could lead to a
loss of customer goodwill.
Failing to send a copy to the purchase
ordering department means that it is not
possible to monitor the level of unfulfilled
orders. This could result in a significant level of
unfulfilled orders leading to stock-outs and a
consequent loss of sales.
GRNs are only sent to the finance department.
In addition, if the GRN is lost, then it will not be
possible for the finance department to match
the invoice to proof of goods being received.
This could result in a delay to the invoice being
paid and a loss of supplier goodwill.
Document count controls can confirm the
completeness of input. However, they do not
Camilla Brown, the purchase ledger clerk, only
verify the accuracy or validity of input.
utilises document count controls when
inputting invoices into
If the invoices are not input correctly, suppliers
the purchase ledger.
may not be paid on time, or paid incorrect
amounts leading to an overpayment or loss of
supplier goodwill who may withdraw credit
facilities.
Control recommendation Test of control
Re-perform the control by undertaking a
Sales orders should be sequentially
sequence check of sales orders.
numbered. On a egular basis, a sequence
check of orders should be undertaken to
Discuss any gaps in the sequence with sales
identify any missing orders.
ordering staff.
The GRN should be created in three parts with
one copy of the GRN being sent to the
ordering department. The second copy should
Review the file of copy GRNs held by the
be held at the warehouse and the third sent to
purchase ordering department and review for
the finance department.
evidence that these are matched to orders and
flagged as complete.
A purchase ordering clerk should agree their
copy of the GRN to the purchase order and
Review the file of unfulfilled purchase orders
change the order status to
for any overdue items and discuss their status
complete. On a regular basis, a review should
with an ordering clerk.
be undertaken for all unfulfilled orders and
these should be followed up with the relevant
supplier.
The audit team should utilise test data
The purchase ledger clerk should instead input
procedures to assess whether data can be
the invoices in batches and apply application
entered without the use of batch control totals
controls, such as control totals, rather than just
and also whether sequence checks are built
completeness checks to ensure both
into the system.
completeness and accuracy over the input of
purchase invoices. In addition, sequence
Observe the inputting of purchase invoices
checks should be built into the system to
and identify what application controls are
ensure completeness of input.
utilised by the clerk.
 The fact
The company values its inventory using
standard costs, which are not being kept up-
to-date.
Overtime worked is not authorised prior to
being paid. The information per employee is
collated and submitted to payroll by a
production clerk, but not authorised. The
production director is only informed about
overtime levels via quarterly reports.
The finance director compares the total of the There could be employees omitted or fictitious staff records to payment list and vice versa to
list of bank transfers with the total to be paid employees added to the payment listing so
per the payroll records.
It is not possible for a store to order goods
from other local stores for customers who
request them. Instead, customers are told to
contact the other stores or use the company
website.
Control deficiency Control recommendation Test of control
If the standard costs were reviewed 18 months
ago, there is the risk that the costs are A review of all standard costs currently in use
misstated as changes in raw materials and should be undertaken by a senior manager in
wages inflation may not have been adjusted the production department. Actual costs for
for. This could result in inventory being under materials, labour and overheads should be
or overvalued and profits being misstated. ascertained and compared to the proposed
Obtain a copy of the standard costs used for
standard costs to ensure they are a close
inventory valuation, assess when the review
In addition for year-end reporting, IAS 2 approximation.
was last undertaken and inspect for evidence
Inventories only allows standard costs to be
of review by the production director.
used for valuation purposes The revised standard costs should be
if they are a close approximation to actual reviewed by the production director who
costs, which is unlikely if the standard costs should evidence this review. At least annually,
remain unchanged for a long period of time. a review of the standard costs should be
Therefore the valuation may not be in line with undertaken to ensure they are up-to-date.
IAS 2.
These reports are reviewed sometime after the
All overtime should be authorised by a All overtime should be authorised by a
payments have been made which could result
responsible official prior to the payment being responsible official prior to the payment being
in unauthorised overtime or amounts being
processed by the payroll department. This processed by the payroll department. This
paid incorrectly and Freesia Co’s payroll cost
authorisation should be evidenced in writing. authorisation should be evidenced in writing.
increasing.
The finance director, when authorising the The finance director, when authorising the
payments, should on a sample basis perform payments, should on a sample basis perform
checks from the human resource department’s checks from the human resource department’s
staff records to payment list and vice versa to
confirm that payments are complete and only confirm that payments are complete and only
that, although the total payments list agrees to made to bona fide employees. made to bona fide employees.
payroll totals, there could be fraudulent or
erroneous payments being made. The finance director should sign the payments The finance director should sign the payments
list as evidence that these checks have been list as evidence that these checks have been
undertaken. undertaken
During the interim audit, arrange to visit a
Customers are less likely to contact individual An inter-branch transfer system should be
number of the stores, discuss with the store
stores themselves and this could result in the established between stores, with inter-branch
manager the process for ordering of inventory
company losing valuable sales inventory forms being completed for store
items, in particular whether it is possible to
transfers.
order from other branches.
In addition, some goods which are slow
moving in one store may be out of stock at This should help stores whose inventory levels
At each store, inspect a sample of completed
another; if goods could be transferred between are low but are awaiting their deliveries from
inter-branch inventory forms for confirmation
stores, then overall sales may be maximised. the suppliers.
the control is operating.
 The fact
Purchase orders below $1,000 are not
authorised and are processed solely by the
purchase order clerk who is also responsible
for processing invoices.
The finance director authorises the bank
transfer payment list for suppliers; however,
she only views the total amount of payments
to be made.
Supplier statement reconciliations are no
longer performed.
Control deficiency Control recommendation Test of control
All purchase orders should be authorised by a
This could result in non-business related
responsible official. Select a sample of purchase orders and
purchases and there is an increased fraud risk
review for evidence of authorisation, agree this
as the clerk could place orders for personal
Authorised signatories should be established to the appropriate signature on the approved
goods up to the value of $1,000, which is
with varying levels of purchase order signatories list.
significant.
authorisation.
The finance director should review the whole
payments list prior to authorising.
Review the payments list for evidence of
Without looking at the detail of the payments As part of this, she should agree the amounts
review by the finance director.
list, as well as supporting documentation, to be paid to supporting documentation, as
there is a risk that suppliers could be being well as reviewing the supplier names to
Enquire of accounts staff what supporting
paid an incorrect amount, or that sums are identify any duplicates or any unfamiliar
documentation the finance director requests
being paid to fictitious suppliers. names.
when undertaking this review.
She should evidence her review by signing the
bank transfer list.
Review the file of reconciliations to ensure that
they are being performed on a regular basis
Supplier statement reconciliations should be and that they have been reviewed by a
This may result in errors in the recording of
performed on a monthly basis for all suppliers responsible official.
purchases and payables not being identified in
and these should be reviewed by a
a timely manner.
responsible official. Re-perform a sample of the reconciliations to
ensure that they have been carried out
appropriately.
The fact Control deficiency Control recommendation Test of control
BANK
(c) Substantive procedures for bank balances
1 Obtain a bank confirmation letter from Airsoft Co’s bankers for all of its bank accounts.
2 Agree all accounts listed on the bank confirmation letter to Airsoft Co’s bank reconciliations and the
trial balance to ensure completeness of bank balances.
3 For all bank accounts, obtain Airsoft Co’s bank account reconciliation and cast to ensure arithmetical
accuracy.
4 Agree the balance per the bank reconciliation to an original year-end bank statement and to the
bank confirmation letter.
5 Agree the reconciliations balance per the cash book to the year-end cash book.
6 Review the financial statements to ensure that the disclosure of bank balances is complete and
accurate.
Review the cash book and bank statements for any unusual items or large transfers around the year
7 end, as this could be evidence of window dressing.
Examine the bank confirmation letter for details of any security provided by Airsoft Co or any legal
8 right of set-off as this may require disclosure.
For the savings bank accounts, review any reconciling items on the year-end bank reconciliations and
9 agree to supporting documentation.
Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank statement and
10 also to the paying-in-book pre year end.

Trace all unpresented cheques through to a pre year-end cash book and post year-end statement. For
11 any unusual amounts or significant delays, obtain explanations from management.
Examine any old unpresented cheques to assess if they need to be written back into the purchase
12 ledger as they are no longer valid to be presented.

(b) Substantive procedures for bank balances

1 Obtain a bank confirmation letter from Jasmine Co’s bankers for all of its accounts.
2 Agree all accounts listed on the bank confirmation letter to the company’s bank reconciliations or the
trial balance/general ledger to ensure completeness of bank balances.
3 For the current account, obtain Jasmine Co’s bank reconciliation and cast to check the additions to
ensure arithmetical accuracy.
4 Agree the balance per the bank reconciliation to an original year-end bank statement and to the bank
confirmation letter.
5 Agree the reconciliation’s balance per the cash book to the year-end cash book.
6 Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank statement and
also to the paying-in book pre year end.
7
Trace all unpresented cheques through to a pre year-end cash book and post year-end bank statement.
For any unusual amounts or significant delays, obtain explanations from management.
8 Examine any old unpresented cheques to assess whether they need to be written back.
9 Review the cash book and bank statements for any unusual items or large transfers around the year
end, as this could be evidence of window dressing.
10 Examine the bank confirmation letter for details of any security provided by Jasmine Co, with
regards to the bank overdraft or any legal right of set-off as this may require disclosure.
11 Review the financial statements to ensure that the disclosure of bank balances is complete and
accurate and classified appropriately between current assets and current liabilities.
Bank
Obtain

Bank
 this is because there are no overtime costs.
Customer statements are no longer being
generated and sent to customers.
The receivables ledger control account is only
reconciled at the end of April in order to verify
the year-end balance.
The bank reconciliations are only carried out
every two months.
The bank reconciliations are only reviewed by reconciling items, as there could be
the financial controller if the sum of reconciling compensating errors which cancel each other
items is significant; therefore some
reconciliations are not being reviewed. The
financial controller relies solely on the
accounts clerk’s notification that the bank
reconciliations require review.
Lily Shah, a finance clerk, is responsible for
several elements of the cash receipts system
as she posts the bank transfer receipts from
the bank statements to the cash book,
updates the sales ledger and performs the
bank reconciliations.
Control deficiency
If statements are not sent regularly, this
increases the likelihood of errors and any
disputed invoices not being quickly identified
and resolved by Amberjack Co. This could
lead to cash flow issues
If the receivables ledger is only reconciled
annually, there is a risk that errors will not be
spotted promptly and receivables may be
misstated.
For a cash-based business, the bank
reconciliation is a key control which reduces
the risk of fraud.
If it is not reconciled regularly enough, then
this reduces its effectiveness as fraud and
errors may not be identified on a timely basis.
The bank reconciliations could contain
significant errors, but a low overall amount of
out.
Bank reconciliations are a key control which
reduces the risk of fraud. If they are not
reviewed, then this reduces its effectiveness
and also results in a lack of assurance that
bank reconciliations are being carried out at all
or on a timely basis.
There is a lack of segregation of duties and
errors will not be identified on a timely basis.
There is also an increased risk of fraud.
Control recommendation Test of control Note
Amberjack Co should produce monthly customer statements
AR
for all customers and send them out promptly.
The receivables ledger control account should be reconciled
on a monthly basis to identify any errors which should be
investigated and corrected. The reconciliations should be AR
reviewed by a responsible official and they should evidence
their review by way of signature.
The bank reconciliations should be performed on a monthly
basis rather than every two months. The financial controller
Bank
should continue to review each reconciliation and evidence her
review by way of signature on the bank reconciliation.
The bank reconciliations should be reviewed by the financial
controller on a monthly basis, even if the reconciling items are
Bank
not significant, and he should evidence his review by way of
signature on the bank reconciliation.
Review the file of completed bank
reconciliations to identify who prepared them.
The key roles of posting bank receipts, updating the sales
Review the log of IDs of individuals who have
ledger and performing bank reconciliations should be split
posted bank receipts and updated the sales
between different individuals.
ledger to assess whether these are different
Bank
individuals.
If this is not practical, then as a minimum, the bank
reconciliations should be undertaken by another member of
Discuss with the financial controller which
the finance team.
members of staff undertake the roles of
processing of bank receipts and updating of
the cash book and sales ledger
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

The finance director, when authorising the payments, should

on a sample basis perform checks from the human resource
The finance director compares the total of the There could be employees omitted or fictitious department’s staff records to payment list and vice versa to
Obtain a sample of payments lists and review
list of bank transfers with the total to be paid employees added to the payment listing so confirm that payments are complete and only made to bona
for signature by the finance director as Bank
per the payroll records. that, although the total payments list agrees to fide employees.
evidence that the control is operating correctly.
payroll totals, there could be fraudulent or
erroneous payments being made. The finance director should sign the payments list as evidence
that these checks have been undertaken.

The finance director should review the whole payments list

The finance director authorises the bank
transfer payment list for suppliers; however,
she only views the total amount of payments
to be made.
Without looking at the detail of the payments
list, as well as supporting documentation,
there is a risk that suppliers could be being
paid an incorrect amount, or that sums are
being paid to fictitious suppliers.
prior to authorising.
Review the payments list for evidence of
review by the finance director.
As part of this, she should agree the amounts to be paid to
supporting documentation, as well as reviewing the supplier Bank
Enquire of accounts staff what supporting
names to identify any duplicates or any unfamiliar names.
documentation the finance director requests
when undertaking this review.
She should evidence her review by signing the bank transfer
list.

This lack of segregation of duties increases

The financial controller prepares the bank
transfers for the payroll and also authorises
these to be paid.
Once the bank transfer has been prepared by the financial
the risk of fraud/error as the financial controller
controller, it should be passed to the finance director to be
could pay themselves or certain employees Bank
reviewed and authorised for payment. The review and
more than they are due without this being
authorisation should be evidenced by the finance director.
detected.

Discrepancies may arise due to the payroll

records or the bank transfer listing being
incorrect. Assuming the discrepancies are
always in the payroll records may result in
incorrect amendments being made to payroll The senior payroll manager should not be able to process
The senior payroll manager reviews the bank or incorrect amounts paid to employees. changes to the payroll system as well as authorise payments.
transfer listing prior to authorising the Discrepancies should be thoroughly investigated, and
payments and if any discrepancies are noted, In addition, there is a lack of segregation of adjustments made in the relevant record as required.
Bank
always makes the adjustment in the payroll duties as it is the payroll team which
records for any changes required. processes the amounts and the senior payroll The authorisation of the bank transfer listing should be
manager who authorises payments. undertaken by an individual outside the payroll department,
such as the finance director.
The senior manager could fraudulently
increase or incorrectly amend the amounts to
be paid to certain employees, process this
payment as well as amend the records.

The finance director should review the whole payments list

The finance director only views the total
amount of payments to be made rather than
the amounts to be paid to each supplier.
prior to authorising.
Without looking at the detail of the payments
list, as well as supporting documentation,
As part of this, he should agree the amounts to be paid to
there is a risk that suppliers could be being Bank
supporting documentation, as well as reviewing the supplier
paid an incorrect amount, or that sums are
names to identify any duplicates or any unfamiliar names.
being paid to fictitious suppliers.
He should evidence his review by signing the bank transfer list.
 this is because there are no overtime costs.
The cashing up of tills along with the recording
of any cash discrepancies is undertaken by
just one individual, the restaurant manager.
Cash is stored in a safe at each venue and the There is a risk of significant cash losses due to The current key lock safe should be replaced with a safe with a
restaurant manager stores the safe key in a
drawer of their desk when not in use.
The cashier is not checking that payments
made by credit card have resulted in cash
being received by Camomile Co.
Equestrian Co has experienced significant
staff shortages within their internal audit (IA)
department. In addition, several members of
the current IA team are new to the company.
The company values its inventory using
standard costs, which are not being kept up-
to-date.
Control deficiency Control recommendation Test of control Note
There is a fraud risk as the manager could
The cashing up process should be undertaken by two
remove some of the cash and then simply
individuals together, ideally an assistant manager and the
record that there was an exception on the daily
restaurant manager. One should count the cash and the other
sales list.
record it.
Cash
In addition, as there is no segregation of
Any exceptions to the till reading should be double checked to
duties, the restaurant manager could,
confirm that they are not simply arithmetical errors. If still
fraudulently or by error, record the total sales
present, the relevant employees who had access to the till can
as per each till incorrectly leading to incorrect
be identified and further investigations can be undertaken.
identification of discrepancies.
theft if access to the safe key is not carefully digital code. Only authorised personnel should have the code Cash
controlled. which should be updated on a regular basis.
The cashier should reconcile the credit card vouchers per
restaurant to the monthly statement received from the card
There is a risk that receipts of cash by credit
company. The daily amounts per the statement should be
card may have been omitted and this would
agreed to the bank statement to ensure that all funds have
not be identified on a timely basis as the bank
been received. Cash
is only reconciled every two months and may
result in difficulties in resolving any
This reconciliation should be reviewed by a responsible official,
discrepancies with the credit card company.
such as the financial controller, who should evidence by
signature that the review has been undertaken
Senior management should consider recruiting additional
employees to join the IA department.
Maintaining an IA department is an important
control as it enables senior management to
In the interim, employees from other departments, such as Internal
test whether controls are operating effectively
finance, could be seconded to IA to assist them with the control
within the company. If the team has staff
internal audits, provided these reviews do not cover controls
shortages or lack of experience, this reduces
operating in the department where the employees normally
the effectiveness of this monitoring control.
work.
If the standard costs were reviewed 18 months
ago, there is the risk that the costs are
misstated as changes in raw materials and A review of all standard costs currently in use should be
wages inflation may not have been adjusted undertaken by a senior manager in the production department.
for. This could result in inventory being under Actual costs for materials, labour and overheads should be
or overvalued and profits being misstated. ascertained and compared to the proposed standard costs to Obtain a copy of the standard costs used for
ensure they are a close approximation. inventory valuation, assess when the review
Inventory
In addition for year-end reporting, IAS 2 was last undertaken and inspect for evidence
Inventories only allows standard costs to be The revised standard costs should be reviewed by the of review by the production director.
used for valuation purposes if they are a close production director who should evidence this review. At least
approximation to actual costs, which is unlikely annually, a review of the standard costs should be undertaken
if the standard costs remain unchanged for a to ensure they are up-to-date.
long period of time. Therefore the valuation
may not be in line with IAS 2.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

The company has 45 centres as well as a

IA should review its programme of visits to assess if additional
head office and warehouse, hence if each
resources could be devoted to ensuring that all sites are visited
year the four largest sites are visited this can
over a shorter period, for example, five years. This would
result in the other sites only being visited every
ensure that physical verification of all assets could be
eight years.
The IA department undertakes physical completed more regularly. For sites visited any assets which
verification of assets each year for the four cannot be located should be investigated fully. If it cannot be
If the non-current assets register is not Inventory
largest centres as well as five of the other located, then it should be written off.
physically verified on a regular basis, there is
centres, randomly selected.
an increased risk of assets being
Each centre should submit a list of assets with serial numbers
misappropriated as there is no check that the
to IA, who should compare these to the PPE register. Those
assets still exist in their correct location. In
sites with significant variations should be prioritised for a site
addition, obsolete assets will not be identified
visit by IA.
on a timely basis.

High value inventory is stored in a secure

As the code is the same across all sites, this
location across all nine warehouses and
significantly increases the risk of fraud. A
access is via a four digit code, which is
considerable number of people will be aware
common to all sites.
of the codes and could access inventory at
any of the nine sites
The access codes for all of the sites should be changed. Each
site should have a unique code, known to a small number of
Inventory
senior warehouse employees. These codes should be
changed on a regular basis.

In order to rely on inventory records for

Monthly perpetual inventory counts are
supposed to be undertaken at each of the nine statements, all lines of inventory must be
warehouses, but some of these are
outstanding.
The programme of perpetual inventory counts should be
decision making and the year-end financial
reviewed for omissions. Any lines which have been missed out
should be included in the remaining counts.
counted at least once a year, with high value
Inventory
or high turnover items counted more regularly.
At the year end, if any lines are identified as having not been
If the counts are outstanding, some goods
counted, the company should organise an additional count to
may not be counted, and the inventory records
ensure that all items are confirmed to inventory records.
may be incorrect.

Additional resources should be devoted to completing the

Physical verification of assets within the non- If non-current assets are not physically verified physical verification of all assets within the register. If any
current asset register has not been undertaken on a regular basis, there is an increased risk of assets cannot be located, they should be written off. Non-
for some time. A current programme has assets being misappropriated or misplaced as current
started but is only 15% complete, due to staff there is no check that the assets still exist in Following this full review, on a monthly basis a sample of asset
shortages. their correct location. assets at the sites should be agreed back to the register to
confirm existence.

Overtime worked is not authorised prior to

These reports are reviewed sometime after the
being paid. The information per employee is Review the overtime report for evidence of
payments have been made which could result All overtime should be authorised by a responsible official prior
collated and submitted to payroll by a authorisation and note the date this occurred
in unauthorised overtime or amounts being to the payment being processed by the payroll department. Payroll
production clerk, but not authorised. The to ensure that this was undertaken prior to the
paid incorrectly and Freesia Co’s payroll cost This authorisation should be evidenced in writing.
production director is only informed about payment of the overtime.
increasing.
overtime levels via quarterly reports.

This could result in employees taking

unauthorised leave which could lead to Employees should receive written confirmation when their
operational difficulties if there are shortages of holiday has been approved and should be informed that they
Department managers are required to approve
staff at critical periods. will not be able to take holiday without this notification.
all employees’ holiday forms, however, this Payroll
does not always occur.
In addition, payments for untaken holiday may Any payments for unused holiday should be authorised by
be made in error as holiday records may be department managers prior to payment.
incorrect.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

As the edit report is not checked, errors made

by the payroll clerk when updating the system
will not be identified promptly. This may result
in new employees not being paid at all, errors
The payroll supervisor or a member of the finance team should
being made in payments to new employees or
review all edit reports and agree changes made to the details
leavers being paid after they have left the
The payroll clerk amends the payroll and an on the joiner/leavers forms. Any discrepancies should be
company.
edit report of changes is produced but this investigated promptly and the payroll system updated for any
Payroll
report is not reviewed. errors or omissions.
This would lead to loss of employee goodwill
and errors in accounting records for wages
The payroll supervisor should evidence their review on the edit
and salaries.
report with their signature.
It could also result in an increased risk of fraud
as fictitious employees could be added by the
payroll clerk

All staff appointments, including temporary staff, should only

The HR department is responsible for
processing joiners and leavers, but due to staff
illness, the operations manager has processed This could result in temporary employees not
temporary new drivers and notified payroll.
The operations manager may not carry out all
be processed by the HR department to ensure that correct
the required procedures for processing
procedures are followed.
temporary new drivers as the manager may
not be using appropriate documentation.
If it is not possible for the HR department to carry out all of the
detailed processing due to staff shortages, a member of the Payroll
HR team should review the leaver/joiner form and authorise it
being set up in the payroll records correctly,
before it is sent to the payroll department.
resulting in the late payment of wages,
incorrect statutory deductions being calculated
The payroll department should be notified not to accept any
and incomplete payroll records.
new joiner information unless approved by a member of HR.

This means that employees could claim to
Only overtime in excess of five hours per week
have worked up to five hours overtime without
needs authorisation by the operations
authorisation resulting in payments being
manager.
made to employees for hours not worked and
additional payroll costs.
All overtime, including that below five hours, should be
authorised by a responsible official before being processed in
Payroll
the payroll. This authorisation should be evidenced by way of
signature.

Where cash wages are paid, the driver is only Payment of wages without proof of identity or All drivers collecting cash pay packets should provide a form of
required to provide their name to collect their signature increases the risk that wages could identification to the finance staff member before the pay packet
Payroll
pay packet. be paid to incorrect employees either in error is handed to them. The driver should also be required to sign
or due to fraud resulting in a loss of cash. for their pay packet.

Approved bonus parameters should be established by the

The operations manager decides on the bonus Without approved parameters, the operations
board. All bonuses should be determined by a senior official,
to be paid to delivery drivers each quarter and manager may award excessive bonuses or
such as the sales director, in line with these parameters, who Payroll
there are no approved parameters for the pay additional sums to friends and family
should communicate the bonus in writing to the payroll
bonus levels. members resulting in additional payroll costs.
department.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

Drivers could take longer breaks than those
authorised resulting in payments being made
to employees for time not worked. Conversely,
Delivery drivers must take breaks throughout
if drivers do not take the required breaks, they
the day which are not monitored.
may be in breach of law and regulations which
require drivers to take regular breaks, hence
the company is at risk of fines.
The company should monitor the activity of the delivery drivers
through electronic means, for example, by using tracking
devices attached to their vehicles to ensure that the prescribed
breaks are taken by the employees. Payroll
Data should be downloaded and reviewed by a responsible
official on a regular basis.

The password to amend standing data should be changed and

only communicated to senior members of the payroll
department.

If all members of payroll need the ability to amend standing

As all members of payroll can amend standing
All members of the payroll department can data, the system should be changed to require authorisation of
data this may result in errors or unauthorised
amend employees' standing data in the payroll all changes by a senior member of payroll. Payroll
changes being made, leading to incorrect
system as they have access to the password.
payment of wages and increased risk of fraud.
Edit reports should be generated for all standing data changes
with clear reference to who made the change and who
authorised it. These edit reports should be regularly reviewed
by a responsible official and they should evidence this review
with a signature.

The bonus should be determined by a responsible official,

such as the production director and should be formulated
Production supervisors should not determine
Production supervisors determine the amount based on a written policy. If significant in value, the bonus
this as they could pay extra bonuses to friends
of the discretionary bonus to be paid to should be formally agreed by the board of directors. Payroll
or family members, resulting in additional
employees.
payroll costs.
The bonus should be communicated in writing to the payroll
department.

A senior member of the payroll team should recalculate the

The wages calculations are generated by the
payroll system and there are no checks
performed.
Therefore, if system errors occur during the
gross to net pay workings for a sample of employees and
payroll processing, this would not be identified.
compare their results to the output from the payroll system.
This could result in wages being over or under Payroll
calculated, leading to an additional payroll cost
These calculations should be signed as approved before
or loss of employee goodwill.
payments are made.

As the payments continue until the employee

notifies HR, and employees are unlikely to be
closely monitoring payments, there is the risk The payroll department should maintain a schedule, by
that overpayments may be made, which then employee, of payments made to third parties, such as the
need to be reclaimed, leading to employee central government as well as the cumulative balance owing.
Student loan deduction forms are completed
dissatisfaction. On a regular basis, at least annually, this statement should be
by relevant employees and payments are
reconciled to the loan statement received from the government
made directly to the third party until the Payroll
In the case of underpayments, Raspberry Co and sent to the employee for agreement.
employee notifies HR that the loan has been
has an obligation to remit funds on time and to
repaid in full.
reconcile to annual loan statements. If the In accordance with the schedule, payments which are due to
company does not make payments in full and cease shortly should be confirmed in writing with the third
on time, this could result in non-compliance by party, prior to stopping.
both the company and employee, which could
result in
fines or penalties.
 this is because there are no overtime costs.
Holiday request forms are required to be
completed and authorised by relevant line
managers, however, this does not always
occur.
The senior payroll manager reviews the bank
transfer listing prior to authorising the
payments and also amends the payroll records
for any changes required.
The pay packets are delivered to the
production supervisors, who distribute them to
employees at the end of their shift.
Monthly management accounts do not analyse understand why variances may have arisen.
the variances between actual and budgeted These could occur due to extra employees
wages and salaries;
Control deficiency Control recommendation Test of control Note
This could result in employees taking
Employees should be informed that they will not be able to
unauthorised leave, resulting in production
take holiday without completion of a holiday request form, with
difficulties if an insufficient number of
authorisation from the line manager.
employees are present to operate the power Payroll
plant. In addition, employees taking
Payroll clerks should not process holiday payments without
unauthorised leave could result in an
agreement to the authorised holiday form.
overpayment of wages.
There is a lack of segregation of duties as it is
the payroll team which processes the amounts
The senior payroll manager should not be able to process
and the senior payroll manager who
changes to the payroll system as well as authorise payments.
authorises payments.
Payroll
The authorisation of the bank transfer listing should be
The senior manager could fraudulently
undertaken by an individual outside the payroll department,
increase the amounts to be paid to certain
such as the finance director.
employees, process this payment as well as
amend the records.
All pay packets should be distributed by the payroll
department, directly to employees, upon sight of the
employee’s clock card and photographic identification as this
confirms proof of identity.
The supervisor is not sufficiently independent
to pay wages out. They could adjust pay
Payroll should undertake a reconciliation of pay packets issued
packets to increase those of close friends
to production supervisors, wages distributed with employee
whilst reducing others.
signatures to confirm receipt and pay packets returned to
payroll due to staff absences. Any differences should be Payroll
In addition, although the production
investigated immediately.
supervisors know their team members,
payment of wages without proof of identity
As employees work eight-hour shifts over 24 hours,
increases the risk that wages could be paid to
consideration should be given to operating a shift system for
incorrect employees.
the payroll department on wages pay out day. This will ensure
that there are sufficient payroll employees to perform the
wages pay out for each shift of employees, with the same level
of controls in place
This is because there are no overtime costs.
However, wages and salaries are a significant
expense and management needs to The monthly management accounts should be amended to
include an analysis of wages and salaries compared to the
budgeted costs. These should be broken down to each Payroll
being recruited which were not budgeted for, relevant department and could also include an analysis of
or an increase in wage pay out rates. The headcount numbers compared to budget.
board would need to monitor the wages and
salaries costs as if they are too high, then this
would impact the profitability of the company.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

The HR director should as a matter of urgency review the

workloads of the department to assess whether other tasks
During the year, the human resources (HR)
This is a lack of segregation of duties, as can be reprioritised as payroll should cease to set up new
department has been busy; therefore the
employees are able to set up new joiners in joiners. This role must immediately revert back to HR to
payroll department has set up new joiners to
the payroll system and process their pay, this undertake. Payroll
the company.
leads to an increased risk of fictitious/duplicate
employees being set up. Additionally, a review should be undertaken of all new joiners
set up by payroll with agreement to employee files to confirm
that all new employees are bona fide.

As payroll can be a significant expense for a

business, any decision to increase this should
be made by the board as a whole and not just All increases of pay should be proposed by the HR department
by the HR director. and then formally agreed by the board of directors.

The wage rate has been increased by the HR In addition, the notification of the payroll
director and notified to the payroll supervisor increase was via email and the payroll
by email. supervisor was able to make changes to the
payroll standing data without further
authorisation.
This increases the risk of fraud or errors
arising within payroll.
Upon agreement of the pay rise, a written notification of the
board decision should be sent to the payroll supervisor who Payroll
enters the revised pay rate into the system. This change
should trigger an exception report for the payroll director, and
the new rate should not go live until the director has signed off
the changes.

Observe which member of staff undertakes the

processing of purchase invoices and confirm
The purchase ordering clerk, Oliver Dancer, this is not the purchase ordering clerk, Oliver
There is a lack of segregation of duties and The roles of purchase ordering and processing of the related
has responsibility for ordering goods below Dancer.
this increases the risk of fraud and non- supplier invoices should be allocated to separate members of Purchase
$1,000 and for processing all purchase
business related purchases being made. staff.
invoices for payment. Inspect a copy of the company’s organisation
chart to identify if these tasks have now been
allocated to different roles.

This could result in delays in suppliers being

Enquire of the accounts clerk as to the
paid as the purchase invoices could not be
A copy of the GRNs should be sent to the accounts frequency of when GRNs are received to
agreed to a GRN and also recorded liabilities
Goods received notes (GRNs) are sent to the department on a more regular basis, such as daily. assess if they are being sent promptly.
being understated.
accounts department every two weeks. Purchase
The accounts department should undertake a sequence check Undertake a sequence check of GRNs held by
Additionally, any prompt payment discounts
of the GRNs to ensure none are missing for processing. the accounts department, discuss any missing
offered by suppliers may be missed due to
items with the accounts clerk.
delayed payments.

Failing to send a copy to the purchase

ordering department means that it is not The GRN should be created in three parts with one copy of the
possible to monitor the level of unfulfilled GRN being sent to the ordering department. The second copy Review the file of copy GRNs held by the
orders. This could result in a significant level of should be held at the warehouse and the third sent to the purchase ordering department and review for
unfulfilled orders leading to stock-outs and a finance department. evidence that these are matched to orders and
consequent loss of sales. flagged as complete.
GRNs are only sent to the finance department. Purchase
A purchase ordering clerk should agree their copy of the GRN
In addition, if the GRN is lost, then it will not be to the purchase order and change the order status to Review the file of unfulfilled purchase orders
possible for the finance department to match complete. On a regular basis, a review should be undertaken for any overdue items and discuss their status
the invoice to proof of goods being received. for all unfulfilled orders and these should be followed up with with an ordering clerk.
This could result in a delay to the invoice being the relevant supplier.
paid and a loss of supplier goodwill.
 this is because there are no overtime costs.
Camilla Brown, the purchase ledger clerk, only verify the accuracy or validity of input.
utilises document count controls when
inputting invoices into the purchase ledger.
It is not possible for a store to order goods
from other local stores for customers who
request them. Instead, customers are told to
contact the other stores or use the company
website.
Purchase orders below $1,000 are not
authorised and are processed solely by the
purchase order clerk who is also responsible
for processing invoices.
Supplier statement reconciliations are no
longer performed.
Some departments have already significantly
exceeded their annual capital expenditure
budgets.
Control deficiency
Document count controls can confirm the
completeness of input. However, they do not
If the invoices are not input correctly, suppliers
may not be paid on time, or paid incorrect
amounts leading to an overpayment or loss of
supplier goodwill who may withdraw credit
facilities.
Customers are less likely to contact individual
stores themselves and this could result in the An inter-branch transfer system should be established
company losing valuable sales
In addition, some goods which are slow
moving in one store may be out of stock at
another; if goods could be transferred between awaiting their deliveries from the suppliers.
stores, then overall sales may be maximised.
This could result in non-business related
purchases and there is an increased fraud risk
as the clerk could place orders for personal
goods up to the value of $1,000, which is
significant.
This may result in errors in the recording of Supplier statement reconciliations should be performed on a
purchases and payables not being identified in monthly basis for all suppliers and these should be reviewed
a timely manner.
It appears that purchase orders for capital
expenditure are being placed without being
agreed back to annual capital budgets,
resulting in overspends.
The increased expenditure may be due to
increased levels of services being provided, or
it could be due to a lack of control over the
capital expenditure process, resulting in
increased costs and reduced profits.
Control recommendation Test of control Note
The audit team should utilise test data
procedures to assess whether data can be
The purchase ledger clerk should instead input the invoices in
entered without the use of batch control totals
batches and apply application controls, such as control totals,
and also whether sequence checks are built
rather than just completeness checks to ensure both
into the system. Purchase
completeness and accuracy over the input of purchase
invoices. In addition, sequence checks should be built into the
Observe the inputting of purchase invoices
system to ensure completeness of input.
and identify what application controls are
utilised by the clerk.
During the interim audit, arrange to visit a
number of the stores, discuss with the store
manager the process for ordering of inventory
between stores, with inter-branch inventory forms being
items, in particular whether it is possible to
completed for store transfers.
order from other branches. Purchase
This should help stores whose inventory levels are low but are
At each store, inspect a sample of completed
inter-branch inventory forms for confirmation
the control is operating.
All purchase orders should be authorised by a responsible
Select a sample of purchase orders and
official.
review for evidence of authorisation, agree this
Purchase
to the appropriate signature on the approved
Authorised signatories should be established with varying
signatories list.
levels of purchase order authorisation.
Review the file of reconciliations to ensure that
they are being performed on a regular basis
and that they have been reviewed by a
responsible official.
Purchase
by a responsible official.
Re-perform a sample of the reconciliations to
ensure that they have been carried out
appropriately.
The company’s monthly management accounts should include
an analysis of capital expenditure against budget and prior
year per department. Each department head should include
narrative which explains the significant variances to date.
Purchase
Capital purchase orders should be compared to the annual
department budgets as part of the authorisation process. Any
spend in excess of the budget should be referred for
authorisation to the finance director.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

There is the risk that Equestrian Co is missing

out on early settlement discounts.
The policy of making payment after 75 days should be
Invoices are authorised by the finance director,
Also, failing to pay in accordance with the reviewed. Consideration should be given to earlier payment if
but payment is only made 75 days after receipt Purchase
supplier’s payment terms can lead to a loss of the settlement discounts are sufficient. If not, invoices should
of the invoice.
supplier goodwill as well as the risk that be paid in accordance with the supplier’s payment terms.
suppliers may refuse to supply goods to the
company

For a sample of new customers accepted in

Customer credit limits are set by sales ledger
clerks.
the year, review the authorisation of the credit
Sales ledger clerks are not sufficiently senior
Credit limits should be set by a senior member of the sales limit, and ensure that this was performed by a
and so may set limits too high, leading to
department and not by sales ledger clerks. These limits should responsible official. Sales
irrecoverable debts, or too low, leading to a
be regularly reviewed by a responsible official.
loss of sales
Enquire of sales ledger clerks as to who can
set credit limits

These numbers are not sequential. Without

Re-perform the control by undertaking a
sequential numbers, it is difficult for Freesia
Sales orders should be sequentially numbered. On a egular sequence check of sales orders.
Customer orders are given a number based on Co to identify missing orders and to monitor if
basis, a sequence check of orders should be undertaken to Sales
the sales person’s own identification number. all orders are being dispatched in a timely
identify any missing orders. Discuss any gaps in the sequence with sales
manner. If they are not, this could lead to a
ordering staff.
loss of customer goodwill.
If credit limits are not reviewed regularly, they
After passing a credit check a credit limit is set
could be out of date, resulting in limits being Credit limits should continue to be set by the sales director;
for all new customers by the sales director, but
too high and sales being made to poor credit however, these limits should be reviewed and amended as Sales
these credit limits are not reviewed after this
risks or too low and Snowdon Co losing appropriate on a regular basis by a responsible official.
unless a review is requested by the customer.
potential revenue.

Client services managers are given

responsibility to chase customers directly for
payment once an invoice is outstanding for 90
days. This is considerably in excess of the
company’s credit terms of 30 days which will
lead to poor cash flow.
Further, client services managers are more
likely to focus on customer relationships and
A credit controller should be appointed, and it should be their
generating further revenues rather than
role, rather than the client services managers, to chase any Sales
chasing payments. This could result in an
outstanding sales invoices which are more than 30 days old
increase in irrecoverable balances and
reduced profit and cash flows.

A petty cash log should be maintained so the purchase of

Each restaurant maintains a petty cash float of
$400, and at any point in time the receipts and
funds present should equal the float. It has
been noted by the internal audit (IA)
department that on occasions there are
differences due to the fact that no log is
maintained of petty cash requests.
sundry items is recorded in the log along with the sum
borrowed, date and employee.
This could be as a result of sundry items being
On purchase of the items, the relevant employee should return
purchased without the relevant receipt or
the relevant receipt or voucher and any funds not spent. The
voucher being returned.
log should be updated to confirm return of funds and receipts. Sales
There is also a possibility that the cash is
On a weekly basis, the restaurant manager should reconcile
being misappropriated by staff members, or
the petty cash and if any receipts are missing, these should be
being spent on non-business related items.
followed up with the relevant employee. If it is cash which is
missing, then this should be investigated further with the
employees who made petty cash purchases during that period.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

This means that when exceptions arise, it will

The reconciliations of the tills to the daily sales be difficult to identify which till caused the The reconciliations should be undertaken on an individual till
readings are performed in total for all five tills difference and therefore which employees may by till basis rather than in aggregate and any discrepancies Sales
at each venue rather than for each till. require further till training or may have noted should be investigated immediately.
undertaken fraudulent transactions.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

Each employee should be provided with a unique log on code

and this is required to be entered when using the tills.

To speed up the cash payment by customers, In the event of cash discrepancies arising in
for each venue the tills have the same log on the tills, it would be difficult to ascertain which
code and these codes are changed fortnightly. employees may be responsible as there is no
way of tracking who used which till. This could
lead to cash being easily misappropriated.
In order to facilitate the investigation of till differences,
employees should be allocated to a specific till point for their
shift. Sales
Any discrepancies which arise should initially be double
checked to ensure they are not arithmetical errors. If still
present, the relevant employees who had access to the till can
be identified and further investigations can be undertaken.

Daily sales sheets for each venue should be sequentially

There is a possibility that some sales sheets
could be misplaced by the restaurant manager
Daily sales sheets are scanned and emailed to
resulting in incomplete sales and cash receipts
head office on a weekly basis.
data being recorded into the accounting
system.
numbered and remitted to head office on a daily basis. At head
office, a sequence check should be undertaken on a regular
basis to identify any missing sheets and any gaps should be
investigated further.
Sales
Once received, the cashier should post the sales and cash
data for all six venues on a daily basis. Once processed, they
should then be signed as posted by the cashier and filed away
securely.

New customers undergo a credit check, after

Over a period of time it may be that the Credit limits should continue to be approved by the sales
which a credit limit is proposed by the sales
customers’ credit limits have been set too director; however, on a regular basis the sales director should Sales
staff and approved by the sales director, these
high, leading to irrecoverable debts, or too low, review these limits based on order history and payment record.
credit limits are not reviewed after this.
leading to a loss of sales.
Receivables ledger clerks are not sufficiently Credit limits should be set by a senior member of the
Customer credit limits are set by receivables senior and so may set limits too high, leading receivables ledger department and not by receivables ledger
Sales
ledger clerks. to irrecoverable debts, or too low, leading to a clerks. These limits should be regularly reviewed by a
loss of sales responsible official.

Receivables ledger clerks should not be able to access the

There is a risk that customers could be set up master data file to add new customers or make amendments.
Receivables ledger clerks record new
incorrectly resulting in a loss of customer
customer details and credit limits in the
goodwill and sales revenue In addition, the Any such additions/amendments to master file data should be
customer master data file and these changes
receivables ledger clerks are not senior restricted so that only supervisors and above can make Sales
are not reviewed.
enough to be given access to making changes changes.
to master file data as this could increase the
risk of fraud An exception report of changes made should be generated
and reviewed by a responsible official.

Amberjack Co’s credit controller is currently on

secondment for six months to the internal audit
During the period of the secondment, an alternative member of
department and has not been replaced. During This could result in an increased risk of
the finance department should be trained in the credit control
this period, it does not appear that anyone irrecoverable debts and lead to customers not Sales
role and assigned responsibility for reviewing the aged
else has been responsible for monitoring paying their outstanding balances on time, or
receivables listing and following up on any overdue customers.
ageing receivables. at all, leading to reduced cash flows.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

Once orders are processed, copies of GDNs
are sent to the finance department, customer
and remain in the warehouse.
However, the sales order department of
Amberjack Co does not receive a copy of the
GDN.
If the sales order department does not receive
a copy of the completed GDNs, they are not
able to monitor if orders are being fulfilled on a
timely basis. This could result in a loss of
revenue and customer goodwill.
The GDN should be amended to be at least four-part. One
copy should be sent to the sales order department.
Once the copy of the GDN has been received by the order Sales
department, it should be matched to the order. A regular
review of unmatched orders should be undertaken by the sales
order department to identify any unfulfilled orders.

The sales invoices are only raised on receipt

of a GDN, and without separate sequential
numbers, it is difficult for Amberjack Co to
identify if any GDNs are missing as they are GDNs should all be sequentially numbered using a sequence
Goods dispatch notes (GDN) are given the
not likely to be raised in the same sequence which is different to the order number. On a regular basis, a
same number as the order number to which Sales
as the sales orders. sequence check of GDNs should be undertaken to identify any
they relate.
missing dispatch notes.
If GDNs are missing and the company fails to
raise invoices in a timely manner, this could
lead to a loss of revenue.

Only the sales clerks should be able to raise sales invoices. As

As the extra staff will not be as experienced as
the sales clerks, there is an increased risk of
Additional staff has been drafted in to help the mistakes being made in the sales invoices.
sales clerks produce the sales invoices. This could result in customers being under or
overcharged leading to misstated revenue or
dissatisfied customers.
Amberjack Co is expanding, consideration should be given to
recruiting and training more permanent sales clerks who can
produce sales invoices.
Sales
If this is not currently possible, temporary staff should be
adequately trained and additional input checks on invoices
should be introduced.

This could result in unauthorised sales

During the period of any special offers, such as the 10% off
discounts being given as there does not seem
weekend, the authorised sales prices file should be updated by
to be any authorisation required. In addition, a
a responsible official. These changes should be reviewed for
clerk could forget to manually enter the
Discounts given to customers who purchased any input errors, this review should be evidenced. The
discount or enter an incorrect level of discount
goods during the 10% off weekend are invoicing system should confirm that orders were placed during
for a customer, leading to the sales invoice
manually entered onto the sales invoices by the discount weekend. Hence the sales invoices for these Sales
being overstated and a loss of customer
sales clerks. periods should automatically contain the reduced prices.
goodwill.
The invoicing system should be amended to prevent sales
Unauthorised discounts in excess of 10%
clerks from being able to manually enter sales discounts onto
would result in a loss of revenue, either due to
invoices.
error or fraud.

This has resulted in a reduction in their
programme of work for the year.
Snowdon Co has experienced significant staff
Maintaining an IA department is an important
shortages within its internal audit (IA)
control as it enables senior management to
department, and the department is currently
test whether controls are operating effectively
under resourced.
within the company. If the team has staff
shortages, this reduces the effectiveness of
this monitoring control.
Senior management should consider recruiting additional
employees to join the IA department or outsourcing the IA
function.
In the interim, employees from other departments, such as Staff
finance, could be seconded to IA to assist them with audits. It
must be ensured that these reviews do not cover controls
operating in the department in which the employees normally
work.Print_Area
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

The cashier is responsible for several

elements of the cash receipts system. She
receives the daily sales sheets from These key roles should be split between different members of
There is a lack of segregation of duties and
restaurants, agrees that cash has cleared into the finance team, with ideally the bank reconciliations being Staff
errors will not be identified on a timely basis.
the bank statements, updates the cash book undertaken by another member of the team.
and undertakes the bank reconciliations.
Key controls and tests of control
The fact
The finance director authorises the bank transfer
payment list for suppliers after agreeing the amounts to
be paid to supporting documentation and reviewing for
any duplicate payments.
The cashier reconciles the bank statements to the cash
book monthly and this reconciliation is reviewed and
investigated by the financial controller, who evidences his the risk of fraud. Monthly review and investigation
review by way of signature on the bank reconciliation.
Swift Co has a separate human resources (HR)
department, which is responsible for setting up all new
employees.
All new employees are assigned a unique employee
As payroll staff are unable to set up new joiners without
number by HR. The payroll system is unable to process
the employee number from the joiner form it reduces the
new joiners without the inclusion of the unique employee
risk of fictitious employees being set up by payroll.
number.
On a monthly basis an exception report of changes to
payroll standing data is produced and reviewed by the
payroll manager.
The payroll supervisor selects a sample of payslips and
recalculates the gross to net pay calculations, compares
the results to the output from the payroll system and
investigates any discrepancies.
All staff members are issued with a sequentially
numbered key card. Sequence checks and checks on
the data recorded are carried out by the human
resources (HR) supervisor.
The clocking-in process is monitored by a camera on
entry to the distribution centre and video footage is
reviewed by HR every week
Key control Test of control Noted
This reduces the risk that suppliers could be being paid Review the payments list for evidence of review by the finance director.
Bank
an incorrect amount, or that sums are being paid to Enquire of accounts staff what supporting documentation the finance
transfer
fictitious suppliers. director requests when undertaking this review.
Review the file of bank reconciliations to confirm that there is one for each
month. Inspect a sample of monthly bank reconciliations for evidence of
The bank reconciliation is a key control which reduces
investigation and review by the financial controller.
Bank
ensure that fraud and errors are identified on a timely transfer
For a sample of months reperform the bank reconciliation and where
basis.
differences have occurred discuss and investigate these with the financial
controller.
Review the job descriptions of payroll and HR to confirm the split of
responsibilities with regards to setting up new joiners.
Having a segregation of roles between HR and payroll
Payroll
departments reduces the risk of fictitious employees
Discuss with members of the payroll department the process for setting up
being set up and also being paid.
new joiners and agree new joiners to documentation initiated by HR.
Attempt to add a new joiner to the payroll system without a unique employee
Payroll
number, the system should reject this addition.
This ensures that any unauthorised amendments to
standing data are identified and investigated on a timely Select a sample of monthly exception reports and review for evidence of
Payroll
basis so that the data used when the payroll is run is review and follow up of any unexpected changes by the payroll manager.
valid and accurate.
Review the monthly payslips sampled by the payroll supervisor for their
This reduces the risk that the automated system signature for evidence the review of calculations has been undertaken.
generates errors during the payroll processing. Any
Payroll
errors would be identified on a timely basis to prevent For a sample of monthly payrolls reperform the gross to net pay calculation
wages being over or under paid. and compare to the payroll system, discuss any discrepancies with the
payroll supervisor.
This ensures that payroll records are complete, that
For a sample of key cards and data recorded in the clocking-in system, carry
employees are paid for hours worked and that all hours Payroll
out a sequence check to identify if there are any gaps in the sequence.
are recorded
Review details of checks carried out by the HR supervisor to identify any
gaps in the sequence and check they have evidenced their review by way of
signature.
This will prevent staff members fraudulently clocking-in For a sample of weeks, review the log of the recordings to identify who
Payroll
for other employees and hence employees will only be reviewed that week’s footage to ensure it has been reviewed by a member
paid for actual hours worked. of the HR department.
Review the log for any gaps in the review process and discuss these
findings with HR.
 The fact Key control Test of control Noted

The payroll clerk confirms the transfer of hours and
calculations has been done accurately by recalculating,
for a sample of employees, their gross to net pay.
For a sample of months, review the calculations of gross to net pay for
This check is also reviewed by the payroll supervisor evidence that the calculations have been performed. Confirm the signature
who evidences their review. of the payroll supervisor as evidence that they have reviewed the report. For
any anomalies, enquire of the reasons and what action was taken to resolve
This reduces the risk that errors occur in the automated the issue Payroll
transfer and calculations during the payroll processing.
Any errors would be dentified on a timely basis to For a sample of months, reperform the gross to net pay calculations and
prevent salaries being over or under paid compare to the payroll system and the calculations prepared by the payroll
clerk. Discuss any discrepancies with the payroll supervisor.

This reduces the risk of fraud by preventing

The payroll system is password-protected and the payroll
unauthorised changes being made to the standing data Attempt to login to the payroll system using a password which should be out
manager changes the password on a monthly basis Payroll
and unauthorised access to sensitive payroll of date. Confirm that the system has rejected access.
using a random password generator.
information.

For a sample of months, review the control account reconciliations and

Each month, the finance director carries out a payroll
control account reconciliation and investigates any
differences.
This will ensure the payroll expense and employment
tax liability is accurate and is not misstated in the year-
end financial statements
make enquiries of the finance director of any errors on the control account,
how they arose and what action was taken to ensure they do not arise in the
future.
Payroll
Reperform a sample of control account reconciliations and compare results
with those prepared by the finance director.

Discuss any discrepancies with the finance director.

Review the job descriptions of payroll and HR to confirm the split of

Snowdon Co has a separate human resources (HR) Having a segregation of roles between HR and payroll responsibilities with regards to setting up new joiners.
department, which is responsible for setting up all new departments reduces the risk of fictitious employees Payroll
employees. being set up and also being paid. Discuss with members of the payroll department the process for setting up
new joiners and agree new joiners to documentation initiated by HR.

Select a sample of new employees added to the payroll during the year,
review the joiner forms for evidence of completion and the allocation of a
Pre-printed forms are completed by HR for new unique employee number which was received by payroll prior to being
employees, and includes assignment of a unique added to the system.
As payroll is unable to set up new joiners without the
employee number, and once verified a copy is sent to the
forms and employee number it reduces the risk of Payroll
payroll department. The payroll system is unable to Select a sample of edit reports for changes to payroll during the year; agree
fictitious employees being set up by payroll.
process new joiners without the inclusion of the a sample of new employees added to payroll to the joiner’s forms.
employee’s unique number.
Attempt to add a new joiner to the payroll system without a unique employee
number, the system should reject this addition.

Review the job descriptions of payroll and HR to confirm the split of

Raspberry Co has a separate human resources (HR) Having a segregation of roles between human responsibilities with regards to setting up new joiners.
department which is responsible for setting up all new resources and payroll departments reduces the risk of Payroll
employees. fictitious employees being set up and also being paid. Discuss with members of the payroll department the process for setting up
new joiners and for confirmation that the process is initiated by HR.
 The fact Key control Test of control Noted

Pre-printed forms are completed by HR for all new
employees, and includes assignment of a unique
employee number, and once verified, a copy is sent to
the payroll department. Payroll is unable to set up new
joiners without information from these forms.
The use of pre-printed forms ensures that all relevant Select a sample of new employees added to the payroll during the year,
information, such as tax IDs, is obtained about review the joiner forms for evidence of completion of all parts and that the
employees prior to set up. This minimises the risk of information was verified as accurate and was received by payroll prior to
incorrect wage and tax payments. In addition, as payroll being added to the system. Payroll
is unable to set
up new joiners without the forms and employee number, Select a sample of edit reports for changes to payroll during the year; agree
it reduces the risk of fictitious employees being set up by a sample of new employees added to payroll to the joiners forms.
payroll.

If attending Raspberry Co at the time of bonus processing, observe the clerk

The quarterly production bonus is input by a clerk into the
payroll system, each entry is checked by a senior clerk This reduces the risk of input errors resulting in over/
for input errors prior to processing, and they evidence
their review via signature.
Production employees are issued with clock cards and
are required to swipe their cards at the beginning and
end of their shift, this process is supervised by security
staff 24 hours a day.
underpayment of the bonus to employees.
This ensures that genuine employees are only paid for
the work actually done, and reduces the risk of
employees being paid but not completing their eight-
hour shift. In addition, due to the supervision it is
unlikely that one employee could swipe in others.
inputting and senior clerk checking the bonus payments into the payroll
system.
Payroll
In addition, obtain listings of quarterly bonus payments and review for
evidence of signature by the senior clerk who checks for input errors.
Observe the use of clock cards by employees when entering the power
station.
Payroll
Confirm the security team is supervising the process and following up on
discrepancies through discussions with the security staff.

As the hours worked are automatically transferred into

The clock card information identifies the employee
the payroll system, this reduces the risk of input errors in Utilise test data procedures to input dummy clock card information, verify
number and links into the hours worked report produced Payroll
entering hours to be paid in calculating payroll, ensuring this has been updated into the payroll system
by the payroll system.
that employees are paid the correct amount.

On a quarterly basis, exception reports of changes to This ensures that any unauthorised amendments to
Select a sample of quarterly exception reports and review for evidence of
payroll standing data are produced and reviewed by the standing data are identified and resolved on a timely Payroll
review and follow up of any unexpected changes by the payroll director.
payroll director. basis.
Enquire of payroll clerks how cash is delivered to Raspberry Co for weekly
It is likely the sum of money required to pay over 175
pay packets.
For production employees paid in cash, cash is received employees would be considerable. It is important that
Payroll
weekly from the bank by a security company. cash is adequately safeguarded to reduce the risk of
Review a sample of invoices from the security company to Raspberry Co for
misappropriation.
delivery of cash.
Observe the preparation of the pay packets ensuring that two members of
The pay packets are prepared by two members of staff staff are involved and that pay packets are checked for accuracy.
with one preparing and one checking the pay packets This ensures there is segregation of duties which
Payroll
and this is evidenced by each staff member signing the prevents fraud and errors not being identified. For a sample of weeks throughout the year, inspect the weekly payroll listing
weekly listing. for evidence of signature by the two members of staff involved in the
preparation of the pay packets.
Purchase orders up to $5,000 are authorised by the This ensures that goods are only purchased which are Select a sample of purchase orders and review for evidence of authorisation
Purchas
purchasing manager and above $5,000 by the required by Swift Co and relate to genuine business in accordance with authorisation limits. Agree this to the appropriate
e
purchasing director. expenses. signature on the approved signatories list.
The warehouse department agrees the receipt of goods During the interim audit observe the warehouse department when receiving
from suppliers to a copy of the purchase order and This ensures that Swift Co is not recording liabilities and goods to understand the level of checks being undertaken.
Purchas
confirms the quantity and quality of the goods received subsequently paying for the receipt of inferior quality
e
and signs the goods received notes (GRNs) to evidence goods or for goods it did not order. Review a sample of GRNs held in the warehouse department for signature,
the checks. as evidence of checks being undertaken on receipt of goods.
 The fact
Purchase invoices are logged into the purchase day
book in batches, utilising control totals.
Supplier statement reconciliations are undertaken on a
monthly basis and these are reviewed by the financial
controller.
Capital expenditure purchase orders are classified by the
finance department between capital and revenue using
guidelines established by the finance director, this is
noted on the purchase order. The finance director also
sample checks the classification is correctly applied.
The amount due to the tax authority is calculated by the
payroll supervisor who then passes it to the financial
controller for review.
Key control Test of control Noted
Utilising control totals ensures both completeness and
accuracy over the input of purchase invoices. If the Select a sample of control total sheets and review for evidence of control Purchas
invoices are not all input completely and accurately totals being utilised and the clerk’s signature. e
payables may be misstated.
Review the file of reconciliations to ensure that they are being performed on
This ensures that any errors in the recording of
a regular basis and that they have been reviewed by a responsible official.
purchases and payables are identified and corrected in Purchas
a timely manner and therefore that payables are e
Re-perform a sample of the reconciliations to ensure that they have been
complete and accurate.
carried out appropriately and discrepancies investigated.
Select a sample of capital expenditure purchase orders and review evidence
of the classification being noted.
The use of finance department guidelines and sample
For a sample of orders compare the classification noted with the finance
checks by the finance director should reduce the risk of Purchas
director’s guidelines to assess whether the classification was correctly
an incorrect assessment and of understated/overstated e
undertaken.
profits, assets and incorrect depreciation charges.
Review purchase orders for evidence of the finance director’s sample
checks for example, by signature.
This ensures that the amount paid to the tax authority is
correct. It also creates segregation of duties between Review a sample of calculations of the monthly employment tax liability for
the payroll supervisor calculating the liability and the evidence of review by the financial controller confirming the calculation is Tax
financial controller reviewing the calculation which correct and that payment can be made.
reduces the risk of error.
 The fact Control deficiency Control recommendation
This could result in employees taking unauthorised leave Employees should receive written confirmation when their holiday
which could lead to operational difficulties if there are has been approved and should be informed that they will not be
Department managers are required to
shortages of staff at critical periods. able to take holiday without this notification.
approve all employees’ holiday forms,
however, this does not always occur.
In addition, payments for untaken holiday may be made Any payments for unused holiday should be authorised by
in error as holiday records may be incorrect. department managers prior to payment.
This lack of segregation of duties increases the risk of Once the bank transfer has been prepared by the financial
The financial controller prepares the bank
fraud/error as the financial controller could pay controller, it should be passed to the finance director to be
transfers for the payroll and also authorises
themselves or certain employees more than they are due reviewed and authorised for payment. The review and
these to be paid.
without this being detected. authorisation should be evidenced by the finance director.

As the edit report is not checked, errors made by the

payroll clerk when updating the system will not be
identified promptly. This may result in new employees
not being paid at all, errors being made in payments to
The payroll clerk amends the payroll and an new employees or leavers being paid after they have left
edit report of changes is produced but this the company.
report is not reviewed.
This would lead to loss of employee goodwill and errors
in accounting records for wages and salaries.
It could also result in an increased risk of fraud as
fictitious employees could be added by the payroll clerk
The payroll supervisor or a member of the finance team should
review all edit reports and agree changes made to the details on
the joiner/leavers forms. Any discrepancies should be investigated
promptly and the payroll system updated for any errors or
omissions.
The payroll supervisor should evidence their review on the edit
report with their signature.

All staff appointments, including temporary staff, should only be

The HR department is responsible for
processing joiners and leavers, but due to
staff illness, the operations manager has
processed temporary new drivers and
notified payroll.
The operations manager may not carry out all the
required procedures for processing temporary new
drivers as the manager may not be using appropriate
documentation.
This could result in temporary employees not being set
up in the payroll records correctly, resulting in the late
payment of wages, incorrect statutory deductions being
calculated and incomplete payroll records.
processed by the HR department to ensure that correct
procedures are followed.
If it is not possible for the HR department to carry out all of the
detailed processing due to staff shortages, a member of the HR
team should review the leaver/joiner form and authorise it before it
is sent to the payroll department.
The payroll department should be notified not to accept any new
joiner information unless approved by a member of HR.

Only overtime in excess of five hours per This means that employees could claim to have worked All overtime, including that below five hours, should be authorised
week needs authorisation by the operations up to five hours overtime without authorisation resulting by a responsible official before being processed in the payroll. This
manager. in payments being made to employees for hours not authorisation should be evidenced by way of signature.
worked and additional payroll costs.
 The fact
Where cash wages are paid, the driver is
only required to provide their name to collect increases the risk that wages could be paid to incorrect
their pay packet.
The operations manager decides on the
bonus to be paid to delivery drivers each
quarter and there are no approved
parameters for the bonus levels.
Delivery drivers must take breaks throughout not worked. Conversely, if drivers do not take the
the day which are not monitored.
Snowdon Co has experienced significant
staff shortages within its internal audit (IA) Maintaining an IA department is an important control as
department, and the department is currently it enables senior management to test whether controls
under resourced.
Some departments have already significantly capital budgets, resulting in overspends.
exceeded their annual capital expenditure
budgets.
Control deficiency Control recommendation
Payment of wages without proof of identity or signature All drivers collecting cash pay packets should provide a form of
identification to the finance staff member before the pay packet is
employees either in error or due to fraud resulting in a handed to them. The driver should also be required to sign for their
loss of cash. pay packet.
The operations manager decides on the bonus to be paid to
delivery drivers each quarter and there are no approved
Without approved parameters, the operations manager
parameters for the bonus levels.
may award excessive bonuses or pay additional sums to
friends and family members resulting in additional payroll
Without approved parameters, the operations manager may award
costs.
excessive bonuses or pay additional sums to friends and family
members resulting in additional payroll costs.
The company should monitor the activity of the delivery drivers
Drivers could take longer breaks than those authorised
through electronic means, for example, by using tracking devices
resulting in payments being made to employees for time
attached to their vehicles to ensure that the prescribed breaks are
taken by the employees.
required breaks, they may be in breach of law and
regulations which require drivers to take regular breaks,
Data should be downloaded and reviewed by a responsible official
hence the company is at risk of fines.
on a regular basis.
This has resulted in a reduction in their programme of
Senior management should consider recruiting additional
work for the year.
employees to join the IA department or outsourcing the IA function.
In the interim, employees from other departments, such as
finance, could be seconded to IA to assist them with audits. It must
are operating effectively within the company. If the team
be ensured that these reviews do not cover controls operating in
has staff shortages, this reduces the effectiveness of this
the department in which the employees normally work.Print_Area
monitoring control.
The company’s monthly management accounts should include an
It appears that purchase orders for capital expenditure
analysis of capital expenditure against budget and prior year per
are being placed without being agreed back to annual
department. Each department head should include narrative which
explains the significant variances to date.
The increased expenditure may be due to increased
Capital purchase orders should be compared to the annual
levels of services being provided, or it could be due to a
department budgets as part of the authorisation process. Any
lack of control over the capital expenditure process,
spend in excess of the budget should be referred for authorisation
resulting in increased costs and reduced profits.
to the finance director.
 The fact
The IA department undertakes physical
verification of assets each year for the four
largest centres as well as five of the other
centres, randomly selected.
All members of the payroll department can
amend employees' standing data in the
payroll system as they have access to the
password.
Control deficiency Control recommendation
IA should review its programme of visits to assess if additional
resources could be devoted to ensuring that all sites are visited
The company has 45 centres as well as a head office
over a shorter period, for example, five years. This would ensure
and warehouse, hence if each year the four largest sites
that physical verification of all assets could be completed more
are visited this can result in the other sites only being
regularly. For
visited every eight years.
sites visited any assets which cannot be located should be
investigated fully. If it cannot be located, then it should be written
If the non-current assets register is not physically verified
off.
on a regular basis, there is an increased risk of assets
being misappropriated as there is no check that the
Each centre should submit a list of assets with serial numbers to
assets still exist in their correct location. In addition,
IA, who should compare these to the PPE
obsolete assets will not be identified on a timely basis.
register. Those sites with significant variations should be prioritised
for a site visit by IA.
The password to amend standing data should be changed and
only communicated to senior members of the payroll department.
If all members of payroll need the ability to amend standing data,
As all members of payroll can amend standing data this the system should be changed to require authorisation of all
may result in errors or unauthorised changes being changes by a senior member of payroll.
made, leading to incorrect payment of wages
and increased risk of fraud. Edit reports should be generated for all standing data changes
with clear reference to who made the change and who authorised
it. These edit reports should be regularly reviewed by a
responsible official and they should evidence this review with a
signature.
 The fact Control deficiency Control recommendation

Discrepancies may arise due to the payroll records or

the bank transfer listing being incorrect. Assuming the
discrepancies are always in the payroll records may
result in incorrect amendments being made to payroll or The senior payroll manager should not be able to process changes
The senior payroll manager reviews the bank incorrect amounts paid to employees. to the payroll system as well as authorise payments.
transfer listing prior to authorising the Discrepancies should be thoroughly investigated, and adjustments
payments and if any discrepancies are In addition, there is a lack of segregation of duties as it is made in the relevant record as required.
noted, always makes the adjustment in the the payroll team which processes the amounts and the
payroll records for any changes required. senior payroll manager who authorises payments. The authorisation of the bank transfer listing should be undertaken
by an individual outside the payroll department, such as the
The senior manager could fraudulently increase or finance director.
incorrectly amend the amounts to be paid to certain
employees, process this payment as well as amend the
records.

After passing a credit check a credit limit is

If credit limits are not reviewed regularly, they could be
set for all new customers by the sales Credit limits should continue to be set by the sales director;
out of date, resulting in limits being too high and sales
director, but these credit limits are not however, these limits should be reviewed and amended as
being made to poor credit risks or too low and Snowdon
reviewed after this unless a review is appropriate on a regular basis by a responsible official.
Co losing potential revenue.
requested by the customer.

Client services managers are given

responsibility to chase customers directly for
Further, client services managers are more likely to
payment once an invoice is outstanding for
focus on customer relationships and generating further A credit controller should be appointed, and it should be their role,
90 days. This is considerably in excess of the
revenues rather than chasing payments. This could rather than the client services managers, to chase any outstanding
company’s credit terms of 30 days which will
result in an increase in irrecoverable balances and sales invoices which are more than 30 days old
lead to poor cash flow.
reduced profit and cash flows.

The bonus should be determined by a responsible official, such as

the production director and should be formulated based on a
Production supervisors determine the Production supervisors should not determine this as they written policy. If significant in value, the bonus should be formally
amount of the discretionary bonus to be paid could pay extra bonuses to friends or family members, agreed by the board of directors.
to employees. resulting in additional payroll costs.
The bonus should be communicated in writing to the payroll
department.
 The fact Control deficiency Control recommendation
A senior member of the payroll team should recalculate the gross
Therefore, if system errors occur during the payroll to net pay workings for a sample of employees and compare their
The wages calculations are generated by the
processing, this would not be identified. This could result results to the output from the payroll system.
payroll system and there are no checks
in wages being over or under calculated, leading to an
performed.
additional payroll cost or loss of employee goodwill. These calculations should be signed as approved before
payments are made.

As the payments continue until the employee notifies

HR, and employees are unlikely to be closely monitoring The payroll department should maintain a schedule, by employee,
payments, there is the risk that overpayments may be of payments made to third parties, such as the central government
made, which then need to be reclaimed, leading to as well as the cumulative balance owing. On a regular basis, at
Student loan deduction forms are completed
employee dissatisfaction. least annually, this statement should be reconciled to the loan
by relevant employees and payments are
statement received from the government and sent to the employee
made directly to the third party until the
In the case of underpayments, Raspberry Co has an for agreement.
employee notifies HR that the loan has been
obligation to remit funds on time and to reconcile to
repaid in full.
annual loan statements. If the company does not make In accordance with the schedule, payments which are due to
payments in full and on time, this could result in non- cease shortly should be confirmed in writing with the third party,
compliance by both the company and employee, which prior to stopping.
could result in
fines or penalties.

Employees should be informed that they will not be able to take

Holiday request forms are required to be
completed and authorised by relevant line
managers, however, this does not always
occur.
This could result in employees taking unauthorised
holiday without completion of a holiday request form, with
leave, resulting in production difficulties if an insufficient
authorisation from the line manager.
number of employees are present to operate the power
plant. In addition, employees taking unauthorised leave
Payroll clerks should not process holiday payments without
could result in an overpayment of wages.
agreement to the authorised holiday form.

There is a lack of segregation of duties as it is the payroll

The senior payroll manager should not be able to process changes
team which processes the amounts and the senior
The senior payroll manager reviews the bank to the payroll system as well as authorise payments.
payroll manager who authorises payments. The senior
transfer listing prior to authorising the
manager could fraudulently increase the amounts to be
payments and also amends the payroll The authorisation of the bank transfer listing should be undertaken
paid to certain employees, process this payment as well
records for any changes required. by an individual outside the payroll department, such as the
as amend
finance director.
the records.
 The fact
The pay packets are delivered to the
production supervisors, who distribute them
to employees at the end of their shift. The
supervisor is not sufficiently independent to
pay wages out. They could adjust pay
packets to increase those of close friends
whilst reducing others.
Monthly management accounts do not
analyse the variances between actual and
budgeted wages and salaries; this is
because there are no overtime costs.
Control deficiency Control recommendation
All pay packets should be distributed by the payroll department,
directly to employees, upon sight of the employee’s clock card and
photographic identification as this confirms proof of identity.
Payroll should undertake a reconciliation of pay packets issued to
production supervisors, wages distributed with employee
In addition, although the production supervisors know
signatures to confirm receipt and pay packets returned to payroll
their team members, payment of wages without proof of
due to staff absences. Any differences should be investigated
identity increases the risk that wages could be paid to
immediately.
incorrect employees.
As employees work eight-hour shifts over 24 hours, consideration
should be given to operating a shift system for the payroll
department on wages pay out day. This will ensure that there are
sufficient payroll employees to perform the wages pay out for each
shift of employees, with the same level of controls in place
However, wages and salaries are a significant expense
and management needs to understand why variances
The monthly management accounts should be amended to include
may have arisen. These could occur due to extra
an analysis of wages and salaries compared to the budgeted
employees being recruited which were not budgeted for,
costs. These should be broken down to each relevant department
or an increase in wage pay out rates. The board would
and could also include an analysis of headcount numbers
need to monitor the
compared to budget.
wages and salaries costs as if they are too high, then
this would impact the profitability of the company.
 The fact
Each restaurant maintains a petty cash float
of $400, and at any point in time the receipts
and funds present should equal the float. It
has been noted by the internal audit (IA)
department that on occasions there are
differences due to the fact that no log is
maintained of petty cash requests.
To speed up the cash payment by
customers, for each venue the tills have the
same log on code and these codes are
changed fortnightly.
The reconciliations of the tills to the daily
sales readings are performed in total for all
five tills at each venue rather than for each
till.
The cashing up of tills along with the
recording of any cash discrepancies is
undertaken by just one individual, the
restaurant manager.
Control deficiency Control recommendation
A petty cash log should be maintained so the purchase of sundry
items is recorded in the log along with the sum borrowed, date and
employee.
This could be as a result of sundry items being
On purchase of the items, the relevant employee should return the
purchased without the relevant receipt or voucher being
relevant receipt or voucher and any funds not spent. The log
returned.
should be updated to confirm return of funds and receipts.
There is also a possibility that the cash is being
On a weekly basis, the restaurant manager should reconcile the
misappropriated by staff members, or being spent on
petty cash and if any receipts are missing, these should be
non-business related items.
followed up with the relevant employee. If it is cash which is
missing, then this should be investigated further with the
employees who made petty cash purchases during that period.
Each employee should be provided with a unique log on code and
this is required to be entered when using the tills.
In the event of cash discrepancies arising in the tills, it
In order to facilitate the investigation of till differences, employees
would be difficult to ascertain which employees may be
should be allocated to a specific till point for their shift.
responsible as there is no way of tracking who used
which till. This could lead to cash being easily
Any discrepancies which arise should initially be double checked
misappropriated.
to ensure they are not arithmetical errors. If still present, the
relevant employees who had access to the till can be identified
and further investigations can be undertaken.
This means that when exceptions arise, it will be difficult
The reconciliations should be undertaken on an individual till by till
to identify which till caused the difference and therefore
basis rather than in aggregate and any discrepancies noted should
which employees may require further till training or may
be investigated immediately.
have undertaken fraudulent transactions.
There is a fraud risk as the manager could remove some The cashing up process should be undertaken by two individuals
of the cash and then simply record that there was an together, ideally an assistant manager and the restaurant
exception on the daily sales list. manager. One should count the cash and the other record it.
In addition, as there is no segregation of duties, the Any exceptions to the till reading should be double checked to
restaurant manager could, fraudulently or by error, confirm that they are not simply arithmetical errors. If still present,
record the total sales as per each till incorrectly leading the relevant employees who had access to the till can be identified
to incorrect identification of discrepancies. and further investigations can be undertaken.
 The fact
Daily sales sheets are scanned and emailed misplaced by the restaurant manager resulting in
to head office on a weekly basis.
Cash is stored in a safe at each venue and
the restaurant manager stores the safe key
in a drawer of their desk when not in use.
The cashier is responsible for several
elements of the cash receipts system. She
receives the daily sales sheets from
restaurants, agrees that cash has cleared
into the bank statements, updates the cash
book and undertakes the bank
reconciliations.
The cashier is not checking that payments
made by credit card have resulted in cash
being received by Camomile Co.
The bank reconciliations are only carried out
every two months.
Control deficiency Control recommendation
Daily sales sheets for each venue should be sequentially
numbered and remitted to head office on a daily basis. At head
office, a sequence check should be undertaken on a regular basis
There is a possibility that some sales sheets could be
to identify any missing sheets and any gaps should be investigated
further.
incomplete sales and cash receipts data being recorded
into the accounting system.
Once received, the cashier should post the sales and cash data for
all six venues on a daily basis. Once processed, they should then
be signed as posted by the cashier and filed away securely.
The current key lock safe should be replaced with a safe with a
There is a risk of significant cash losses due to theft if
digital code. Only authorised personnel should have the code
access to the safe key is not carefully controlled.
which should be updated on a regular basis.
These key roles should be split between different members of the
There is a lack of segregation of duties and errors will
finance team, with ideally the bank reconciliations being
not be identified on a timely basis.
undertaken by another member of the team.
The cashier should reconcile the credit card vouchers per
restaurant to the monthly statement received from the card
There is a risk that receipts of cash by credit card may
company. The daily amounts per the statement should be agreed
have been omitted and this would not be identified on a
to the bank statement to ensure that all funds have been received.
timely basis as the bank is only reconciled every two
months and may result in difficulties in resolving any
This reconciliation should be reviewed by a responsible official,
discrepancies with the credit card company.
such as the financial controller, who should evidence by signature
that the review has been undertaken
For a cash-based business, the bank reconciliation is a
key control which reduces the risk of fraud. The bank reconciliations should be performed on a monthly basis
rather than every two months. The financial controller should
If it is not reconciled regularly enough, then this reduces continue to review each reconciliation and evidence her review by
its effectiveness as fraud and errors may not be way of signature on the bank reconciliation.
identified on a timely basis.
 The fact Control deficiency Control recommendation

The finance director should review the whole payments list prior to
authorising.
Without looking at the detail of the payments list, as well
The finance director only views the total
as supporting documentation, there is a risk that As part of this, he should agree the amounts to be paid to
amount of payments to be made rather than
suppliers could be being paid an incorrect amount, or supporting documentation, as well as reviewing the supplier
the amounts to be paid to each supplier.
that sums are being paid to fictitious suppliers. names to identify any duplicates or any unfamiliar names.

He should evidence his review by signing the bank transfer list.

Additional resources should be devoted to completing the physical

Physical verification of assets within the non- verification of all assets within the register. If any assets cannot be
If non-current assets are not physically verified on a
current asset register has not been located, they should be written off.
regular basis, there is an increased risk of assets being
undertaken for some time. A current
misappropriated or misplaced as there is no check that
programme has started but is only 15% Following this full review, on a monthly basis a sample of assets at
the assets still exist in their correct location.
complete, due to staff shortages. the sites should be agreed back to the register to confirm
existence.

Senior management should consider recruiting additional

Equestrian Co has experienced significant employees to join the IA department.
Maintaining an IA department is an important control as
staff shortages within their internal audit (IA)
it enables senior management to test whether controls
department. In addition, several members of In the interim, employees from other departments, such as
are operating effectively within the company. If the team
the current IA team are new to the company. finance, could be seconded to IA to assist them with the internal
has staff shortages or lack of experience, this reduces
audits, provided these reviews do not cover controls operating in
the effectiveness of this monitoring control.
the department where the employees normally work.

The HR director should as a matter of urgency review the

During the year, the human resources (HR) workloads of the department to assess whether other tasks can be
department has been busy; therefore the This is a lack of segregation of duties, as employees are reprioritised as payroll should cease to set up new joiners. This
payroll department has set up new joiners to able to set up new joiners in the payroll system and role must immediately revert back to HR to undertake.
the company. process their pay, this leads to an increased risk of
fictitious/duplicate employees being set up. Additionally, a review should be undertaken of all new joiners set
up by payroll with agreement to employee files to confirm that all
new employees are bona fide.
 The fact
The wage rate has been increased by the
HR director and notified to the payroll
supervisor by email.
New customers undergo a credit check, after
which a credit limit is proposed by the sales Over a period of time it may be that the customers’ credit
staff and approved by the sales director,
these credit limits are not reviewed after this. debts, or too low, leading to a loss of sales.
High value inventory is stored in a secure
location across all nine warehouses and
access is via a four digit code, which is
common to all sites.
Monthly perpetual inventory counts are
supposed to be undertaken at each of the
nine warehouses, but some of these are
outstanding.
Control deficiency Control recommendation
As payroll can be a significant expense for a business,
any decision to increase this should be made by the
All increases of pay should be proposed by the HR department
board as a whole and not just by the HR director.
and then formally agreed by the board of directors.
In addition, the notification of the payroll increase was
Upon agreement of the pay rise, a written notification of the board
via email and the payroll supervisor was able to make
decision should be sent to the payroll supervisor who enters the
changes to the payroll standing data without further
revised pay rate into the system. This change should trigger an
authorisation.
exception report for the payroll director, and the new rate should
not go live until the director has signed off the changes.
This increases the risk of fraud or errors arising within
payroll.
Credit limits should continue to be approved by the sales director;
however, on a regular basis the sales director should review these
limits have been set too high, leading to irrecoverable
limits based on order history and payment record.
The access codes for all of the sites should be changed. Each site
As the code is the same across all sites, this significantly
should have a unique code, known to a small number of senior
increases the risk of fraud. A considerable number of
warehouse employees. These codes should be changed on a
people will be aware of the codes and could access
regular basis.
inventory at any of the nine sites
The programme of perpetual inventory counts should be reviewed
In order to rely on inventory records for decision making
for omissions. Any lines which have been missed out should be
and the year-end financial statements, all lines of
included in the remaining counts.
inventory must be counted at least once a year, with high
value or high turnover items counted more regularly. If
At the year end, if any lines are identified as having not been
the counts are outstanding, some goods may not be
counted, the company should organise an additional count to
counted, and the inventory records may be incorrect.
ensure that all items are confirmed to inventory records.
 The fact Control deficiency Control recommendation

The bank reconciliations could contain significant errors,

The bank reconciliations are only reviewed
by the financial controller if the sum of
reconciling items is significant; therefore
some reconciliations are not being reviewed.
The financial controller relies solely on the
accounts clerk’s notification that the bank
reconciliations require review.
but a low overall amount of reconciling items, as there
could be compensating errors which cancel each other
out. The bank reconciliations should be reviewed by the financial
controller on a monthly basis, even if the reconciling items are not
Bank reconciliations are a key control which reduces the significant, and he should evidence his review by way of signature
risk of fraud. If they are not reviewed, then this reduces on the bank reconciliation.
its effectiveness and also results in a lack of assurance
that bank reconciliations are being carried out at all or on
a timely basis.

There is the risk that Equestrian Co is missing out on

Invoices are authorised by the finance
director, but payment is only made 75 days
after receipt of the invoice.
early settlement discounts.
The policy of making payment after 75 days should be reviewed.
Consideration should be given to earlier payment if the settlement
Also, failing to pay in accordance with the supplier’s
discounts are sufficient. If not, invoices should be paid in
payment terms can lead to a loss of supplier goodwill as
accordance with the supplier’s payment terms.
well as the risk that suppliers may refuse to supply
goods to the company

Receivables ledger clerks are not sufficiently senior and Credit limits should be set by a senior member of the receivables
Customer credit limits are set by receivables
so may set limits too high, leading to irrecoverable debts, ledger department and not by receivables ledger clerks. These
ledger clerks.
or too low, leading to a loss of sales limits should be regularly reviewed by a responsible official.

Receivables ledger clerks should not be able to access the master

Receivables ledger clerks record new data file to add new customers or make amendments.
There is a risk that customers could be set up incorrectly
customer details and credit limits in the
resulting in a loss of customer goodwill and sales
customer master data file and these changes Any such additions/amendments to master file data should be
revenue In addition, the receivables ledger clerks are not
are not reviewed. restricted so that only supervisors and above can make changes.
senior enough to be given access to making changes to
master file data as this could increase the risk of fraud
An exception report of changes made should be generated and
reviewed by a responsible official.

Amberjack Co’s credit controller is currently

on secondment for six months to the internal
audit department and has not been replaced.
During this period, it does not appear that
anyone else has been responsible for
monitoring ageing receivables.
During the period of the secondment, an alternative member of the
This could result in an increased risk of irrecoverable
finance department should be trained in the credit control role and
debts and lead to customers not paying their outstanding
assigned responsibility for reviewing the aged receivables listing
balances on time, or at all, leading to reduced cash
and following up on any overdue customers.
flows.
 The fact Control deficiency Control recommendation

The sales invoices are only raised on receipt of a GDN,

and without separate sequential numbers, it is difficult for
Amberjack Co to identify if any GDNs are missing as
GDNs should all be sequentially numbered using a sequence
Goods dispatch notes (GDN) are given the they are not likely to be raised in the same sequence as
which is different to the order number. On a regular basis, a
same number as the order number to which the sales orders.
sequence check of GDNs should be undertaken to identify any
they relate.
missing dispatch notes.
If GDNs are missing and the company fails to raise
invoices in a timely manner, this could lead to a loss of
revenue.

Once orders are processed, copies of GDNs The GDN should be amended to be at least four-part. One copy
are sent to the finance department, customer should be sent to the sales order department.
If the sales order department does not receive a copy of
and remain in the warehouse.
the completed GDNs, they are not able to monitor if
Once the copy of the GDN has been received by the order
orders are being fulfilled on a timely basis. This could
However, the sales order department of department, it should be matched to the order. A regular review of
result in a loss of revenue and customer goodwill.
Amberjack Co does not receive a copy of the unmatched orders should be undertaken by the sales order
GDN. department to identify any unfulfilled orders.

Only the sales clerks should be able to raise sales invoices. As

Amberjack Co is expanding, consideration should be given to
As the extra staff will not be as experienced as the sales
recruiting and training more permanent sales clerks who can
clerks, there is an increased risk of mistakes being made
Additional staff has been drafted in to help produce sales invoices.
in the sales invoices. This could result in customers
the sales clerks produce the sales invoices.
being under or overcharged leading to misstated
If this is not currently possible, temporary staff should be
revenue or dissatisfied customers.
adequately trained and additional input checks on invoices should
be introduced.

Discounts given to customers who
purchased goods during the 10% off
weekend are manually entered onto the
sales invoices by sales clerks.
During the period of any special offers, such as the 10% off
This could result in unauthorised sales discounts being
weekend, the authorised sales prices file should be updated by a
given as there does not seem to be any authorisation
responsible official. These changes should be reviewed for any
required. In addition, a clerk could forget to manually
input errors, this review should be evidenced. The invoicing
enter the discount or enter an incorrect level of discount
system should confirm that orders were placed during the discount
for a customer, leading to the sales invoice being
weekend. Hence the sales invoices for these periods should
overstated and a loss of customer goodwill.
automatically contain the reduced prices.
Unauthorised discounts in excess of 10% would result in
The invoicing system should be amended to prevent sales clerks
a loss of revenue, either due to error or fraud.
from being able to manually enter sales discounts onto invoices.
 The fact
Customer statements are no longer being
generated and sent to customers.
The receivables ledger control account is
only reconciled at the end of April in order to there is a risk that errors will not be spotted promptly and and corrected. The reconciliations should be reviewed by a
verify the year-end balance.
Control deficiency
If statements are not sent regularly, this increases the
likelihood of errors and any disputed invoices not being
quickly identified and resolved by Amberjack Co. This
could lead to cash flow issues
If the receivables ledger is only reconciled annually,
receivables may be misstated.
Control recommendation
Amberjack Co should produce monthly customer statements for all
customers and send them out promptly.
The receivables ledger control account should be reconciled on a
monthly basis to identify any errors which should be investigated
responsible official and they should evidence their review by way
of signature.
INTERNAL CONTROL SYSTEM

2020 - Mar, Jun

(a) Significant deficiencies
Examples of matters the external auditor may consider in determining whether a deficiency in
internal controls is significant include:
1. The likelihood of the deficiencies leading to material misstatements in the financial statements in
the future.
2. The susceptibility to loss or fraud of the related asset or liability.
3. The subjectivity and complexity of determining estimated amounts.
4. The financial statement amounts exposed to the deficiencies.
5. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
6. The importance of the controls to the financial reporting process.
7. The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
8. The interaction of the deficiency with other deficiencies in internal control

2019 - Sep, Dec

(a) Control objectives for sales and dispatch system
1. To ensure that orders are only accepted if goods are available to be processed for customers.
2. To ensure that all orders are recorded completely and accurately.
3. To ensure that goods are not supplied to poor credit risks.
4. To ensure that goods are dispatched for all orders on a timely basis.
5. To ensure that the correct quantity of goods are dispatched and they are of an adequate quality.
6. To ensure that all goods dispatched are correctly invoiced at authorised prices.
7. To ensure completeness of income for goods dispatched.
8. To ensure that sales discounts are only provided during the valid period.

2017 MJ
(a) Control activities - Mô tả các thủ tục control
Segregation of duties – assignment of roles or responsibilities to ensure the tasks of authorising and
recording transactions and maintaining custody of assets are carried out by different people,
thereby reducing the risk of fraud and error occurring. For example, the purchase ledger clerk
recording invoices onto the purchase ledger, and the finance director authorising the payment of
those purchase invoices.
2020 - Dec, Sep

Documenting
Description Advantage Disadvantage
systems

They are simple to record; after discussion with staff members, They may prove to be time-consuming and cumbersome
Narrative notes consist of a written description of the
these discussions are easily written up as notes. They can if the internal control system is complex.
Narrative system. They detail what occurs in the system at each
facilitate understanding by all members of the audit team,
notes stage and include details of any controls which operate at
especially more junior members who might find alternative It may make it more difficult to identify if any internal
each stage.
methods too complex. controls are missing in narrative notes

Changes can be difficult as often the whole flowchart

Flowcharts are a diagrammatic illustration of the internal
control system. Lines usually demonstrate the sequence of
Flowcharts
events and standard symbols are used to signify controls or
documents.
With flowcharts it is easy to view the system in its entirety as it
needs re-drawing
is all presented together in one diagram. Due to the use of
standard symbols for controls, it can be effective in identifying
Narrative notes will still be needed to explain the
missing controls.
flowchart and hence it can be time consuming

Internal control questionnaires (ICQs) or internal control
evaluation questionnaires (ICEQs) contain a list of
Questionnaire
questions for each major transaction cycle; ICQs are used
s
to assess whether controls exist whereas ICEQs assess
the effectiveness of the controls in place.
Questionnaires are quick to prepare, which means they are a
timely method for recording the system. If drafted thoroughly
they ensure that all controls present within the system are
considered and recorded, hence missing controls or
deficiencies are clearly highlighted by the audit team
Internal controls may be overstated if the client is aware
that the auditor is looking for a particular answer.
Unusual controls may not be included on a standard
questionnaire and hence may not be identified
 Back
The fact Audit risk Response Noted
The company’s suppliers have been paid There is a risk that understated payables and bank balances. Request that the bank reconciliation is amended to remove the supplier payments AP
on 1 June 20X5 and the payment has been at the year-end as these should be accounted for in the 31 May 20X6 financial
included as an unpresented item in the year (Trả 1/6 nhưng ghi nhận trên sổ là 31/5 -> phải trả giảm, statements.
end bank reconciliation. tiền giảm so với thực tế)
Review the journal entry correcting the payables and bank balances at the year
end.

Preliminary analytical review of the
August management accounts shows
payable days of 56 for August 20X7,
compared to 87 days for September 20X6.
It is anticipated that the year-end payable
days will be even lower.
The forecast profit is higher than last year, indicating an The audit team should increase their testing on trade payables at the year end, with AP
increase in trade, also the company’s cash position has a particular focus on completeness of payables. A payables circularisation or
continued to deteriorate and therefore, it is unusual for review of supplier statement reconciliations should be undertaken.
payable days to have decreased.
There is an increased risk of errors within trade payables
and the year-end payables may be understated.

The company purchases their goods from
its main supplier in Asia and has
responsibility for goods at the point of
dispatch, the goods are in transit for up to
one month.
1) There is a risk that the cut-off of purchases may not be 1) Discuss with management the point at which inventory is recorded and review AP,
accurate as they may not correctly recognise the goods from the contract with the supplier to verify the requirements in place. Inventory
the point of dispatch at the year end.
2) Review the controls the company has in place to ensure that inventory is
2) There is also a risk that inventory and trade payables are recorded from the point of dispatch.
understated at the year end.
3) The audit team should undertake detailed cut-off testing of purchases of goods
at the year end and the sample of shipping documentation immediately before and
after the year end relating to goods from its main supplier in Asia should be
increased to ensure that cut-off is complete and accurate.

Since the dismissal of the payables ledger There is a risk that the purchases and trade payables balance Review the unprocessed invoices file at the year end to identify any invoices which AP
supervisor, purchase invoices have yet to at the year end will be understated if these invoices are not relate to the supply of pre year-end goods and ensure they have been properly
be logged onto the payables ledger. logged onto the payables ledger before it is closed down for accrued for in the year-end financial statements and recognised as a liability.
the year or accrued for.
Discuss with the finance director the approach to be adopted to resolve the issue of
unprocessed purchase invoices.
 The fact
The report to management issued after the
prior year audit highlighted significant
deficiencies relating to the purchases
cycle.
Audit risk
If these deficiencies have not been rectified, the controls
over purchases and payables may continue to be weak
leading to increased control risk and risk of misstatements
arising. Cost of sales, expenses and trade payables may not
be complete or accurate.
Response Noted
Discuss with management whether the purchases cycle recommendations AP
suggested by Brooklyn & Co were implemented successfully this year. If so,
undertake tests of these controls to assess if they are operating efficiently.
If the controls are not in place or operating efficiently, adopt a fully substantive
approach for confirming the completeness and accuracy of cost of sales and other
expenses and trade payables.

No supplier statement or purchase ledger This a key control which is being overridden and as such The audit team should increase their testing on trade payables at the year end, AP
control account reconciliations have been there is an increased risk of errors within trade payables and including performing supplier statement reconciliations, with a particular focus on
erformed in the period from December the year-end payables balance may be under or overstated. completeness of trade payables.
20X7 to the year end.
Request management prepare a year-end purchase ledger control account
reconciliation. The audit team should undertake a detailed review of this
reconciliation with a focus on any unusual reconciling items

Customers who wish to purchase a There is a risk that overstated revenue and understated Discuss with management the treatment of deposits received in advance, to ensure AR
property are required to place an order and liabilities if management may have incorrectly treated the it is appropriate.
a 5% non-refundable deposit prior to the deferred income as revenue.
completion of the building. During the final audit, undertake increased testing over the cut-off of revenue and
These deposits should not be recognised as revenue in the completeness of deferred income.
statement of profit or loss until the performance obligations
as per the contracts have been satisfied, which is likely to
be when the building is finished and the sale process is
complete. Instead, they should be recognised as deferred
income within current liabilities.

A customer of Hurling Co has been If the customer is experiencing difficulties, there is an Review the revised credit terms and identify if any after date cash receipts for this AR
encountering difficulties paying their increased risk that the receivable is not recoverable and customer have been made.
outstanding balance of $1·2m and Hurling hence is overvalued.
Co has agreed to a revised credit period. Discuss with the finance director whether he intends to make an allowance for this
receivable. If not, review whether any existing allowance for uncollectable
accounts is sufficient to cover the amount of this receivable.
 The fact
An allowance for receivables has
historically been maintained, but it is
anticipated that this will be reduced.
Over the last six months, the receivables
collection period has increased from 42
days to 55 days and the allowance for
receivables will be at the same level as the
prior year.
Preliminary analytical procedures indicate
that the receivables collection period has
increased from 38 days to 52 days due to
customers taking longer to pay.
A significant customer has been granted a There is a risk that receivables will be overvalued; some
six-month payment break and the
receivables collection period has increased not adequately provided for
from 38 to 51 days. An allowance for
receivables has historically been
maintained, and it is anticipated that it will
remain at the prior year level.
Audit risk Response Noted
There is a risk that receivables will be overvalued; some Review and test the controls surrounding how the finance director identifies old or AR
balances may not be recoverable and so will be overstated if potentially irrecoverable receivables balances and credit control to ensure that they
not provided for. are operating effectively.
In addition, reducing the allowance for receivables will Discuss with the director the rationale for reducing the allowance for receivables.
increase asset values and would improve the covenant
compliance, which increases the manipulation risk further. Extended post year-end cash receipts testing and a review of the aged receivables
ledger to be performed to assess valuation and the need for an allowance for
receivables.
There is the risk that receivables will be overstated and the Review and test the controls surrounding the way in which the finance director AR
allowance for receivables understated if some receivables assesses the recoverability of receivables balances and other credit control
may not be recoverable and if an additional allowance for processes to ensure that they are operating effectively.
receivables is not included in the financial statements.
Perform extended post year-end cash receipts testing and a review of the aged
receivables ledger in order to assess valuation and the need for an increased
allowance for irrecoverable receivables.
Discuss with the finance director whether an additional allowance for receivables
will be required against balances older than the company’s credit terms.
There is a risk that some receivables may not be Extend post year-end cash receipts testing and perform a review of the aged AR
recoverable and an allowance for receivables is required, receivables listing to assess the valuation of receivables.
hence receivables may be overstated and the allowance for
receivables understated. Discuss with management the adequacy of any allowance for receivables.
Discuss with the director the rationale for maintaining the allowance for AR
balances may not be recoverable and so will be overstated if receivables at the same level as the prior year, despite the increase in receivables
collection period and the payment break granted to a large customer.
Extended post year-end cash receipts testing and a review of the aged receivables
ledger to be performed to assess valuation and the need for an increased level of
allowance for receivables.
 The fact
The receivables collection period has
increased from 38 to 51 days and
management has extended the credit terms
given to customers on the condition that
sales order quantities were increased.
Customers pay a 25% deposit on signing
the contract to purchase the playgrounds.
Revenue has increased by 16·8% in the
year; and the gross margin has increased
slightly from 36·4% to 37·3%.
The sales ledger processing transferred to There is a risk that sales and receivables being
the service organisation from 1 February under/overstated if any errors occurred during the transfer
20X8.
This year the company made a ‘price
promise’ to match the price of its
competitors for similar products.
Customers are able to claim the difference
from the company for one month after the
date of purchase of goods.
Audit risk Response Noted
The increase in receivable days could be solely due to these Review and test the controls surrounding how Darjeeling Co identifies receivables AR
increased credit terms. balances which may not be recoverable and procedures around credit control to
ensure that they are operating effectively.
However, it could also be due to an increased risk over
recoverability of receivables as they may be overvalued and Extended post year-end cash receipts testing and a review of the aged receivables
expenses understated. ledger to be performed to assess valuation. Also consider the adequacy of any
allowance for receivables.
The deposits should not be recognised as revenue 1) Obtain a copy of the contracts with customers and review them to understand AR, Sales
immediately and instead should be recognised as deferred the performance obligations.
income (contract liabilities) within current liabilities until
the performance obligations, as per the contracts, have been 2) Discuss with management the criteria for determining whether performance
satisfied obligations have been satisfied and the treatment of deposits received to ensure it
is appropriate and consistent with relevant standards.
-> There is a risk that revenue is overstated and current
liabilities understated if the deposits have been recorded
within revenue.
This is a significant increase in revenue and, along with the During the audit a detailed breakdown of sales will be obtained, discussed with Sales
increase in gross margin, may be related to the increased management and tested in order to understand the sales increase. Also increased
credit period and price promise promotion or could be due cut-off testing should be undertaken to verify that revenue is recorded in the right
to an overstatement of revenue. period and is not overstated.
Discuss with management the transfer process undertaken and any controls put in Sales
place to ensure the completeness and accuracy of the data.
process.
Where possible, undertake tests of controls to confirm the effectiveness of the
transfer controls. In addition, perform substantive testing on the transfer of
information from the old to the new system.
There is a risk that overstated revenue, under/overstated Discuss with management the basis of the refund liability of $0·25m and obtain Sales
profits and liabilities if company did not recored supporting documentation to confirm the reasonableness of the assumptions and
appropriate refund liablity calculations.
 The fact Audit risk Response Noted
The company provides a six-month There is the risk that liabilities and expenses may be Review the calculation of the warranty provision and assess its reasonableness in Sales return/
warranty on its products which require understated if the company has reduced the warranty light of the value of claims received in the period. warranty
defects to be repaired at Corley Appliances provision excessively at the year end.
Co’s own cost. The directors have reduced Review the assumptions underpinning the warranty provision for reasonableness
this provision during the year on the Because the company does not manufacture the goods (they
grounds they feel the products they sell are only sell them) and therefore this is not a reasonable reason Review the level of claims made under warranty post year end to assess the
built to a high standard. for reduction reasonableness of the reduced provision.

The company has a returns policy allowing There is a risk that revenue will be overstated and the Enquire with the finance director how the returns policy has been applied at the Sales return/
a customer to return goods within 28 days refund liability understated if the company has not correctly year end and whether the provisions in IFRS 15 have been reflected. warranty
of purchase if they are dissatisfied with the accounted for the refund liability.
product. Review the assumptions underpinning the refund liability for reasonableness and
IFRS® 15 Revenue from Contracts with Customers requires whether they meet the historic 5% value of returns.
that revenue should only be recognised to the extent that
goods will not be returned. The company should recognise a Compare the level of post year-end returns to the refund liability and discuss any
refund liability for goods which are expected to be returned. significant differences with management

A customer has returned $120,000 of There is a risk that revenue and receivables are overstated if Inspect a copy of the credit note and confirm an adjustment to revenue and Sales return/
faulty goods to the company prior to the the credit note is not correctly recorded prior to the year receivables has been recorded pre- year end. warranty
year-end but a credit note is yet to be end.
issued.

The finance director is planning on There is a risk that revenue and cost of sales may be Discuss the basis of the revised assumption of a 5% return rate with the finance Sales return/
reducing the estimated return rate for overstated and liabilities understated if reducing the rate of director. Review a period of 60 days to quantify the levels of return in the specified warranty
goods sold on a sale or return basis to return goods period and compare this to the assumed rate of 5%. Discuss any significant
wholesale customers from 10% to 5%. variations with the finance director.

IFRS® 15 Revenue from Contracts with Customers

provides that revenue and cost of sales should only be
accounted for to the extent that the company foresees that
the goods will not be returned. For the goods which may be
returned, the company should recognise a refund liability.
If, after 60 days, the goods are not returned, then this
liability is reversed and revenue is recognised.
 The fact Audit risk Response Noted
Hart Co offers its customers a warranty at There is a risk that the warranty provision could be 1) Discuss with management the basis of the provision calculation and compare Sales return/
no extra cost, which guarantees the understated, leading to understated expenses and liabilities this to industry averages and the level of post year-end claims warranty
playgrounds will function as expected for if the company does not record enough warranty provision
three years. The provision is calculated as under IAS 37 2) Discuss the rationale behind reducing the level of provision this year.
2% of revenue in the current year against
6% in the prior year, despite there being no 3) Compare the prior year provision with the actual level of claims in the year, to
changes in the construction techniques or assess the reasonableness of the judgements made by management.
the level of claims.

A sales-related bonus scheme has been
introduced in the year for sales staff, with
a significant number of new customer
accounts on favourable credit terms being
opened pre year end. This has resulted in a
5% increase in revenue.
Sales staff seeking to maximise their current year bonus Increased sales cut-off testing will be performed along with a review of any post Sales/
may result in new accounts being opened from poor credit year-end returns as they may indicate cut-off errors. In addition, increased after Bonus
risks leading to irrecoverable receivables. date cash receipts testing to be undertaken for new customer account receivables.
In addition, there is a risk of sales cut-off errors as new
customers could place orders within the two-month
introductory period and subsequently return these goods
post year end.

The external audit team may place reliance If reliance is placed on irrelevant or poorly performed
on the controls testing work undertaken by testing, then the external audit team may form an incorrect
the IA department. conclusion on the strength of the internal controls at Peony
Co. This could result in them performing insufficient levels
of substantive testing, thereby increasing detection risk
The external audit team should meet with IA staff, read their reports and review Audit team
their files relating to store visits to ascertain the nature of the work undertaken.
Before using the work of IA, the audit team will need to evaluate and perform
audit procedures on the entirety of the work which they plan to use, in order to
determine its adequacy for the purposes of the audit. In addition, the team will
need to re-perform some of the testing carried out by IA to assess its adequacy.

The directors are paid a bonus based on a There is a risk that the directors will try to overstate the 1) Maintain professional scepticism and be alert to the increased risk of Bonus
percentage of profit before tax for the year. profit, and therefore their bonuses by increasing the revenue manipulation.
and income recorded and decreasing expenses
2) Increased testing should be performed relating to adjusting journal entries

Directors’ remuneration disclosures have The directors’ remuneration disclosure will not be complete Discuss this matter with management and review the requirements of local Bonus
been made in line with IFRS® Standards if the additional information is not disclosed as local legislation to determine if the disclosure in the financial statements is included
but not local legislation. legislation appropriately.
 The fact
The directors have each been paid a
significant bonus at the year end and
separate disclosure of this is required in
the financial statements by local
legislation.
Audit risk Response Noted
The directors’ remuneration disclosure will be incomplete Discuss this matter with management and review the disclosure in the financial Bonus
and inaccurate if the bonus paid is included in the payroll statements to ensure it complies with local legislation.
charge for the year and not separately disclosed in
accordance with the local legislation.
 The fact
In May 20X5, the financial controller was If it is probable that Harlem Co will make payment to the The audit team should discuss with management and request confirmation from
dismissed and is threatening to sue the
company for unfair dismissal.
In December 20X7, the financial
accountant of Blackberry Co was
dismissed and is threatening to sue the
company for unfair dismissal.
Petanque Co, a customer of Hurling Co,
has announced that they intend to
commence legal action for a loss of
information and profits as a result of the
Luge product sold to them.
The payables ledger supervisor was
dismissed in June 20X5 due to a fraud.
The value of this fraud has been
recognised as an expense in the draft
statement of profit or loss.
Audit risk Response Noted
Dismissal
financial controller, a provision for unfair dismissal is the company’s lawyers of the existence and likelihood of success of any claim
required to comply with IAS 37 Provisions, Contingent from the former financial controller.
Liabilities and Contingent Assets. If the payment is possible
rather than probable, a contingent liability disclosure would
be necessary. If Harlem Co has not done this, there is a risk
over the completeness of any provisions or contingent
liabilities disclosures.
If it is probable that Blackberry Co will make a payment to The audit team should request confirmation from the company’s lawyers of the Dismissal
the financial accountant, a provision for unfair dismissal is existence and likelihood of success of any claim from the former financial
required. accountant.
If the payment is possible rather than probable, a contingent
liability disclosure would be necessary.
If Blackberry Co has not done this, there is a risk over the
completeness of any provisions or contingent liabilities.
If it is probable that the company will make payment to the Caving & Co should write to the company’s lawyers to enquire of the existence Dismissal
customer, a legal provision is required. If the payment is and likelihood of success of any claim from Petanque Co. The results of this
possible rather than probable, a contingent liability should be used to assess the level of provision or disclosure included in the
disclosure would be necessary. If Hurling Co has not done financial statements.
this, there is a risk over the completeness of any provisions
or the necessary disclosure of contingent liabilities.
1) There is a risk that expenses being understated and The audit team should undertake additional substantive procedures over the Fraud
payables being overstated If additional frauds committed by payables balance, particularly the fictitious supplier set up on the payables ledger
the payables ledger supervisor are not discovered. to ensure this has been removed.
2) Control risk is also increased if the fraud has gone Discuss with the finance director the details of the fraud perpetrated by the
undetected for a period of time. payables ledger supervisor and what procedures have been adopted to date to
identify any further adjustments which are needed in the financial statements. In
addition, discuss with the finance director what additional controls have been put
in place to prevent any similar frauds.
In addition, the team should maintain professional scepticism and be alert to the
risk of further fraud.
 The fact
Harlem Co’s financial controller has
allegedly carried out a number of
fraudulent transactions at the company.
The investigation into the extent of the
fraud has only recently commenced.
Audit risk Response Noted
There is a risk that she may have undertaken a significant Discuss with the finance director the details of the fraud perpetrated by the Fraud
level of fraudulent transactions leading to an increased financial controller and what procedures have been adopted to date to identify any
control risk which has not yet been identified. These would adjustments which are needed in the financial statements.
need to be written off to the statement of profit or loss. If
these have not been uncovered by the year end, the financial Additional substantive testing should be conducted over the affected areas of the
statements could include errors resulting in the accounting records.
misstatement of profits.
In addition, the team should maintain their professional scepticism and be alert to
the risk of further fraud and errors.

In November 20X7, it was discovered that
a significant teeming and lading fraud had
been carried out by four members of the
sales ledger department.
There is a risk that the full impact of the fraud has not been
quantified and any additional fraudulent transactions would
need to be written off in the statement of profit or loss. If
these have not been uncovered, the financial statements
could be misstated.
In addition, individual receivable balances may be
under/overstated as customer receipts have been
misallocated to other receivable balances.
Discuss with the finance director what procedures they have adopted to fully Fraud
identify and quantify the impact of the teeming and lading fraud. In addition,
discuss with the finance director, what controls have been put in place to identify
any similar frauds.
Review the receivables listing to identify any unusual postings to individual
receivable balances as this could be further evidence of fraudulent transactions.
In addition, the team should maintain their professional scepticism and be alert to
the risk of further fraud and errors.

The payables payment period has These are all indicators that the company could be Detailed going concern testing to be performed during the audit, including the Going
increased from 40 to 58 days. The current experiencing a reduction in its cash flow which could result review of cash flow forecasts and the underlying assumptions. These should be concern
ratio has decreased from 3·08 to 1·65. in going concern difficulties or uncertainties. discussed with management to ensure that the going concern basis is reasonable.

The quick ratio has also decreased from These uncertainties may not be adequately disclosed in the
1·97 to 0·99. In addition, the bank balance financial statements.
has moved from $0·56m to an overdraft of
$0·81m.

The company breached the terms of its If the bank refuses to continue to support the company, Discuss with the finance director the availability of alternative financing if the Going
overdraft facility in June 20X5 and the there may be doubts as to the company’s ability to continue bank is unwilling to continue to support the company and review the adequacy of concern
bank will only confirm the decision as a going concern. The uncertainties may not be adequately any going concern disclosures in the financial statements.
whether, or not, to continue to support the disclosed in the financial statements.
business in November 20X5, which is after The audit team should undertake detailed going concern testing, in particular,
the auditor’s report will be signed. The reviewing the impact of a non-renewal of the overdraft facility.
company is dependent on the overdraft
facility.
 The fact
A current asset of $360,000 has been
included within the statement of profit or
loss and assets. It represents an anticipated
pay out from liquidators handling the
bankruptcy of a customer who owed
Blackberry Co $0·9m. The sum of $0·9m
was written off in the prior year accounts.
However, the company has not received a
formal notification from the liquidators
confirming the payment and this would
therefore represent a possible contingent
asset.
Prancer Construction Co offers its
customers a building warranty of five
years, which covers any construction
defects.
A patent has been purchased for $1·1m
and this grants Blackberry Co the
exclusive right for three years to customise
their portable music players to gain a
competitive advantage in their industry.
Management has expensed the full amount
paid to the current year statement of profit
or loss.
Audit risk
To comply with IAS 37 Provisions, Contingent Liabilities
and Contingent Assets, this should not be recognised until
the receipt is virtually certain. With no firm response to
date, the inclusion of this sum overstates profit and current
assets.
A warranty provision will be required under IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
Calculating warranty provisions requires judgement as it is
an uncertain amount.
The finance director anticipates this provision will be lower
than last year as the company has improved its building
practices and the quality of its finished properties.
However, there is a risk that this provision could be
understated,
especially in light of the overdraft covenant relating to a
minimum level of net assets and is being used as a
mechanism to manipulate profit and asset levels.
In accordance with IAS 38 Intangible Assets, this should
have been included as an intangible asset and amortised
over its three-year life. As the sum has been fully expensed
and not treated in accordance with IAS 38, intangible assets
and profits are understated.
Response Noted
Discuss with management whether any notification of payment has been received IAS 37 -
from the liquidators and review the related correspondence. If virtually certain, the Provision
treatment adopted is correct. If payment has been received, agree to post-year end
cash book.
If receipt is not virtually certain, management should be requested to remove it
from profit and receivables. If the receipt is probable, the auditor should request
management include a contingent asset disclosure note.
Discuss with management the basis of the provision calculation, and compare this IAS 37 -
to the level of post year-end claims, if any, made by customers. In particular, Provision
discuss the rationale behind reducing the level of provision this year.
Compare the prior year provision with the actual level of claims in the year, to
assess the reasonableness of the judgements made by management.
The audit team will need to agree the purchase price to supporting documentation Intangible
and confirm the useful life is three years as per the contract. assets
Discuss with management the reason for fully expensing the $1·1m paid, and
request they correct the treatment.
The correcting journal should be reviewed and the amortisation charge should be
recalculated in order to ensure the accuracy of the charge and that the intangible is
correctly valued at the year end.
 The fact
The company’s central warehouse and all
20 branches will be carrying out an
inventory count at the year-end date of 31
August.
Audit risk
It is unlikely that the auditor will be able to attend all sites
which increases detection risk. It may not be possible to
gain sufficient appropriate audit evidence over the
inventory counting controls and completeness and existence
of inventory for those sites which are not visited.
Response Noted
The audit team should assess which of the inventory counts they will attend. This Inventory
should include the count for the central warehouse and a sample of branches which
contain the most material balances of inventory and those which have historically
had exceptions reported during the inventory count.
For those not visited, the auditor will need to review the level of exceptions noted
during the count and discuss any issues which arose during the count with
management.

At the year end there will be inventory It is unlikely that the auditor will be able to attend all of
counts undertaken at all 11 of the building these inventory counts, increasing detection risk, and
sites in progress. therefore they need to ensure that they obtain sufficient
evidence over the inventory counting controls, and
completeness and existence of inventory for any sites not
visited.
The auditor should assess for which of the building sites they will attend the Inventory
counts. This will be those with the most material inventory or which according to
management have the most significant risk of misstatement.
For those not visited, the auditor will need to review the level of exceptions noted
during the count and discuss with management any issues, which arose during the
count.

The audit team will only attend the WIP
counts at five of the 16 sites.
WIP is a material balance and the valuation of WIP is a
judgemental area.
-> As the audit team is not attending all sites, detection risk
is increased as the team will be unable to directly obtain
evidence relating to WIP.
1) Assess which inventory counts the team will attend _ the most material WIP Inventory
balances or which are assessed as having the greatest risk of misstatement.
2) For those inventory counts not attended -> +) obtain and review documentation
relating to the controls surrounding the counts
+) discuss with management any issues which arise during the count

The delivery time of three weeks from the There is a risk that inventory is not recorded on dispatch Discuss with management the point at which inventory is recorded and review the Inventory
company’s international supplier is likely and therefore inventory and liabilities are understated at the contract with the supplier to verify the requirements in place.
to result in goods in transit at the year end. year end.
The company has advised that the contract Review the controls the company has in place to ensure that inventory is recorded
with the supplier means that Scarlet Co from the point of dispatch.
will be responsible for goods from
dispatch and therefore inventory should be Extend cut-off testing by reviewing pre and post year-end GRNs and supplier
recorded when the products are sent by the dispatch notes to verify that inventory is recorded at the correct point.
supplier.
 The fact
Harlem Co has had production problems
which have affected the quality of a
significant batch of tyres. In addition, the
inventory holding period has increased
from 34 to 41 days.
The company is holding a number of
damaged paint products in inventory and
overall the inventory holding period has
increased from 45 days to 54 days.
Prancer Construction Co is likely to have a
material level of work in progress at the
year end, being construction work in
progress as well as ongoing maintenance
services, as Prancer Construction Co has
annual contracts for many of the buildings
constructed.
Darjeeling Co has stopped further sales of
one of its paint products and a product
recall has been initiated for any goods sold
since June.
Audit risk
Inventory may be overvalued as its net realisable value
(NRV) may be below its cost. If the tyres can be rectified,
the rectification costs may mean that cost exceeds net
realisable value. If the tyres cannot be rectified, the
inventory may need to be written off completely.
There is a risk that this inventory may be overvalued as its
net realisable value may be below cost.
Due to the issue with the paint consistency, the quality of
these products is questionable and management is
investigating whether these products can be rectified.
The level of work in progress will need to be assessed at the
year end. Assessing the percentage completion for partially
constructed buildings is likely to be quite subjective, and
the team should consider if they have the required expertise
to undertake this. If the percentage completion is not
correctly calculated, the inventory valuation may be under
or overstated.
This product recall will result in Darjeeling Co paying
refunds to customers. The sales will need to be removed
from the 20X8 financial statements and a refund liability
recognised. Also inventory will need to be reinstated, albeit
at a possibly written down value. Failing to account for this
correctly could result in overstated revenue, understated
liabilities and misstated inventory.
Response Noted
Discuss with the finance director whether any write downs will be made to the Inventory
affected tyres, and what, if any, modifications may be required with regards to the
quality.
Testing should be undertaken to confirm cost and NRV of the affected products in
inventory and that all inventory on a
line-by-line basis is valued correctly.
Discuss with the finance director whether any write downs will be made to this Inventory
product, and what, if any, modifications will be required to rectify the quality of
the product.
Testing should be undertaken to confirm cost and NRV of the affected paint
products held in inventory and that on a line by line basis the goods are valued
correctly.
The auditor should discuss with management the process they will undertake to Inventory
assess the percentage completion for work in progress at the year end. This process
should be reviewed by the auditor while attending the year-end inventory counts.
In addition, consideration should be given as to whether an independent expert is
required to value the work in progress or if a management expert has been used. If
the work of an expert is to be used, then the audit team will need to assess the
competence, capabilities and objectivity of the expert.
Review the list of sales of the paint product made between June and the date of the Inventory
recall, agree that the sales have been removed from revenue and the inventory
included. If the refunds have not been paid before the year end, review the draft
financial statements to confirm that it is included within current liabilities.
 The fact Audit risk
The company utilises a perpetual inventory Inventory could be under or overstated if the perpetual
system at its warehouse rather than a full inventory counts are not all completed, such that some
year-end count. Under such a system, all inventory lines are not counted in the year.
inventory must be counted at least once a
year with adjustments made to the During the interim audit, it was noted that there were
inventory records on a timely basis. significant exceptions with the inventory records being
higher than the inventory in the warehouse. As the year-end
quantities will be based on the records, this is likely to
result in overstated inventory
Response Noted
The timetable of the perpetual inventory counts should be reviewed and the Inventory
controls over the counts and adjustments to records should be tested.
In addition, the level of adjustments made to inventory should be considered to
assess their significance. This should be discussed with management as soon as
possible as it may not be possible to place reliance on the inventory records at the
year end, which could result in the requirement for a full year-end inventory count.

Blackberry Co values its inventory at the The general overheads do not meet requirement to record in Discuss with management the nature of the overheads included in inventory Inventory
lower of cost and net realisable value. Cost inventory cost. If these are included in inventory cost, then valuation. If general overheads are included, request management remove them
includes both production and general this will result in over-valued inventory. from the valuation to be included in the draft financial statements.
overheads.
Review supporting documentation to verify those overheads deemed to be of a
production nature are valid.

The company is planning to undertake the There is a risk that the year-end inventory could be under or The auditor should attend the inventory count held after the year end and note Inventory
full year-end inventory counts after the overstated if the adjustments are not completed accurately details of goods received and despatched post year end, in order to agree to the
year end and then adjust for movements reconciliation.
from the year end.
During the final audit, the year-end inventory adjustments schedule should be
reviewed in detail and agreed to supporting documentation obtained during the
inventory count for all adjusting items.

The audit team should increase the extent of inventory cut-off testing at the year
end and at the date of the count.

Peony Co’s inventory valuation policy is There is a risk that inventory could be under or overvalued Testing should be undertaken to confirm cost and NRV of inventory and that on a Inventory
selling price less average profit margin, as because inventory should be valued at the lower of cost and line-by-line basis the goods are valued correctly.
this is industry practice. net realisable value (NRV).
In addition, valuation testing should focus on comparing the cost of inventory to
the selling price less margin for a sample of items to confirm whether this method
is actually a close approximation to cost.
 The fact
The August 20X7 management accounts
contain $2·1 million of completed
properties; this balance was $1·4 million
in September 20X6.
Audit risk Response Noted
The increase in inventory may be due to an increased level Detailed cost and net realisable value (NRV) testing to be performed at the year Inventory
of pre year-end orders. Alternatively, it may be that Prancer end and the aged inventory report to be reviewed to assess whether inventory
Construction Co is struggling to sell completed properties, requires to be written down.
which may indicate that they are overvalued. IAS 2
Inventories requires that inventory should be stated at the
lower of cost and NRV.

Hurling Co has halted further sales of its If there are issues with the quality of the Luge product,
new product Luge and a product recall has inventory may be overvalued as its NRV may be below its
been initiated for any goods sold in the last cost.
four months.
Discuss with the finance director whether any write downs will be made to this Inventory
product, and what, if any, modifications may be required with regards the quality.
Testing should be undertaken to confirm cost and NRV of the Luge products in
inventory and that on a line-by-line basis the goods are valued correctly

Additionally, products of Luge sold within The sale will need to be removed; a refund liability should Review the list of sales made of product Luge prior to the recall, agree that the sale Inventory
the last four months are being recalled, this be recognised along with the reinstatement of inventory, has been removed from revenue and the inventory included. If the refund has not
will result in Hurling Co paying customer although the NRV of this inventory could be of a minimal been paid pre year end, agree it is included within current liabilities.
refunds. value. Failing to account for this correctly could result in
overstated revenue and understated liabilities and inventory.

Harlem Co has issued shares during the If the company has not accounted for a bonus issue before,
year via a bonus issue. Share capital within there is a risk that it could have been incorrectly treated
equity should increase by the value of the with equity being under or overstated. In addition, legal
shares and a reserve should decrease issues may arise if the shares have not been issued in
accordingly. accordance with the company’s statutory constitution.
Additionally, bonus issues require disclosure in the
financial statements and there is a risk that these may be
incomplete or inaccurate.
Review the treatment of the bonus issue and agree the increase in shares to the Issue shares
share register and share certificates, and agree that the corresponding reduction in
reserves is correct.
Review board minutes for authorisation and terms of the bonus issue and review if
the transaction has been conducted in line with this approval. Review the statutory
constitution documents to confirm the legality of the share issue.
Review the adequacy of the bonus issue disclosures in the financial statements.

Hart Co made a rights issue in the year.
1) There is a risk that the split between share capital and
share premium has not been accounted for correctly and
that these balances are misstated
1) Obtain legal documentation in support of the rights issue to agree the number of Issue shares
shares issued and the rights price.
2) Recalculate the split of share capital and share premium and agree this to the
journal entry to record the rights issue.
 The fact Audit risk Response Noted
Significant finance has been obtained in There is a risk that understated equity and overstated non- Review share issue documentation to confirm that the preference shares are Issue shares
the year, as the company has issued $5m current liabilities if irredeemable preference shares are irredeemable. Confirm that they have been correctly classified as equity within the
of irredeemable preference shares. classified incorrectly into non-current liabilities, not equity. accounting records and that total financing proceeds of $5m were received.

In addition, the disclosures for this share issue should be reviewed in detail to
ensure compliance with relevant accounting standards.

During the year Blackberry Co has raised This needs to be accounted for correctly, with adequate The audit team should confirm that proceeds of $1·2m were received and that the Issue shares
new finance through issuing $1·2m of disclosure made and the equity finance needs to be split of share capital and share premium is correct and appropriately recorded.
shares at a premium. allocated correctly between share capital and share
premium. In addition, the disclosures for this finance should be reviewed in detail to ensure
compliance with relevant accounting standards and local legislation.
If this is not done, then the accounts may be misstated due
to a lack of disclosure or share capital and share premium
may be misstated.

The company has borrowed $4m from the This loan needs to be correctly split between current and During the audit, the team would need to confirm that the $4 million loan finance Loan
bank via an eight-year loan. non-current liabilities in order to ensure correct disclosure. was received.

In addition, the split between current and non-current liabilities and the disclosures
for this loan should be reviewed in detail to ensure compliance with relevant
accounting standards and local legislation.

Details of security should be agreed to the bank confirmation letter.

As the level of debt has increased, there
should be additional finance costs as the
loan has an interest rate of 5%.
There is a risk that this has been omitted from the statement The finance costs should be recalculated and any increase agreed to the loan Loan
of profit or loss leading to understated finance costs and documentation for confirmation of the 5% interest rate.
overstated profit.
Interest payments should be agreed to the cash book and bank statements to
confirm the amount was paid and is not therefore a year-end payable.

Prancer Construction Co has a material
overdraft which has minimum profit and
net assets covenants attached to it. If these
covenants were to be breached, the
overdraft balance would become instantly
repayable.
If the company does not have sufficient cash to meet this Review the covenant calculations prepared by the company at the year end and Manipulate
repayment, then there could be going concern implications. identify whether any defaults have occurred; if so, determine the effect on the
company.
In addition, there is a risk of manipulation of profit and net
assets to ensure that covenants are met. The team should maintain their professional scepticism and be alert to the risk that
profit and/or net assets have been overstated to ensure compliance with the
covenants.
 The fact Audit risk Response Noted
The year-end financial statements have to This increases the risk that the directors may manipulate the The audit engagement team should maintain professional scepticism throughout Manipulate
be prepared by the end of September 20X5 financial statements, by overstating profits and assets and the course of the audit.
in order to secure bank finance and understating liabilities.
management wish to report strong results. Detailed cut-off testing on areas such as revenue, inventory and payables should be
performed to ensure that cut-off has been correctly applied and substantive
procedures performed on estimates and judgements to ensure accuracy.

Harlem Co intends to restructure its debt
finance after the year end. However, the
interest cover has declined from 4·4 to 2·6
and the level of gearing has increased from
53·7% to 56·5%.
In order to maximise the chances of securing the debt Brooklyn & Co should ensure that there is a suitably experienced audit team. Also, Manipulate
finance restructure, Harlem Co will need to present adequate time should be allocated for team members to obtain an understanding of
financial statements which show the best possible position the company and the significant risks of overstatement of profits and assets and
and performance. The worsening interest cover and gearing understatement of debt, including attendance at an audit team briefing.
ratio increases the risk that the directors may manipulate the
financial statements, by overstating profits and assets and The team needs to maintain professional scepticism and be alert to the increased
understating debt liabilities risk of manipulation.

Significant estimates and judgements should be carefully reviewed in light of the

misstatement risk.

Darjeeling Co intends to undertake a stock There is a risk that the directors have an incentive to
exchange listing in the next 12 months. manipulate the financial statements, by overstating revenue,
profits and assets because in order to maximise the success
of the potential listing, Darjeeling Co will need to present
financial statements which show the best possible position
and performance.
Earl & Co should ensure that there is a suitably experienced audit team. Also, Manipulate
adequate time should be allocated for team members to obtain an understanding of
the company and the significant risks of overstatement of revenue, profits and
assets, including attendance at an audit team briefing.
The team needs to maintain professional scepticism and be alert to the increased
risk of manipulation.

Significant estimates and judgements should be carefully reviewed in light of the

misstatement risk.

1) not familiar with the accounting 1) An increased detection risk on the audit 1) Assign suitably experienced team to the audit New client
policies, transactions and balances
2) Less assurance over opening balances as the audit team 2) Ensure adequate time is allowed for team members to obtain an understanding
2) a new audit client of the firm. did not perform the audit last yea of the company and the risks of material misstatement

3) Increased audit procedures should be performed over opening balances.

 The fact Audit risk Response Noted
The payroll function was transferred to the If any errors occurred during the transfer process, these Discuss with management the extent of records maintained at Peony Co for the Outsource
service organisation from 1 January 20X9, could result in wages and salaries being under/overstated period since January 20X9 and any monitoring of controls which has been
which is five months prior to the year end. undertaken by management over payroll.

Consideration should be given to contacting the service organisation’s auditor to

confirm the level of controls in place, a type 1 or type 2 report could be requested.

Hart Co’s payroll function is outsourced to 1) A detection risk arises as to whether sufficient and 1) Discuss with management any changes to the extent of records maintained at Outsource
an external service organisation. appropriate evidence is available at Hart Co to confirm the Hart Co since the prior year audit and any monitoring of controls which has been
completeness and accuracy of controls over the payroll undertaken by management over payrol.
cycle and liabilities at the year end.

2) Consideration should be given to the level of controls in
place at the service organisation and whether the data is
reliable. If any errors occurred these could result in the
wages and salaries expense and any accruals being
misstated.
2) Consideration should be given to contacting the auditor of the service
organisation to confirm the level of controls in place. Consider the extent to which
sufficient appropriate audit evidence can be obtained from records held at Hart Co
in respect of the wages and salaries expense and liabilities.

During the year, Peony Co outsourced its
payroll function to an external service
organisation.
A detection risk arises as to whether sufficient and Discuss with management the extent of records maintained at Peony Co for the Outsource
appropriate evidence is available at Peony Co to confirm period since January 20X9 and any monitoring of controls which has been
the completeness and accuracy of controls over the payroll undertaken by management over payroll.
cycle and liabilities at the year end.
Consideration should be given to contacting the service organisation’s auditor to
confirm the level of controls in place, a type 1 or type 2 report could be requested.

During the year Blackberry Co outsourced A detection risk arises as to whether sufficient and Discuss with management the extent of records maintained at Blackberry Co for Outsource
its sales ledger processing to an external appropriate evidence is available at Blackberry Co to the period since February 20X8 and any monitoring of controls undertaken by
service organisation. confirm the completeness and accuracy of controls over the management over sales and receivables.
sales and receivables cycle and balances at the year end.
Consideration should be given to contacting the service organisation’s auditor to
confirm the level of controls in place.

Surplus plant and machinery was sold
during the year, resulting in a loss on
disposal of $160,000.
Significant profits or losses on disposal are an indication Recalculate the loss on disposal calculations and agree all items to supporting PPE
that the depreciation policy of plant and machinery may not documentation.
be appropriate. Therefore depreciation may be understated
and profit and assets overstated Discuss the depreciation policy for plant and machinery with the finance director
to assess its reasonableness.

Review for other significant gains or losses on disposal of property, plant and
equipment to assess the reasonableness
of the company’s depreciation policies.
 The fact
The finance director has extended the
useful lives of fixtures and fittings from
three to four years, resulting in the
depreciation charge reducing.
Hart Co placed an order for $2.4m of
machinery, paying $1m in advance. The
machinery was due to be received in July
20X5 but will now be delivered
post year end.
A number of assets which had not been
fully depreciated were identified as being of non-current assets may not be appropriate, as
obsolete.
Hurling Co has entered into a transaction
to purchase a new warehouse for $3·2m
and it is anticipated that the legal process
will be completed by the year end.
The company purchased and installed a
new dispatch system. The costs which
have been capitalised include staff training
costs ($0·1m).
Audit risk Response Noted
Under IAS 16 Property, Plant and Equipment, useful lives Discuss with the directors the rationale for any extensions of asset lives and PPE
are to be reviewed annually, and if asset lives have reduction of depreciation rates. Also, the four-year life should be compared to how
genuinely increased, then this change is reasonable. often these assets are replaced, to assess the useful life of assets.
However, there is a risk that this reduction has occurred in
order to boost profits. If this is the case, then fixtures and
fittings are overvalued and profit overstated.
There is a risk that prepayments are understated and PPE 1) Review the non-current asset register to determine if the $1m paid in advance PPE
will be overstated if the deposit of $1m paid in advance has has been capitalised.
been capitalised within PPE because only assets which
physically exist at the year end should be capitalised as PPE 2) Discuss the correct accounting treatment with management to confirm that the
amount paid in advance is recognised as a prepayment and if incorrectly
recognised review the correcting journal entry.
This is an indication that the company’s depreciation policy Discuss the depreciation policy for non-current assets with the finance director and PPE
assess its reasonableness. Enquire
depreciation in the past appears to have been understated. of the finance director if the obsolete assets have been written off. If so, review the
adjustment for completeness
If an asset is obsolete, it should be written off to the
statement of profit or loss. Therefore depreciation may be
understated and profit and assets overstated
Only assets which physically exist at the year end should be Discuss with management as to whether the warehouse purchase was completed by PPE
included in property, plant and equipment. If the transaction the year end. If so, inspect legal documents of ownership, such as title deeds
has not been completed by the year end, there is a risk that ensuring these are dated prior to 1 April 20X7 and are in the company name.
assets are overstated if the company incorrectly includes the
warehouse at the year end.
There is a risk that PPE and profits are overstated because Discuss the accounting treatment with the finance director and request that the PPE
the training costs should be charged to profit or loss. training costs are written off to profit or loss to ensure treatment is in accordance
with IAS 16.
IAS 16 does not allow staff training costs to be capitalised
as part of the cost of a non-current asset If adjusted, review the journal entry for accuracy.
 The fact Audit risk Response Noted
A specialised machine was acquired and There is a risk that profits and property, plant and Discuss the accounting treatment with the directors and request that an adjustment PPE
staff members had to be trained in the equipment will be overstated, and expenses understated if is made to ensure appropriate treatment of the training costs. Obtain a breakdown
achine’s use at a cost of $15,000 which has the training costs are not written off to the statement of of the remaining capitalised costs and agree to supporting documentation to ensure
been capitalised as part of the cost of the profit or loss. that they meet the recognition criteria in IAS 16.
machine.
IAS® 16 prohibits training costs from being capitalised and

Darjeeling Co purchased and installed a
new manufacturing line. The costs include
purchase price ($2·2m), installation costs
($0·4m) and a five-year servicing and
maintenance plan ($0·5m).
If the service for 20X8 has been carried out, then $0·1m
($0·5m/5) should be charged to profit or loss. Therefore
property, plant and equipment (PPE) and profits are
overstated and prepayments are understated.
Review the purchase documentation for the new manufacturing line to confirm the PPE
exact cost of the servicing and that it does relate to a five-year period.
Discuss the accounting treatment with the finance director and the level of any
necessary adjustment to ensure treatment is in accordance with IAS 16.

The company purchased a patent for There is a risk that intangible assets and profits are Agree the useful life of the patent is four years to supporting documentation. PPE
$800,000 at the end of the prior year which overstated if that management has correctly accounted for
has a useful life of four years. the amortisation. The amortisation charge should be calculated and the appropriate journal
adjustment discussed with management, in order to ensure the accuracy of the
The carrying amount in the forecast IAS® 38 Intangible Assets, this intangible asset should be charge and that the intangible is correctly valued at the year end.
financial statements is $800,000 which is amortised over its four-year life.
the same as the prior year.

The company purchased a patent for There is a risk that intangible assets and profits are Agree the useful life of the patent is four years to supporting documentation. PPE
$800,000 at the end of the prior year which overstated if that management has correctly accounted for
has a useful life of four years. the amortisation. The amortisation charge should be calculated and the appropriate journal
adjustment discussed with management, in order to ensure the accuracy of the
The carrying amount in the forecast IAS® 38 Intangible Assets, this intangible asset should be charge and that the intangible is correctly valued at the year end.
financial statements is $800,000 which is amortised over its four-year life.
the same as the prior year.

Peony Co is planning to include a current
asset of $0·7m, which relates to
advertising costs incurred and adverts
shown on TV before the year end.
The costs were incurred and adverts shown in the year Discuss with management the rationale for including the advertising as a current PPE
ending 20X9 and there is no basis for including them as a asset. Request evidence to support the assessment of probable future cash flows,
current asset at the year end. The costs should be recognised and review for reasonableness.
in operating expenses in the current year financial
statements. Review supporting documentation for the advertisements to confirm that all were
shown before the 20X9 year end.
If these costs are not expensed, current assets and profits
will be overstated. Request that management remove the current asset and record the amount as an
expense in the statement of profit or loss.
 The fact Audit risk Response Noted
Hurling Co upgraded their website during The costs incurred should be correctly allocated between Review a breakdown of the costs and agree to invoices to assess the nature of the PPE
the year at a cost of $1·1m. revenue and capital expenditure. As the website has been expenditure and if capital, agree to inclusion within the asset register or agree to
upgraded, there is a possibility that the new processes and the statement of profit or loss.
systems may not record data reliably and accurately.
The audit team should document the revised system and undertake tests over the
This may lead to a risk over completeness and accuracy of completeness and accuracy of data recorded from the website to the accounting
data in the underlying accounting records. records.

Hart Co has recognised $0.6m of research
expenditure in profit or loss with the
remaining $1.2m having been capitalised
as development expenditure.
There is a risk that intangible assets could be overstated and
research expenses understated If research costs have been
incorrectly classified as development expenditure because
IAS 38 Intangible Assets has strict criteria to capitalise with
development expenditure.
2) Obtain a breakdown of the research expenditure recognised in profit or loss and R&D
of the development costs capitalised and review supporting documentation to
determine whether they have been correctly classified. Any development
expenditure agreed must meet the relevant criteria for capitalisation under IAS 38.
2) Discuss the accounting treatment with the finance director and ensure it is in
accordance with IAS 38.

During the year, Darjeeling Co has spent If research costs have been incorrectly classified as Obtain a breakdown of the expenditure and verify that it relates to the development R&D
$0·9m on developing new product lines, development expenditure, there is a risk that intangible of the new products. Review expenditure documentation to determine whether the
some of hich are in the early stages of their assets could be overstated and expenses understated. costs relate to the research or development stage. Discuss the accounting treatment
development cycle. with the finance director and ensure it is in accordance with IAS 38.
This expenditure is classed as research and development
under IAS® 38 Intangible Assets. The standard requires
research costs to be expensed to profit or loss and only
development costs to be capitalised as an intangible asset.

Forecast ratios from the finance director
show that the gross margin is expected to
increase from 56% to 60% and the
operating margin is expected to decrease
from 21% to 18%.
There is a risk that costs may have been omitted or included The classification of costs between cost of sales and operating expenses should be Reclassify
in operating expenses rather than cost of sales because this reviewed in comparison to the prior year and any inconsistencies investigated.
movement in gross margin is significant and inconsistent
with the fall in operating margin.
Misclassification of expenses would result in
understatement of cost of sales and overstatement of
operating expenses.
 The fact
On 29 May 20X5, the directors announced
that a brand was being discontinued
resulting in four members of staff being
made redundant. The costs of redundancy
are being included in the July 20X5
payroll run.
Audit risk Response Noted
There is a risk that profit would be overstated and liabilities Obtain the calculation of the redundancy payments and agree that a provision has Redundancy
and payables would be understated if a provision is not been included as a liability in the year-end financial statements.
recognised.
Agree the redundancy payments have been paid post year end.
As there is a present obligation for which the costs can be
reliably measured, and which will result in an outflow of
funds, IAS 37 Provisions, Contingent Assets and
Contingent Liabilities would require this provision to be
recognised in the financial statements.

Peony Co is planning to make
approximately 60 employees redundant
after the year end.
The timing of this announcement has not been confirmed; if Discuss with management the status of the redundancy announcement; if before Redundancy
it is announced to the staff before the year end, then under the year end, review supporting documentation to confirm the timing. In addition,
IAS 37 Provisions, Contingent Liabilities and Contingent review the basis of and recalculate the redundancy provision.
Assets, a redundancy provision will be required at the year
end as a constructive obligation will have been created.

Failure to provide or to provide an appropriate amount will

result in an understatement of provisions and expenses.

The finance director has requested that the A reduction in the audit timetable will increase detection
audit completes one week earlier than risk and place additional pressure on the team in obtaining
normal as he wishes to report results sufficient and appropriate evidence.
earlier.
In addition, the finance team of Hurling Co will have less
time to prepare the financial information leading to an
increased risk of errors arising in the financial statements
The timetable should be confirmed with the finance director. If it is to be reduced, Request
then consideration should be given to performing an interim audit in late March or finish soon
early April; this would then reduce the pressure on the final audit.
The team needs to maintain professional scepticism and be alert to the increased
risk of errors occurring.

The company’s financial accountant was
taken ill suddenly in May 20X5 and a
temporary accountant has been drafted in
to help prepare the financial statements.
There is an increased risk of errors in the financial
statements as the temporary financial accountant may not
be familiar with the company’s activities and so
errors/omissions may go unnoticed.
Discuss with management the technical competency and experience of the Staff
temporary financial accountant.
In addition, the audit engagement team should ensure that increased substantive
procedures are undertaken on the material areas of the financial statements to
reduce audit risk, particularly those requiring judgement.
 The fact
The company is intending to propose a
final dividend once the financial
statements are finalised.
Audit risk Response Noted
This amount should not be provided for in the 20X7 Discuss the issue with management and confirm that the dividend will not be Subsequent
financial statements, as the obligation only arises once the included within liabilities in the 20X7 financial statements. event
dividend is announced, which is post year end.
The financial statements need to be reviewed to ensure that adequate disclosure of
In line with IAS 10 Events after the Reporting Date the the proposed dividend is included.
dividend should only be disclosed. If the dividend is
included, this will result in an overstatement of liabilities
and understatement of equity.
2020 - Dec, Sep
The fact Audit risk Response
2017 MJ Audit risk
a) Audit risk and the components of audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of two main components, being the
risk of material misstatement and detection risk. Risk of material misstatement is made up of a
further two components, inherent risk and control risk.

Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or
disclosure to a misstatement which could be material, either individually or when aggregated
with other misstatements, before consideration of any related controls.

Control risk is the risk that a misstatement which could occur in an assertion about a class of
transaction, account balance or disclosure and which could be material, either individually or
when aggregated with other misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity’s internal control.

Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement which exists and which could be material,
either individually or when aggregated with other misstatements. Detection risk is affected by
sampling and non-sampling risk.
2020 - Dec, Sep
Audit risk Auditor’s response The fact
Hart Co is a new client for Morph & Co. As Morph & Co should ensure it has a suitably The audit team is not familiar with the
the audit team is not familiar with the experienced team assigned to the audit and accounting policies, transactions and
accounting policies, transactions and that adequate time is allowed for team balances
balances of Hart Co, there will be an members to obtain an understanding of the
increased detection risk on the audit. company and the risks of material
misstatement, including a detailed team
briefing to cover the key areas of risk.
There is also less assurance over opening
balances as Morph & Co did not perform Increased audit procedures should be
the audit last year. performed over opening balances.

The directors are paid a bonus based on a The audit team should be aware of the The directors are paid a bonus based on a
percentage of profit before tax for the year. increased risks of manipulation and should percentage of profit before tax for the year.
assign more experienced audit members to
There is a risk that the directors will try to significant estimates and judgemental areas.
overstate the profit, and therefore their
bonuses by increasing the revenue and Also, adequate time should be allocated for
income recorded and decreasing expenses. team members to obtain an understanding
This is a particular risk relating to of the company and the significant risks of
judgemental areas such as provisions and overstatement of profit, including
estimates. attendance at an audit team briefing.

The team needs to maintain professional

scepticism and be alert to the increased risk
of manipulation. Increased testing should
be performed relating to adjusting journal
entries.
Customers pay a 25% deposit on signing The audit team should obtain a copy of the Customers pay a 25% deposit on signing
the contract to purchase the playgrounds. contracts with customers and review them the contract to purchase the playgrounds.
to understand the performance obligations.
The deposits should not be recognised as They should discuss with management the
revenue immediately and instead should be criteria for determining whether
recognised as deferred income (contract performance obligations have been satisfied
liabilities) within current liabilities until the and the treatment of deposits received to
performance obligations, as per the ensure it is appropriate and consistent with
contracts, have been satisfied. This is likely relevant standards.
to be at a point in time, when control of the
playground is passed to the customer. During the final audit, the audit team
should undertake increased testing over the
There is a risk that revenue is overstated cut-off of revenue and the completeness of
and current liabilities understated if the deferred income (contract liabilities).
deposits have been recorded within
revenue.

The audit team will only attend the WIP The auditor should assess which inventory The audit team will only attend the WIP
counts at five of the 16 sites. counts the team will attend, most likely to counts at five of the 16 sites.
be those with the most material WIP
WIP is a material balance and the valuation balances or which are assessed as having
of WIP is a judgemental area. As the audit the greatest risk of
team is not attending all sites, detection risk misstatement.
is increased as the team will be unable to
directly obtain evidence relating to WIP. For those inventory counts not attended, the
audit team will need to obtain and review
documentation relating to the controls
surrounding the counts and will need to
review report from any experts used to
value the WIP, and any exceptions noted
during the count and discuss with
management any issues which arise during
the count
Hart Co offers its customers a warranty at
no extra cost, which guarantees the
playgrounds will function as expected for
three years. The provision is calculated as
2% of revenue in the current year against
6% in the prior year, despite there being no
changes in the construction techniques or
the level of claims.
Under IAS® 37 Provisions, Contingent
Liabilities and Contingent Assets this
should be recognised as a warranty
provision. Calculating warranty provisions
requires judgement as it is an uncertain
amount.
There is a risk that the warranty provision
could be understated, leading to understated
expenses and liabilities.
The audit team should discuss with
management the basis of the provision
calculation and compare this to industry
averages and the level of post year-end
claims, if any, made by customers. In
particular, they should discuss the rationale
behind reducing the level of provision this
year.
The audit team should also compare the
prior year provision with the actual level of
claims in the year, to assess the
reasonableness of the judgements made by
management.
Hart Co offers its customers a warranty at
no extra cost, which guarantees the
playgrounds will function as expected for
three years. The provision is calculated as
2% of revenue in the current year against
6% in the prior year, despite there being no
changes in the construction techniques or
the level of claims.
Hart Co has recognised $0.6m of research The audit team should obtain a breakdown Hart Co has recognised $0.6m of research
expenditure in profit or loss with the of the research expenditure recognised in expenditure in profit or loss with the
remaining $1.2m having been capitalised as profit or loss and of the development costs remaining $1.2m having been capitalised as
development expenditure. capitalised and review supporting development expenditure.
documentation to determine whether they
IAS 38 Intangible Assets has strict criteria have been
as to which costs can be capitalised as correctly classified. Any development
development expenditure. There is a risk expenditure should then be agreed as
that the requirements of the standard have meeting the relevant criteria for
not been applied correctly. capitalisation as set out in IAS 38.

If research costs have been incorrectly The team should also discuss the
classified as development expenditure, accounting treatment with the finance
there is a risk that intangible assets could be director and ensure it is in accordance with
overstated and research expenses IAS 38.
understated

Hart Co placed an order for $2.4m of Review the non-current asset register to Hart Co placed an order for $2.4m of
machinery, paying $1m in advance. The determine if the $1m paid in advance has machinery, paying $1m in advance. The
machinery was due to be received in July been capitalised. Discuss the correct machinery was due to be received in July
20X5 but will now be delivered post year accounting treatment with management to 20X5 but will now be delivered
end. confirm that the amount paid in advance is post year end.
recognised as a prepayment and if
Only assets which physically exist at the incorrectly recognised review the correcting
year end should be capitalised as property, journal entry.
plant and equipment (PPE). The $1m
deposit paid in advance should be
recognised as a prepayment. If the deposit
of $1m paid in advance has been capitalised
within PPE then prepayments are
understated and PPE will be overstated.
Hart Co made a rights issue in the year.
This is a non-standard transaction and there
is increased risk that the issue has not been
recorded correctly. The rights issue has
been made at a premium and therefore
requires to be split into its share capital and
share premium elements.
The audit team should obtain legal Hart Co made a rights issue in the year.
documentation in support of the rights issue
to agree the number of shares issued and
the rights price. They should recalculate the
split of share capital and share premium
and agree this to the journal entry to record
the rights issue.

There is a risk that the split between share The audit team should also agree that
capital and share premium has not been disclosures are adequate and consistent with
accounted for correctly and that these standards and legislation.
balances are misstated. There is also a risk
that the rights issue has not been disclosed
in accordance with accounting standards
and local company legislation.

Hart Co’s payroll function is outsourced to Discuss with management any changes to Hart Co’s payroll function is outsourced to
an external service organisation. A the extent of records maintained at Hart Co an external service organisation.
detection risk arises as to whether sufficient since the prior year audit and any
and appropriate evidence is available at monitoring of controls which has been
Hart Co to confirm the completeness and undertaken by management over payrol.
accuracy of controls over the payroll cycle
and liabilities at the year end. Consideration Consideration should be given to contacting
should be given to the level of controls in the auditor of the service organisation, Chaz
place at the service organisation and Co, to confirm the level of controls in
whether the data is reliable. If any errors place. A type 1 or type 2 report could be
occurred these could result in the wages and requested. Consider the extent to which
salaries expense and any accruals being sufficient appropriate audit evidence can be
misstated. obtained from records held at Hart Co in
respect of the wages and salaries
expense and liabilities.
 Directors’ remuneration disclosures have Discuss this matter with management and Directors’ remuneration disclosures have
been made in line with IFRS® Standards review the requirements of local legislation been made in line with IFRS® Standards
but not local legislation. to determine if the disclosure in the but not local legislation.
financial statements is included
Where the local legislation is more appropriately.
comprehensive than IFRS Standards it is
likely that the company must comply with
local legislation. The directors’
remuneration disclosure will not be
complete if the additional information is not
disclosed.

2021 - Mar, Jun

Audit risk
The company has a returns policy allowing
a customer to return goods within 28 days
of purchase if they are dissatisfied with the
product.
Auditor's response
Enquire with the finance director how the
returns policy has been applied at the year
end and whether the provisions in IFRS 15
have been reflected.
The company has a returns policy allowing
a customer to return goods within 28 days
of purchase if they are dissatisfied with the
product.

IFRS® 15 Revenue from Contracts with Review the assumptions underpinning the
Customers requires that revenue should refund liability for reasonableness and
only be recognised to the extent that goods whether they meet the historic 5% value of
will not be returned. The company should returns.
recognise a refund liability for goods which
are expected to be returned. Compare the level of post year-end returns
to the refund liability and discuss any
If the company has not correctly accounted significant differences with management
for the refund liability, revenue will be
overstated and the refund liability
understated
The company provides a six-month
warranty on its products which require
defects to be repaired at Corley Appliances
Co’s own cost. The directors have reduced
this provision during the year on the
grounds they feel the products they sell are
built to a high standard.
Review the calculation of the warranty
provision and assess its reasonableness in
light of the value of claims received in the
period.
Review the assumptions underpinning the
warranty provision for reasonableness
The company provides a six-month
warranty on its products which require
defects to be repaired at Corley Appliances
Co’s own cost. The directors have reduced
this provision during the year on the
grounds they feel the products they sell are
built to a high standard.

The company does not manufacture the Review the level of claims made under
goods (they only sell them) and therefore warranty post year end to assess the
this is not a reasonable reason for reduction, reasonableness of the reduced provision.
hence if the company has reduced the
warranty provision excessively at the year
end, liabilities and expenses may be
understated.

The company purchases their goods from
its main supplier in Asia and has
responsibility for goods at the point of
dispatch, the goods are in transit for up to
one month.
At the year end, there is a risk that the cut-
off of purchases may not be accurate as
they may not correctly recognise the goods
from the point of dispatch. There is also a
risk that inventory and trade payables are
understated at the year end.
Discuss with management the point at The company purchases their goods from
which inventory is recorded and review the its main supplier in Asia and has
contract with the supplier to verify the responsibility for goods at the point of
requirements in place. dispatch, the goods are in transit for up to
one month.
Review the controls the company has in
place to ensure that inventory is recorded
from the point of dispatch.
The audit team should undertake detailed
cut-off testing of purchases of goods at the
year end and the sample of shipping
documentation immediately before and
after the year end relating to goods from its
main supplier in Asia should be increased
to ensure that cut-off is complete and
accurate.
The company’s central warehouse and all
20 branches will be carrying out an
inventory count at the year-end date of 31
August.
It is unlikely that the auditor will be able to inventory and those which have historically
attend all sites which increases detection
risk. It may not be possible to gain
sufficient appropriate audit evidence over
the inventory counting controls and
completeness and existence of inventory for to review the level of exceptions noted
those sites which are not visited.
Over the last six months, the receivables
collection period has increased from 42
days to 55 days and the allowance for
receivables will be at the same level as the
prior year.
Some receivables may not be recoverable
and if an additional allowance for
receivables is not included in the financial
statements, receivables will be overstated
and the allowance for receivables
understated.
The audit team should assess which of the The company’s central warehouse and all
inventory counts they will attend. This 20 branches will be carrying out an
should include the count for the central inventory count at the year-end date of 31
warehouse and a sample of branches which August.
contain the most material balances of
had exceptions reported during the
inventory count.
For those not visited, the auditor will need
during the count and discuss any issues
which arose during the count with
management.
Review and test the controls surrounding Over the last six months, the receivables
the way in which the finance director collection period has increased from 42
assesses the recoverability of receivables days to 55 days and the allowance for
balances and other credit control processes receivables will be at the same level as the
to ensure that they are operating effectively. prior year.
Perform extended post year-end cash
receipts testing and a review of the aged
receivables ledger in order to assess
valuation and the need for an increased
allowance for irrecoverable receivables.
Discuss with the finance director whether
an additional allowance for receivables will
be required against balances older than the
company’s credit terms.
The payables ledger supervisor was Discuss with the finance director the details The payables ledger supervisor was
dismissed in June 20X5 due to a fraud. The of the fraud perpetrated by the payables dismissed in June 20X5 due to a fraud. The
value of this fraud has been recognised as ledger supervisor and what procedures have value of this fraud has been recognised as
an expense in the draft statement of profit been adopted to date to identify any further an expense in the draft statement of profit
or loss. adjustments which are needed in the or loss.
financial statements. In addition, discuss
If additional frauds committed by the with the finance director what additional
payables ledger supervisor are not controls have been put in place to prevent
discovered, this could result in expenses any similar frauds.
being understated and payables being
overstated. Control risk is also increased if The audit team should undertake additional
the fraud has gone undetected for a period substantive procedures over the payables
of time. balance, particularly the fictitious supplier
set up on the payables ledger to ensure this
has been removed.

In addition, the team should maintain

professional scepticism and be alert to the
risk of further fraud.

Since the dismissal of the payables ledger Review the unprocessed invoices file at the Since the dismissal of the payables ledger
supervisor, purchase invoices have yet to be year end to identify any invoices which supervisor, purchase invoices have yet to be
logged onto the payables ledger. relate to the supply of pre year-end goods logged onto the payables ledger.
and ensure they have been properly accrued
There is a risk that the purchases and trade for in the year-end financial statements and
payables balance at the year end will be recognised as a liability.
understated if these invoices are not logged
onto the payables ledger before it is closed Discuss with the finance director the
down for the year or accrued for. approach to be adopted to resolve the issue
of unprocessed purchase invoices.
 The company purchased and installed a new Discuss the accounting treatment with the The company purchased and installed a new
dispatch system. The costs which have been finance director and request that the dispatch system. The costs which have been
capitalised include staff training costs training costs are written off to profit or capitalised include staff training costs
($0·1m). loss to ensure treatment is in accordance ($0·1m).
with IAS 16. If adjusted, review the journal
As per IAS® 16 Property, Plant and entry for accuracy.
Equipment, the cost of an asset includes its
purchase price and directly attributable
costs only. IAS 16 does not allow staff
training costs to be capitalised as part of the
cost of a non-current asset, as these costs
are not directly related to the cost of
bringing the asset to its working condition.

The training costs should be charged to

profit or loss. Therefore property, plant and
equipment (PPE) and profits are overstated.

The company breached the terms of its Discuss with the finance director the The company breached the terms of its
overdraft facility in June 20X5 and the bank availability of alternative financing if the overdraft facility in June 20X5 and the bank
will only confirm the decision whether, or bank is unwilling to continue to support the will only confirm the decision whether, or
not, to continue to support the business in company and review the adequacy of any not, to continue to support the business in
November 20X5, which is after the going concern disclosures in the financial November 20X5, which is after the
auditor’s report will be signed. The statements. auditor’s report will be signed. The
company is dependent on the overdraft company is dependent on the overdraft
facility. The audit team should undertake detailed facility.
going concern testing, in particular,
If the bank refuses to continue to support reviewing the impact of a non-renewal of
the company, there may be doubts as to the the overdraft facility.
company’s ability to continue as a going
concern. The uncertainties may not be
adequately disclosed in the financial
statements.

2020 - Mar, Jun

(c) Audit risks and auditor’s responses
Audit risk
Scarlet Co is a new audit client of the firm.
The audit engagement team will be
unfamiliar with the accounting policies,
transactions and balances of the client,
hence there will be increased detection risk
on the audit.
In addition, there is less assurance over
opening balances as Orange & Co did not
perform last year’s audit.
The company’s financial accountant was
taken ill suddenly in May 20X5 and a
temporary accountant has been drafted in to
help prepare the financial statements.
There is an increased risk of errors in the
financial statements as the temporary
financial accountant may not be familiar
with the company’s activities and so
errors/omissions may go unnoticed.
Auditor’s response
Orange & Co should ensure that it has Scarlet Co is a new audit client of the firm.
suitably experienced team deployed on
audit. In addition, sufficient time must be
set aside so that the team members can
familiarise themselves with the new client,
document its systems and controls and
understand the risks of material
misstatement.
Increased audit procedures should be
performed on the opening balances to
confirm their reasonableness.
Discuss with management the technical The company’s financial accountant was
competency and experience of the taken ill suddenly in May 20X5 and a
temporary financial accountant. In addition, temporary accountant has been drafted in to
the audit engagement team should ensure help prepare the financial statements.
that increased substantive procedures are
undertaken on the material areas of the
financial statements to reduce audit risk,
particularly those requiring judgement.
The year-end financial statements have to The audit engagement team should The year-end financial statements have to
be prepared by the end of September 20X5 maintain professional scepticism be prepared by the end of September 20X5
in order to secure bank finance and throughout the course of the audit. Detailed in order to secure bank finance and
management wish to report strong results. cut-off testing on areas such as revenue, management wish to report strong results.
inventory and payables should be
This increases the risk that the directors performed to ensure that cut-off has been
may manipulate the financial statements, by correctly applied and substantive
overstating profits and assets and procedures performed on estimates and
understating liabilities. judgements to ensure accuracy.

A specialised machine was acquired and Discuss the accounting treatment with the A specialised machine was acquired and
staff members had to be trained in the directors and request that an adjustment is staff members had to be trained in the
achine’s use at a cost of $15,000 which has made to ensure appropriate treatment of the achine’s use at a cost of $15,000 which has
been capitalised as part of the cost of the training costs. Obtain a breakdown of the been capitalised as part of the cost of the
machine. remaining capitalised costs and agree to machine.
supporting documentation to ensure that
IAS® 16 Property, Plant and Equipment they meet the recognition criteria in IAS 16.
prohibits training costs from being
capitalised and therefore profits and
property, plant and equipment will be
overstated, and expenses understated if the
training costs are not written off to the
statement of profit or loss.
The delivery time of three weeks from the Discuss with management the point at The delivery time of three weeks from the
company’s international supplier is likely to which inventory is recorded and review the company’s international supplier is likely to
result in goods in transit at the year end. contract with the supplier to verify the result in goods in transit at the year end.
The company has advised that the contract requirements in place. The company has advised that the contract
with the supplier means that Scarlet Co will with the supplier means that Scarlet Co will
be responsible for goods from dispatch and Review the controls the company has in be responsible for goods from dispatch and
therefore inventory should be recorded place to ensure that inventory is recorded therefore inventory should be recorded
when the products are sent by the supplier. from the point of dispatch. when the products are sent by the supplier.
Extend cut-off testing by reviewing pre and
There is a risk that inventory is not post year-end GRNs and supplier dispatch
recorded on dispatch and therefore notes to verify that inventory is recorded at
inventory and liabilities are understated at the correct point.
the year end.

Preliminary analytical procedures indicate Extend post year-end cash receipts testing Preliminary analytical procedures indicate
that the receivables collection period has and perform a review of the aged that the receivables collection period has
increased from 38 days to 52 days due to receivables listing to assess the valuation of increased from 38 days to 52 days due to
customers taking longer to pay. receivables. customers taking longer to pay.

There is a risk that some receivables may Discuss with management the adequacy of
not be recoverable and an allowance for any allowance for receivables.
receivables is required, hence receivables
may be overstated and the allowance for
receivables understated.
On 29 May 20X5, the directors announced Obtain the calculation of the redundancyOn 29 May 20X5, the directors announced
that a brand was being discontinued payments and agree that a provision has that a brand was being discontinued
resulting in four members of staff being been included as a liability in the year-end
resulting in four members of staff being
made redundant. The costs of redundancy financial statements. made redundant. The costs of redundancy
are being included in the July 20X5 payroll are being included in the July 20X5 payroll
run. Agree the redundancy payments have been run.
paid post year end.
As there is a present obligation for which
the costs can be reliably measured, and
which will result in an outflow of funds,
IAS 37 Provisions, Contingent Assets and
Contingent Liabilities would require this
provision to be recognised in the financial
statements. If a provision is not recognised
profit would be overstated and liabilities
and payables would be understated.

The directors have each been paid a Discuss this matter with management and The directors have each been paid a
significant bonus at the year end and review the disclosure in the financial significant bonus at the year end and
separate disclosure of this is required in the statements to ensure it complies with local separate disclosure of this is required in the
financial statements by local legislation. legislation. financial statements by local legislation.

The directors’ remuneration disclosure will

be incomplete and inaccurate if the bonus
paid is included in the payroll charge for
the year and not separately disclosed in
accordance with the local legislation.
 A customer has returned $120,000 of faulty Inspect a copy of the credit note and A customer has returned $120,000 of faulty
goods to the company prior to the year-end confirm an adjustment to revenue and goods to the company prior to the year-end
but a credit note is yet to be issued. receivables has been recorded pre- year but a credit note is yet to be issued.
end.
As this sale occurred pre year end there is a
risk that revenue and receivables are
overstated if the credit note is not correctly
recorded prior to the year end.

The company’s suppliers have been paid on
1 June 20X5 and the payment has been
included as an unpresented item in the year
end bank reconciliation.
This is possible evidence of window
dressing which results in understated
payables and bank balances.
Request that the bank reconciliation is The company’s suppliers have been paid on
amended to remove the supplier payments 1 June 20X5 and the payment has been
at the year-end as these should be included as an unpresented item in the year
accounted for in the 31 May 20X6 financial end bank reconciliation.
statements.
Review the journal entry correcting the
payables and bank balances at the year end.

2019 - Sep, Dec

Audit risk Auditor's response
The finance director is planning on Discuss the basis of the revised assumption The finance director is planning on
reducing the estimated return rate for goods of a 5% return rate with the finance reducing the estimated return rate for goods
sold on a sale or return basis to wholesale director. Review a period of 60 days to sold on a sale or return basis to wholesale
customers from 10% to 5%. quantify the levels of return in the specified customers from 10% to 5%.
period and compare this to the assumed rate
IFRS® 15 Revenue from Contracts with of 5%. Discuss any significant variations
Customers provides that revenue and cost with the finance director.
of sales should only be accounted for to the
extent that the company foresees that the
goods will not be returned. For the goods
which may be returned, the company
should recognise a refund liability. If, after
60 days, the goods are not returned, then
this liability is reversed and revenue is
recognised.

By reducing the return rate, there is a risk

that revenue and cost of sales may be
overstated and liabilities understated.

The company purchased a patent for Agree the useful life of the patent is four The company purchased a patent for
$800,000 at the end of the prior year which years to supporting documentation. The $800,000 at the end of the prior year which
has a useful life of four years. amortisation charge should be calculated has a useful life of four years.
and the appropriate journal adjustment
The carrying amount in the forecast discussed with management, in order to The carrying amount in the forecast
financial statements is $800,000 which is ensure the accuracy of the charge and that financial statements is $800,000 which is
the same as the prior year. the intangible is correctly valued at the year the same as the prior year.
end.
In accordance with IAS® 38 Intangible
Assets, this intangible asset should be
amortised over its four-year life. It does not
appear that management has correctly
accounted for the amortisation and as a
result, intangible assets and profits are
overstated
Surplus plant and machinery was sold Recalculate the loss on disposal Surplus plant and machinery was sold
during the year, resulting in a loss on calculations and agree all items to during the year, resulting in a loss on
disposal of $160,000. supporting documentation. disposal of $160,000.

Significant profits or losses on disposal are
an indication that the depreciation policy of
plant and machinery may not be
appropriate. Therefore depreciation may be
understated and profit and assets overstated
Discuss the depreciation policy for plant
and machinery with the finance director to
assess its reasonableness.
Review for other significant gains or losses
on disposal of property, plant and
equipment to assess the reasonableness
of the company’s depreciation policies.

Harlem Co’s financial controller has Discuss with the finance director the details Harlem Co’s financial controller has
allegedly carried out a number of fraudulent of the fraud perpetrated by the financial allegedly carried out a number of fraudulent
transactions at the company. The controller and what procedures have been transactions at the company. The
investigation into the extent of the fraud has adopted to date to identify any adjustments investigation into the extent of the fraud has
only recently commenced. which are needed in the financial only recently commenced.
statements.
There is a risk that she may have
undertaken a significant level of fraudulent Additional substantive testing should be
transactions leading to an increased control conducted over the affected areas of the
risk which has not yet been identified. accounting records.
These would need to be written off to the
statement of profit or loss. If these have not In addition, the team should maintain their
been uncovered by the year end, the professional scepticism and be alert to the
financial statements could include errors risk of further fraud and errors.
resulting in the misstatement of profits.
In May 20X5, the financial controller was The audit team should discuss with In May 20X5, the financial controller was
dismissed and is threatening to sue the management and request confirmation from dismissed and is threatening to sue the
company for unfair dismissal. the company’s lawyers of the existence and company for unfair dismissal.
likelihood of success of any claim from the
If it is probable that Harlem Co will make former financial controller.
payment to the financial controller, a
provision for unfair dismissal is required to
comply with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. If the
payment is possible rather than probable, a
contingent liability disclosure would be
necessary. If Harlem Co has not done this,
there is a risk over
the completeness of any provisions or
contingent liabilities disclosures.

Harlem Co has had production problems
which have affected the quality of a
significant batch of tyres. In addition, the
inventory holding period has increased
from 34 to 41 days.
Discuss with the finance director whether
any write downs will be made to the
affected tyres, and what, if any,
modifications may be required with regards
to the quality.
Harlem Co has had production problems
which have affected the quality of a
significant batch of tyres. In addition, the
inventory holding period has increased
from 34 to 41 days.

Inventory may be overvalued as its net Testing should be undertaken to confirm

realisable value (NRV) may be below its cost and NRV of the affected products in
cost. If the tyres can be rectified, the inventory and that all inventory on a
rectification costs may mean that cost line-by-line basis is valued correctly.
exceeds net realisable value. If the tyres
cannot be rectified, the inventory may need
to be written off completely.
A significant customer has been granted a Discuss with the director the rationale for A significant customer has been granted a
six-month payment break and the maintaining the allowance for receivables at six-month payment break and the
receivables collection period has increased the same level as the prior year, despite the receivables collection period has increased
from 38 to 51 days. An allowance for increase in receivables collection period from 38 to 51 days. An allowance for
receivables has historically been and the payment break granted to a large receivables has historically been
maintained, and it is anticipated that it will
customer. maintained, and it is anticipated that it will
remain at the prior year level. remain at the prior year level.
Extended post year-end cash receipts
There is a risk that receivables will be testing and a review of the aged receivables
overvalued; some balances may not be ledger to be performed to assess valuation
recoverable and so will be overstated if not and the need for an increased level of
adequately provided for allowance for receivables.

The report to management issued after the Discuss with management whether the The report to management issued after the
prior year audit highlighted significant purchases cycle recommendations prior year audit highlighted significant
deficiencies relating to the purchases cycle. suggested by Brooklyn & Co were deficiencies relating to the purchases cycle.
implemented successfully this year. If so,
If these deficiencies have not been rectified, undertake tests of these controls to assess if
the controls over purchases and payables they are operating efficiently.
may continue to be weak leading to
increased control risk and risk of If the controls are not in place or operating
misstatements arising. Cost of sales, efficiently, adopt a fully substantive
expenses and trade payables may not be approach for confirming the completeness
complete or accurate. and accuracy of cost of sales and other
expenses and trade payables.
Harlem Co intends to restructure its debt
finance after the year end. However, the
interest cover has declined from 4·4 to 2·6
and the level of gearing has increased from
53·7% to 56·5%.
In order to maximise the chances of
securing the debt finance restructure,
Harlem Co will need to present financial
statements which show the best possible
position and performance. The worsening
interest cover and gearing ratio increases
the risk that the directors may manipulate
the financial statements, by overstating
profits and assets and understating debt
liabilities
Harlem Co has issued shares during the
year via a bonus issue. Share capital within
equity should increase by the value of the
shares and a reserve should decrease
accordingly.
If the company has not accounted for a
bonus issue before, there is a risk that it
could have been incorrectly treated with
equity being under or overstated. In
addition, legal issues may arise if the shares
have not been issued in accordance with the
company’s statutory constitution.
Additionally, bonus issues require
disclosure in the financial statements and
there is a risk that these may be incomplete
or inaccurate.
Brooklyn & Co should ensure that there is a Harlem Co intends to restructure its debt
suitably experienced audit team. Also, finance after the year end. However, the
adequate time should be allocated for team interest cover has declined from 4·4 to 2·6
members to obtain an understanding of the and the level of gearing has increased from
company and the significant risks of 53·7% to 56·5%.
overstatement of profits and assets and
understatement of debt, including
attendance at an audit team briefing.
The team needs to maintain professional
scepticism and be alert to the increased risk
of manipulation.
Significant estimates and judgements
should be carefully reviewed in light of the
misstatement risk.
Review the treatment of the bonus issue and Harlem Co has issued shares during the
agree the increase in shares to the share year via a bonus issue. Share capital within
register and share certificates, and agree equity should increase by the value of the
that the corresponding reduction in reserves shares and a reserve should decrease
is correct. accordingly.
Review board minutes for authorisation and
terms of the bonus issue and review if the
transaction has been conducted in line with
this approval. Review the statutory
constitution documents to confirm the
legality of the share issue.
Review the adequacy of the bonus issue
disclosures in the financial statements.
2019 - Sep, Dec
Control deficiency
Customer credit limits are set by
receivables ledger clerks. Receivables
ledger clerks are not sufficiently senior and
so may set limits too high, leading to
irrecoverable debts, or too low, leading to a
loss of sales
Control recommendation
Credit limits should be set by a senior
member of the receivables ledger
department and not by receivables ledger
clerks. These limits should be regularly
reviewed by a responsible official.

Receivables ledger clerks record new Receivables ledger clerks should not be
customer details and credit limits in the able to access the master data file to add
customer master data file and these changes new customers or make amendments.
are not reviewed.
Any such additions/amendments to master
There is a risk that customers could be set file data should be restricted so that only
up incorrectly resulting in a loss of supervisors and above can make changes.
customer goodwill and sales revenue In
addition, the receivables ledger clerks are An exception report of changes made
not senior enough to be given access to should be generated and reviewed by a
making changes to master file data as this responsible official.
could increase the risk of fraud

Amberjack Co’s credit controller is During the period of the secondment, an

currently on secondment for six months to
the internal audit department and has not
been replaced. During this period, it does
not appear that anyone else has been
responsible for monitoring ageing
receivables.
alternative member of the finance
department should be trained in the credit
control role and assigned responsibility for
reviewing the aged receivables listing and
following up on any overdue customers.

This could result in an increased risk of

irrecoverable debts and lead to customers
not paying their outstanding balances on
time, or at all, leading to reduced cash
flows.
Goods dispatch notes (GDN) are given the
same number as the order number to which
they relate. The sales invoices are only
raised on receipt of a GDN, and without
separate sequential numbers, it is difficult
for Amberjack Co to identify if any GDNs
are missing as they are not likely to be
raised in the same sequence as the sales
orders.
GDNs should all be sequentially numbered
using a sequence which is different to the
order number. On a regular basis, a
sequence check of GDNs should be
undertaken to identify any missing dispatch
notes.

If GDNs are missing and the company fails

to raise invoices in a timely manner, this
could lead to a loss of revenue.

Once orders are processed, copies of GDNs The GDN should be amended to be at least
are sent to the finance department, four-part. One copy should be sent to the
customer and remain in the warehouse. sales order department.

However, the sales order department of Once the copy of the GDN has been
Amberjack Co does not receive a copy of received by the order department, it should
the GDN. If the sales order department does be matched to the order. A regular review
not receive a copy of the completed GDNs, of unmatched orders should be undertaken
they are not able to monitor if orders are by the sales order department to identify
being fulfilled on a timely basis. This could any unfulfilled orders.
result in a loss of revenue and customer
goodwill.
Additional staff has been drafted in to help
the sales clerks produce the sales invoices.
As the extra staff will not be as experienced
as the sales clerks, there is an increased risk
of mistakes being made in the sales
invoices. This could result in customers
being under or overcharged leading to
misstated revenue or dissatisfied customers.
Only the sales clerks should be able to raise
sales invoices. As Amberjack Co is
expanding, consideration should be given to
recruiting and training more permanent
sales clerks who can produce sales invoices.
If this is not currently possible, temporary
staff should be adequately trained and
additional input checks on invoices
should be introduced.

Discounts given to customers who During the period of any special offers,
purchased goods during the 10% off such as the 10% off weekend, the
weekend are manually entered onto the authorised sales prices file should be
sales invoices by sales clerks. updated by a responsible official. These
changes should be reviewed for any input
This could result in unauthorised sales errors, this review should be evidenced.
discounts being given as there does not The invoicing system should confirm that
seem to be any authorisation required. In orders were placed during the discount
addition, a clerk could forget to manually weekend. Hence the sales invoices for these
enter the discount or enter an incorrect level periods should automatically contain the
of discount for a customer, leading to the reduced prices.
sales invoice being overstated and a loss of
customer goodwill. The invoicing system should be amended to
prevent sales clerks from being able to
Unauthorised discounts in excess of 10% manually enter sales discounts onto
would result in a loss of revenue, either due invoices.
to error or fraud.

Customer statements are no longer being Amberjack Co should produce monthly

generated and sent to customers. If customer statements for all customers and
statements are not sent regularly, this send them out promptly.
increases the likelihood of errors and any
disputed invoices not being quickly
identified and reso
 The receivables ledger control account is
only reconciled at the end of April in order
to verify the year-end balance. If the
receivables ledger is only reconciled
annually, there is a risk that errors will not
be spotted promptly and receivables may be
misstated.
2019 - Mar, Jun
Audit risk
The external audit team may place reliance
on the controls testing work undertaken by
the IA department.
If reliance is placed on irrelevant or poorly
performed testing, then the external audit
team may form an incorrect conclusion on
the strength of the internal controls at
Peony Co. This could result in them
performing insufficient levels of
substantive testing, thereby increasing
detection risk
The receivables ledger control account
should be reconciled on a monthly basis to
identify any errors which should be
investigated and corrected. The
reconciliations should be reviewed by a
responsible official and they should
evidence their review by way of signature.
Auditors response
The external audit team should meet with The external audit team may place reliance
IA staff, read their reports and review their on the controls testing work undertaken by
files relating to store visits to ascertain the the IA department.
nature of the work undertaken.
Before using the work of IA, the audit team
will need to evaluate and perform audit
procedures on the entirety of the work
which they plan to use, in order to
determine its adequacy for the purposes of
the audit. In addition, the team will need to
re-perform some of the testing carried out
by IA to assess its adequacy.
Forecast ratios from the finance director
show that the gross margin is expected to
increase from 56% to 60% and the
operating margin is expected to decrease
from 21% to 18%.
The classification of costs between cost of
sales and operating expenses should be
reviewed in comparison to the prior year
and any inconsistencies investigated.
Forecast ratios from the finance director
show that the gross margin is expected to
increase from 56% to 60% and the
operating margin is expected to decrease
from 21% to 18%.

This movement in gross margin is

significant and inconsistent with the fall in
operating margin. There is a risk that costs
may have been omitted or included in
operating expenses rather than cost of sales.
Misclassification of expenses would result
in understatement of cost of sales and
overstatement of operating expenses.

Peony Co’s inventory valuation policy is
selling price less average profit margin, as
this is industry practice. Inventory should
be valued at the lower of cost and net
realisable value (NRV).
IAS 2 Inventories allows this as a cost
calculation method as long as it is a close
pproximation to cost. If this is not the case,
then inventory could be under or
overvalued
Testing should be undertaken to confirm Peony Co’s inventory valuation policy is
cost and NRV of inventory and that on a selling price less average profit margin, as
line-by-line basis the goods are valued this is industry practice.
correctly.
In addition, valuation testing should focus
on comparing the cost of inventory to the
selling price less margin for a sample of
items to confirm whether this method is
actually a close approximation to cost.
The company utilises a perpetual inventory
system at its warehouse rather than a full
year-end count. Under such a system, all
inventory must be counted at least once a
year with adjustments made to the
inventory records on a timely basis.
Inventory could be under or overstated if
the perpetual inventory counts are not all
completed, such that some inventory lines
are not counted in the year.
During the interim audit, it was noted that
there were significant exceptions with the
inventory records being higher than the
inventory in the warehouse. As the year-end
quantities will be based on the records, this
is likely to result in overstated inventory
A number of assets which had not been
fully depreciated were identified as being
obsolete.
This is an indication that the company’s
depreciation policy of non-current assets
may not be appropriate, as depreciation in
the past appears to have been understated.
If an asset is obsolete, it should be written
off to the statement of profit or loss.
Therefore depreciation may be understated
and profit and assets overstated
The timetable of the perpetual inventory The company utilises a perpetual inventory
counts should be reviewed and the controls system at its warehouse rather than a full
over the counts and adjustments to records year-end count. Under such a system, all
should be tested. inventory must be counted at least once a
year with adjustments made to the
In addition, the level of adjustments made inventory records on a timely basis.
to inventory should be considered to assess
their significance. This should be discussed
with management as soon as possible as it
may not be possible to place reliance on the
inventory records at the year end, which
could result in the requirement for a full
year-end inventory count.
Discuss the depreciation policy for non- A number of assets which had not been
current assets with the finance director and fully depreciated were identified as being
assess its reasonableness. Enquire obsolete.
of the finance director if the obsolete assets
have been written off. If so, review the
adjustment for completeness
Peony Co is planning to include a current
asset of $0·7m, which relates to advertising
costs incurred and adverts shown on TV
before the year end.
The costs were incurred and adverts shown
in the year ending 20X9 and there is no
basis for including them as a current asset
at the year end. The costs should be
recognised in operating expenses in the
current year financial statements.
If these costs are not expensed, current
assets and profits will be overstated.
During the year, Peony Co outsourced its
payroll function to an external service
organisation. A detection risk arises as
to whether sufficient and appropriate
evidence is available at Peony Co to
confirm the completeness and accuracy of
controls over the payroll cycle and
liabilities at the year end.
Discuss with management the rationale for Peony Co is planning to include a current
including the advertising as a current asset. asset of $0·7m, which relates to advertising
Request evidence to support the costs incurred and adverts shown on TV
assessment of probable future cash flows, before the year end.
and review for reasonableness.
Review supporting documentation for the
advertisements to confirm that all were
shown before the 20X9 year end.
Request that management remove the
current asset and record the amount as an
expense in the statement of profit or loss.
Discuss with management the extent of During the year, Peony Co outsourced its
records maintained at Peony Co for the payroll function to an external service
period since January 20X9 and any organisation.
monitoring of controls which has been
undertaken by management over payroll.
Consideration should be given to contacting
the service organisation’s auditor to
confirm the level of controls in place, a
type 1 or type 2 report could be requested.
The payroll function was transferred to the
service organisation from 1 January 20X9,
which is five months prior to the year end.
If any errors occurred during the transfer
process, these could result in wages and
salaries being under/overstated
A $3m loan was obtained in March 20X9.
This finance needs to be accounted for
correctly, with adequate disclosure made.
The loan needs to be allocated between
non-current and current liabilities. Failure
to classify the loan correctly could result in
misclassified liabilities
Discuss with management the extent of The payroll function was transferred to the
records maintained at Peony Co for the service organisation from 1 January 20X9,
period since January 20X9 and any which is five months prior to the year end.
monitoring of controls which has been
undertaken by management over payroll.
Consideration should be given to contacting
the service organisation’s auditor to
confirm the level of controls in
place, a type 1 or type 2 report could be
requested.
Re-perform the company’s calculations to A $3m loan was obtained in March 20X9.
confirm that the split of the loan note is This finance needs to be accounted for
correct between non-current and current correctly, with adequate disclosure made.
liabilities and that total financing proceeds
of $3m were received.
In addition, the disclosures for this loan
note should be reviewed in detail to ensure
compliance with relevant accounting
standards
 Peony Co is planning to make Discuss with management the status of the Peony Co is planning to make
approximately 60 employees redundant redundancy announcement; if before the approximately 60 employees redundant
after the year end. year end, review supporting documentation after the year end.
to confirm the timing. In addition, review
The timing of this announcement has not the basis of and recalculate the redundancy
been confirmed; if it is announced to the provision.
staff before the year end, then under IAS 37
Provisions, Contingent Liabilities and
Contingent Assets, a redundancy provision
will be required at the year end as a
constructive obligation will have been
created.

Failure to provide or to provide an

appropriate amount will result in an
understatement of provisions and expenses.

2018 - Sep, Dec

(c) Audit risks and auditor’s response
Audit rirsk Audit response
During the year, Darjeeling Co has spent
$0·9m on developing new product lines,
some of hich are in the early stages of their
development cycle. This expenditure is
classed as research and development under
IAS® 38 Intangible Assets. The standard
requires research costs to be expensed to
profit or loss and only development costs to
be capitalised as an intangible asset.
Obtain a breakdown of the expenditure and During the year, Darjeeling Co has spent
verify that it relates to the development of $0·9m on developing new product lines,
the new products. Review expenditure some of hich are in the early stages of their
documentation to determine whether the development cycle.
costs relate to the research or development
stage. Discuss the accounting treatment
with the finance director and ensure it is in
accordance with IAS 38.

The company has included all of this

expenditure as an intangible asset. If
research costs have been incorrectly
classified as development expenditure,
there is a risk that intangible assets could be
overstated and expenses understated.
Darjeeling Co purchased and installed a Review the purchase documentation for the Darjeeling Co purchased and installed a
new manufacturing line. The costs include new manufacturing line to confirm the new manufacturing line. The costs include
purchase price ($2·2m), installation costs exact cost of the servicing and that it does purchase price ($2·2m), installation costs
($0·4m) and a five-year servicing and relate to a five-year period. ($0·4m) and a five-year servicing and
maintenance plan ($0·5m). maintenance plan ($0·5m).
Discuss the accounting treatment with the
As per IAS 16 Property, Plant and finance director and the level of any
Equipment, the cost of an asset includes its necessary adjustment to ensure treatment is
purchase price and directly attributable in accordance with IAS 16.
costs only. IAS 16 does not allow servicing
and maintenance costs to be capitalised as
part of the cost of a non-current asset, as
they are not directly related to the cost of
bringing the asset to its working condition.

The servicing costs relate to a five-year

period and so should be charged to profit or
loss over this time. The upfront payment
represents a prepayment for five years; as
the services are received, the relevant
proportion of the cost should be charged to
profit or loss. If the service
for 20X8 has been carried out, then $0·1m
($0·5m/5) should be charged to profit or
loss. Therefore property, plant and
equipment (PPE) and profits are overstated
and prepayments are understated.
The company has borrowed $4m from the During the audit, the team would need to The company has borrowed $4m from the
bank via an eight-year loan. This loan needs confirm that the $4 million loan finance bank via an eight-year loan.
to be correctly split between current and was received. In addition, the split between
non-current liabilities in order to ensure current and non-current liabilities and the
correct disclosure. disclosures for this loan should be reviewed
in detail to ensure compliance with relevant
accounting standards and local legislation.

Details of security should be agreed to the

bank confirmation letter.

As the level of debt has increased, there
should be additional finance costs as the
loan has an interest rate of 5%. There is a
risk that this has been omitted from the
statement of profit or loss leading to
understated finance costs and overstated
profit.
The finance costs should be recalculated As the level of debt has increased, there
and any increase agreed to the loan should be additional finance costs as the
documentation for confirmation of the 5% loan has an interest rate of 5%.
interest rate. Interest payments should be
agreed to the cash book and bank
statements to confirm the amount was paid
and is not therefore a year-end payable.
Darjeeling Co intends to undertake a stock Earl & Co should ensure that there is a Darjeeling Co intends to undertake a stock
exchange listing in the next 12 months. suitably experienced audit team. Also, exchange listing in the next 12 months.
adequate time should be allocated for team
In order to maximise the success of the members to obtain an understanding of the
potential listing, Darjeeling Co will need to company and the significant risks of
present financial statements which show the overstatement of revenue, profits and
best possible position and performance. assets, including attendance at an audit
team briefing.
The directors therefore have an incentive to
manipulate the financial statements, by The team needs to maintain professional
overstating revenue, profits and assets scepticism and be alert to the increased risk
of manipulation.

Significant estimates and judgements

should be carefully reviewed in light of the
misstatement risk.

The receivables collection period has Review and test the controls surrounding The receivables collection period has
increased from 38 to 51 days and how Darjeeling Co identifies receivables increased from 38 to 51 days and
management has extended the credit terms balances which may not be recoverable and management has extended the credit terms
given to customers on the condition that procedures around credit control to ensure given to customers on the condition that
sales order quantities were increased. The that they are operating effectively. sales order quantities were increased.
increase in receivable days could be solely
due to these increased credit terms. Extended post year-end cash receipts
testing and a review of the aged receivables
However, it could also be due to an ledger to be performed to assess valuation.
increased risk over recoverability of Also consider the adequacy of any
receivables as they may be overvalued and allowance for receivables.
expenses understated.
This year the company made a ‘price Discuss with management the basis of the This year the company made a ‘price
promise’ to match the price of its refund liability of $0·25m and obtain promise’ to match the price of its
competitors for similar products. Customers supporting documentation to confirm the competitors for similar products. Customers
are able to claim the difference from the reasonableness of the assumptions and are able to claim the difference from the
company for one month after the date of calculations. company for one month after the date of
purchase of goods. purchase of goods.

The company should account for the price

promise in accordance with IFRS® 15
Revenue from Contracts with Customers.
As the company may be required to provide
a refund, the anticipated refund amount
should not be initially recognised as
revenue but instead as a refund liability
until the one-month price promise period
has ended.

This is a highly subjective area, with many

judgements required with regards to the
level of likely refund due. As this is a new
liability, the directors may not have
correctly accounted for this sum resulting in
overstated revenue, under/overstated profits
and liabilities.
Darjeeling Co has stopped further sales of Review the list of sales of the paint product Darjeeling Co has stopped further sales of
one of its paint products and a product made between June and the date of the one of its paint products and a product
recall has been initiated for any goods sold recall, agree that the sales have been recall has been initiated for any goods sold
since June. removed from revenue and the inventory since June.
included. If the refunds have not been paid
This product recall will result in Darjeeling before the year end, review the draft
Co paying refunds to customers. The sales financial statements to confirm that it is
will need to be removed from the 20X8 included within current liabilities.
financial statements and a refund liability
recognised. Also inventory will need to be
reinstated, albeit at a possibly written down
value. Failing to account for this correctly
could result in overstated revenue,
understated liabilities and misstated
inventory.

The company is holding a number of
damaged paint products in inventory and
overall the inventory holding period has
increased from 45 days to 54 days.
Due to the issue with the paint consistency,
the quality of these products is questionable
and management is investigating whether
these products can be rectified. There is a
risk that this inventory may be overvalued
as its net realisable value may be below
cost.
Discuss with the finance director whether The company is holding a number of
any write downs will be made to this damaged paint products in inventory and
product, and what, if any, modifications overall the inventory holding period has
will be required to rectify the quality of the increased from 45 days to 54 days.
product.
Testing should be undertaken to confirm
cost and NRV of the affected paint products
held in inventory and that on a line by line
basis the goods are valued correctly.
 Revenue has increased by 16·8% in the
year; and the gross margin has increased
slightly from 36·4% to 37·3%. This is a
significant increase in revenue and, along
with the increase in gross margin, may be
related to the increased credit period and
price promise promotion or could be due to
an overstatement of revenue.
During the audit a detailed breakdown of Revenue has increased by 16·8% in the
sales will be obtained, discussed with year; and the gross margin has increased
management and tested in order to slightly from 36·4% to 37·3%.
understand the sales increase. Also
increased cut-off testing should be
undertaken to verify that revenue is
recorded in the right period and is not
overstated.

The payables payment period has increased Detailed going concern testing to be The payables payment period has increased
from 40 to 58 days. The current ratio has performed during the audit, including the from 40 to 58 days. The current ratio has
decreased from 3·08 to 1·65. review of cash flow forecasts and the decreased from 3·08 to 1·65.
underlying assumptions. These should be
The quick ratio has also decreased from discussed with management to ensure that The quick ratio has also decreased from
1·97 to 0·99. In addition, the bank balance the going concern basis is reasonable. 1·97 to 0·99. In addition, the bank balance
has moved from $0·56m to an overdraft of has moved from $0·56m to an overdraft of
$0·81m. $0·81m.

These are all indicators that the company

could be experiencing a reduction in its
cash flow which could result in going
concern difficulties or uncertainties. These
uncertainties may not be adequately
disclosed in the financial statements.

2018 - Mar, Jun

(b) Audit risks and auditor’s response
Audit risk Auditor’s response
Blackberry Co values its inventory at the
lower of cost and net realisable value. Cost
includes both production and general
overheads.
IAS 2 Inventories requires that costs
included in valuing goods and services
should only be those incurred in bringing
inventory to its present location and
condition.
Discuss with management the nature of the Blackberry Co values its inventory at the
overheads included in inventory valuation. lower of cost and net realisable value. Cost
If general overheads are included, request includes both production and general
management remove them from the overheads.
valuation to be included in the draft
financial statements.
Review supporting documentation to verify
those overheads deemed to be of a
production nature are valid.

Although production overheads meet these

criteria, general overheads do not. If these
are included in inventory cost, then this will
result in over-valued inventory.

The company is planning to undertake the The auditor should attend the inventory The company is planning to undertake the
full year-end inventory counts after the year count held after the year end and note full year-end inventory counts after the year
end and then adjust for movements from the details of goods received and despatched end and then adjust for movements from the
year end. post year end, in order to agree to the year end.
reconciliation.
If the adjustments are not completed
accurately, then the year-end inventory During the final audit, the year-end
could be under or overstated. inventory adjustments schedule should be
reviewed in detail and agreed to supporting
documentation obtained during the
inventory count for all adjusting items.

The audit team should increase the extent of

inventory cut-off testing at the year end and
at the date of the count.
A patent has been purchased for $1·1m and
this grants Blackberry Co the exclusive
right for three years to customise their
portable music players to gain a
competitive advantage in their industry.
Management has expensed the full amount
paid to the current year statement of profit
or loss.
In accordance with IAS 38 Intangible
Assets, this should have been included as
an intangible asset and amortised over its
three-year life. As the sum has been fully
expensed and not treated in accordance
with IAS 38, intangible assets and profits
are understated.
During the year Blackberry Co has raised
new finance through issuing $1·2m of
shares at a premium. This needs to be
accounted for correctly, with adequate
disclosure made and the equity finance
needs to be allocated correctly between
share capital and share premium.
If this is not done, then the accounts may be standards and local legislation.
misstated due to a lack of disclosure or
share capital and share premium may be
misstated.
The audit team will need to agree the A patent has been purchased for $1·1m and
purchase price to supporting documentation this grants Blackberry Co the exclusive
and confirm the useful life is three years as
right for three years to customise their
per the contract. portable music players to gain a
competitive advantage in their industry.
Discuss with management the reason for Management has expensed the full amount
fully expensing the $1·1m paid, and request paid to the current year statement of profit
they correct the treatment. or loss.
The correcting journal should be reviewed
and the amortisation charge should be
recalculated in order to ensure the accuracy
of the charge and that the intangible is
correctly valued at the year end.
The audit team should confirm that During the year Blackberry Co has raised
proceeds of $1·2m were received and that new finance through issuing $1·2m of
the split of share capital and share premium shares at a premium.
is correct and appropriately recorded.
In addition, the disclosures for this finance
should be reviewed in detail to ensure
compliance with relevant accounting
In November 20X7, it was discovered that a Discuss with the finance director what In November 20X7, it was discovered that a
significant teeming and lading fraud had procedures they have adopted to fully significant teeming and lading fraud had
been carried out by four members of the identify and quantify the impact of the been carried out by four members of the
sales ledger department. teeming and lading fraud. In addition, sales ledger department.
discuss with the finance director, what
There is a risk that the full impact of the controls have been put in place to identify
fraud has not been quantified and any any similar frauds.
additional fraudulent transactions would
need to be written off in the statement of Review the receivables listing to identify
profit or loss. If these have not been any unusual postings to individual
uncovered, the financial statements could receivable balances as this could be further
be misstated. evidence of fraudulent transactions.

In addition, individual receivable balances In addition, the team should maintain their
may be under/overstated as customer professional scepticism and be alert to the
receipts have been misallocated to other risk of further fraud and errors.
receivable balances.

During the year Blackberry Co outsourced
its sales ledger processing to an external
service organisation. A detection risk arises
as to whether sufficient and appropriate
evidence is available at Blackberry Co to
confirm the completeness and accuracy of
controls over the sales and receivables
cycle and balances at the year end.
Discuss with management the extent of During the year Blackberry Co outsourced
records maintained at Blackberry Co for the its sales ledger processing to an external
period since February 20X8 and any service organisation.
monitoring of controls undertaken by
management over sales and receivables.
Consideration should be given to contacting
the service organisation’s auditor to
confirm the level of controls in place.
The sales ledger processing transferred to
the service organisation from 1 February
20X8. If any errors occurred during the
transfer process, these could result in sales
and receivables being under/overstated.
Discuss with management the transfer The sales ledger processing transferred to
process undertaken and any controls put in the service organisation from 1 February
place to ensure the completeness and 20X8.
accuracy of the data.
Where possible, undertake tests of controls
to confirm the effectiveness of the transfer
controls. In addition, perform substantive
testing on the transfer of information from
the old to the new system.

In December 20X7, the financial The audit team should request confirmation In December 20X7, the financial
accountant of Blackberry Co was dismissed from the company’s lawyers of the accountant of Blackberry Co was dismissed
and is hreatening to sue the company for existence and likelihood of success of any and is threatening to sue the company for
unfair dismissal. claim from the former financial accountant. unfair dismissal.

If it is probable that Blackberry Co will

make a payment to the financial accountant,
a provision for unfair dismissal is required.
If the payment is possible rather than
probable, a contingent liability disclosure
would be necessary. If Blackberry Co has
not done this, there is a risk over the
completeness of any provisions or
contingent liabilities.
No supplier statement or purchase ledger
control account reconciliations have been
erformed in the period from December
20X7 to the year end.
This a key control which is being
overridden and as such there is an increased
risk of errors within trade payables and the
year-end payables balance may be under or
overstated.
A current asset of $360,000 has been
included within the statement of profit or
loss and assets. It represents an anticipated
pay out from liquidators handling the
bankruptcy of a customer who owed
Blackberry Co $0·9m. The sum of $0·9m
was written off in the prior year
accounts.
However, the company has not received a
formal notification from the liquidators
confirming the payment and this would
therefore represent a possible contingent
asset.
To comply with IAS 37 Provisions,
Contingent Liabilities and Contingent
Assets, this should not be recognised until
the receipt is virtually certain. With no firm
response to date, the inclusion of this sum
overstates profit and current assets.
The audit team should increase their testing No supplier statement or purchase ledger
on trade payables at the year end, including control account reconciliations have been
performing supplier statement erformed in the period from December
reconciliations, with a particular focus on 20X7 to the year end.
completeness of trade payables.
Request management prepare a year-end
purchase ledger control account
reconciliation. The audit team should
undertake a detailed review of this
reconciliation with a focus on any unusual
reconciling items
Discuss with management whether any A current asset of $360,000 has been
notification of payment has been received included within the statement of profit or
from the liquidators and review the related loss and assets. It represents an anticipated
correspondence. If virtually certain, the pay out from liquidators handling the
treatment adopted is correct. If payment has bankruptcy of a customer who owed
been received, agree to post-year end cash Blackberry Co $0·9m. The sum of $0·9m
book. was written off in the prior year accounts.
However, the company has not received a
If receipt is not virtually certain, formal notification from the liquidators
management should be requested to remove confirming the payment and this would
it from profit and receivables. If the receipt therefore represent a possible contingent
is probable, the auditor should request asset.
management include a contingent asset
disclosure note.
2017 SD
Audit risk
Prancer Construction Co is a new client for
Cupid & Co. As the team is not familiar
with the accounting policies, transactions
and balances of the company, there will be
an increased detection risk on the audit.
Auditor's response
Cupid & Co should ensure they have a Prancer Construction Co is a new client for
suitably experienced team. In addition, Cupid & Co.
adequate time should be allocated for team
members to obtain an understanding of the
company and the risks of material
misstatement including a detailed team
briefing to cover the key areas of risk.

Prancer Construction Co is likely to have a
material level of work in progress at the
year end, being construction work in
progress as well as ongoing maintenance
services, as Prancer Construction Co has
annual contracts for many of the buildings
constructed.
The auditor should discuss with
management the process they will
undertake to assess the percentage
completion for work in progress at the year
end. This process should be reviewed by
the auditor while attending the year-end
inventory counts.
Prancer Construction Co is likely to have a
material level of work in progress at the
year end, being construction work in
progress as well as ongoing maintenance
services, as Prancer Construction Co has
annual contracts for many of the buildings
constructed.

The level of work in progress will need to In addition, consideration should be given
be assessed at the year end. Assessing the as to whether an independent expert is
percentage completion for partially required to value the work in progress or if
constructed buildings is likely to be quite a management expert has been used. If the
subjective, and the team should consider if work of an expert is to be used, then the
they have the required expertise to audit team will need to assess the
undertake this. If the percentage completion competence, capabilities and objectivity of
is not correctly calculated, the inventory the expert.
valuation may be under or overstated.
The August 20X7 management accounts Detailed cost and net realisable value The August 20X7 management accounts
contain $2·1 million of completed (NRV) testing to be performed at the year contain $2·1 million of completed
properties; this balance was $1·4 million in end and the aged inventory report to be properties; this balance was $1·4 million in
September 20X6. reviewed to assess whether inventory September 20X6.
requires to be written down.
The increase in inventory may be due to an
increased level of pre year-end orders.
Alternatively, it may be that Prancer
Construction Co is struggling to sell
completed properties, which may indicate
that they are overvalued. IAS 2
Inventories requires that inventory should
be stated at the lower of cost and NRV.

At the year end there will be inventory The auditor should assess for which of the At the year end there will be inventory
counts undertaken at all 11 of the building building sites they will attend the counts. counts undertaken at all 11 of the building
sites in progress. This will be those with the most material sites in progress.
inventory or which according to
It is unlikely that the auditor will be able to management have the most significant risk
attend all of these inventory counts, of misstatement.
increasing detection risk, and therefore they
need to ensure that they obtain sufficient For those not visited, the auditor will need
evidence over the inventory counting to review the level of exceptions noted
controls, and completeness and existence of during the count and discuss with
inventory for any sites not visited. management any issues, which arose during
the count.
Prancer Construction Co offers its Discuss with management the basis of the Prancer Construction Co offers its
customers a building warranty of five years, provision calculation, and compare this to customers a building warranty of five years,
which covers any construction defects. A the level of post year-end claims, if any, which covers any construction defects.
warranty provision will be required under made by customers. In particular, discuss
IAS 37 Provisions, Contingent Liabilities the rationale behind reducing the level of
and Contingent Assets. provision this year.

Calculating warranty provisions requires Compare the prior year provision with the
judgement as it is an uncertain amount. actual level of claims in the year, to assess
the reasonableness of the judgements made
The finance director anticipates this by management.
provision will be lower than last year as the
company has improved its building
practices and the quality of its finished
properties. However, there is a risk that this
provision could be understated,
especially in light of the overdraft covenant
relating to a minimum level of net assets
and is being used as a mechanism to
manipulate profit and asset levels.
Customers who wish to purchase a property Discuss with management the treatment of Customers who wish to purchase a property
are required to place an order and a 5% deposits received in advance, to ensure it is are required to place an order and a 5%
non-refundable deposit prior to the appropriate. non-refundable deposit prior to the
completion of the building. completion of the building.
During the final audit, undertake increased
These deposits should not be recognised as testing over the cut-off of revenue and
revenue in the statement of profit or loss completeness of deferred income.
until the performance obligations as per the
contracts have been satisfied, which is
likely to be when the building is finished
and the sale process is complete. Instead,
they should be recognised as deferred
income within current liabilities.

Management may have incorrectly treated

the deferred income as revenue, resulting in
overstated revenue and understated
liabilities.

An allowance for receivables has Review and test the controls surrounding An allowance for receivables has
historically been maintained, but it is how the finance director identifies old or historically been maintained, but it is
anticipated that this will be reduced. potentially irrecoverable receivables anticipated that this will be reduced.
balances and credit control to ensure that
There is a risk that receivables will be they are operating effectively.
overvalued; some balances may not be
recoverable and so will be overstated if not Discuss with the director the rationale for
provided for. reducing the allowance for receivables.

In addition, reducing the allowance for
receivables will increase asset values and
would improve the covenant compliance,
which increases the manipulation risk
further.
Extended post year-end cash receipts
testing and a review of the aged receivables
ledger to be performed to assess valuation
and the need for an allowance for
receivables.
 Prancer Construction Co has a material
overdraft which has minimum profit and
net assets covenants attached to it. If these
covenants were to be breached, the
overdraft balance would become instantly
repayable.
If the company does not have sufficient
cash to meet this repayment, then there
could be going concern implications.
Review the covenant calculations prepared Prancer Construction Co has a material
by the company at the year end and identify overdraft which has minimum profit and
whether any defaults have occurred; if so, net assets covenants attached to it. If these
determine the effect on the company. covenants were to be breached, the
overdraft balance would become instantly
The team should maintain their professional repayable.
scepticism and be alert to the risk that profit
and/or net assets have been overstated to
ensure compliance with the covenants.

In addition, there is a risk of manipulation

of profit and net assets to ensure that
covenants are met.

Preliminary analytical review of the August
management accounts shows payable days
of 56 for August 20X7, compared to 87
days for September 20X6. It is anticipated
that the year-end payable days will be even
lower.
The audit team should increase their testing
on trade payables at the year end, with a
particular focus on completeness of
payables. A payables circularisation or
review of supplier statement reconciliations
should be undertaken.
Preliminary analytical review of the August
management accounts shows payable days
of 56 for August 20X7, compared to 87
days for September 20X6. It is anticipated
that the year-end payable days will be even
lower.

The forecast profit is higher than last year,

indicating an increase in trade, also the
company’s cash position has continued to
deteriorate and therefore, it is unusual for
payable days to have decreased.

There is an increased risk of errors within

trade payables and the year-end payables
may be understated.

2017 MJ
a) Audit risk and the components of audit risk
Audit risk is the risk that the auditor
expresses an inappropriate audit opinion
when the financial statements are materially
misstated. Audit risk is a function of two
main components, being the risk of material
misstatement and detection risk. Risk of
material misstatement is made up of a
further two components, inherent risk and
control risk.

Inherent risk is the susceptibility of an

assertion about a class of transaction,
account balance or disclosure to a
misstatement which could be material,
either individually or when aggregated with
other misstatements, before consideration
of any related controls.

Control risk is the risk that a misstatement

which could occur in an assertion about a
class of transaction, account balance or
disclosure and which could be material,
either individually or when aggregated with
other misstatements, will not be prevented,
or detected and corrected, on a timely basis
by the entity’s internal control.

Detection risk is the risk that the procedures

performed by the auditor to reduce audit
risk to an acceptably low level will not
detect a misstatement which exists and
which could be material, either individually
or when aggregated with other
misstatements. Detection risk is affected by
sampling and non-sampling risk.
b)
Audit risk Auditor's response
Hurling Co upgraded their website during Review a breakdown of the costs and agree Hurling Co upgraded their website during
the year at a cost of $1·1m. The costs to invoices to assess the nature of the the year at a cost of $1·1m.
incurred should be correctly allocated expenditure and if capital, agree to
between revenue and capital expenditure As inclusion within the asset register or agree
the website has been upgraded, there is a to the statement of profit or loss.
possibility that the new processes and
systems may not record data reliably and The audit team should document the
accurately. revised system and undertake tests over the
completeness and accuracy of data recorded
This may lead to a risk over completeness from the website to the accounting records.
and accuracy of data in the underlying
accounting records.

Hurling Co has entered into a transaction to Discuss with management as to whether the Hurling Co has entered into a transaction to
purchase a new warehouse for $3·2m and it warehouse purchase was completed by the purchase a new warehouse for $3·2m and it
is anticipated that the legal process will be year end. If so, inspect legal documents of is anticipated that the legal process will be
completed by the year end. ownership, such as title deeds ensuring completed by the year end.
these are dated prior to 1 April 20X7 and
Only assets which physically exist at the are in the company name.
year end should be included in property,
plant and equipment. If the transaction has
not been completed by the year end, there is
a risk that assets are overstated if the
company incorrectly includes the
warehouse at the year end.
Significant finance has been obtained in the Review share issue documentation to Significant finance has been obtained in the
year, as the company has issued $5m of confirm that the preference shares are year, as the company has issued $5m of
irredeemable preference shares. irredeemable. Confirm that they have been irredeemable preference shares.
correctly classified as equity within the
This finance needs to be accounted for accounting records and that total financing
correctly, with adequate disclosure made. proceeds of $5m were received.
As the preference shares are irredeemable,
they should be classified as equity rather In addition, the disclosures for this share
than non-current liabilities. Failing to issue should be reviewed in detail to ensure
correctly classify the shares could result in compliance with relevant accounting
understated equity and overstated non- standards.
current liabilities.

The finance director has extended the Discuss with the directors the rationale for The finance director has extended the
useful lives of fixtures and fittings from any extensions of asset lives and reduction useful lives of fixtures and fittings from
three to four years, resulting in the of depreciation rates. Also, the four-year three to four years, resulting in the
depreciation charge reducing. Under IAS 16 life should be compared to how often these depreciation charge reducing.
Property, Plant and Equipment, useful lives assets are replaced, to assess the useful life
are to be reviewed annually, and if asset of assets.
lives have genuinely increased, then this
change is reasonable.

However, there is a risk that this reduction

has occurred in order to boost profits. If this
is the case, then fixtures and fittings are
overvalued and profit overstated.
A customer of Hurling Co has been Review the revised credit terms and A customer of Hurling Co has been
encountering difficulties paying their identify if any after date cash receipts for encountering difficulties paying their
outstanding balance of $1·2m and Hurling this customer have been made. outstanding balance of $1·2m and Hurling
Co has agreed to a revised credit period. Co has agreed to a revised credit period.
Discuss with the finance director whether
If the customer is experiencing difficulties, he intends to make an allowance for this
there is an increased risk that the receivable receivable. If not, review whether any
is not recoverable and hence is overvalued. existing allowance for uncollectable
accounts is sufficient to cover the amount
of this receivable.

A sales-related bonus scheme has been
introduced in the year for sales staff, with a
significant number of new customer
accounts on favourable credit terms being
opened pre year end. This has resulted in a
5% increase in revenue.
Increased sales cut-off testing will be
performed along with a review of any post
year-end returns as they may indicate cut-
off errors. In addition, increased after date
cash receipts testing to be undertaken for
new customer account receivables.
A sales-related bonus scheme has been
introduced in the year for sales staff, with a
significant number of new customer
accounts on favourable credit terms being
opened pre year end. This has resulted in a
5% increase in revenue.

Sales staff seeking to maximise their

current year bonus may result in new
accounts being opened from poor credit
risks leading to irrecoverable receivables.
In addition, there is a risk of sales cut-off
errors as new customers could place orders
within the two-month introductory period
and subsequently return these goods post
year end.
Hurling Co has halted further sales of its Discuss with the finance director whether Hurling Co has halted further sales of its
new product Luge and a product recall has any write downs will be made to this new product Luge and a product recall has
been initiated for any goods sold in the last product, and what, if any, modifications been initiated for any goods sold in the last
four months. may be required with regards the quality. four months.

If there are issues with the quality of the Testing should be undertaken to confirm
Luge product, inventory may be overvalued cost and NRV of the Luge products in
as its NRV may be below its cost. inventory and that on a line-by-line basis
the goods are valued correctly

Additionally, products of Luge sold within Review the list of sales made of product Additionally, products of Luge sold within
the last four months are being recalled, thisLuge prior to the recall, agree that the sale the last four months are being recalled, this
will result in Hurling Co paying customer has been removed from revenue and the will result in Hurling Co paying customer
refunds. inventory included. If the refund has not refunds.
been paid pre year end, agree it is included
The sale will need to be removed; a refund within current liabilities.
liability should be recognised along with
the reinstatement of inventory, although the
NRV of this inventory could be of a
minimal value. Failing to account for this
correctly could result in overstated revenue
and understated liabilities and inventory.
Petanque Co, a customer of Hurling Co, has Caving & Co should write to the company’s Petanque Co, a customer of Hurling Co, has
announced that they intend to commence lawyers to enquire of the existence and announced that they intend to commence
legal action for a loss of information and likelihood of success of any claim from legal action for a loss of information and
profits as a result of the Luge product sold Petanque Co. The results of this should be profits as a result of the Luge product sold
to them. used to assess the level of provision or to them.
disclosure included in the
If it is probable that the company will make financial statements.
payment to the customer, a legal provision
is required. If the payment is possible rather
than probable, a contingent liability
disclosure would be necessary. If Hurling
Co has not done this, there is a risk over the
completeness of any provisions or the
necessary disclosure of contingent
liabilities.

The finance director has requested that the The timetable should be confirmed with the The finance director has requested that the
audit completes one week earlier than finance director. If it is to be reduced, then audit completes one week earlier than
normal as he wishes to report results earlier. consideration should be given to normal as he wishes to report results earlier.
A reduction in the audit timetable will performing an interim audit in late March
increase detection risk and place additional or early April; this would then reduce the
pressure on the team in obtaining sufficient pressure on the final audit.
and appropriate evidence. The team needs to maintain professional
scepticism and be alert to the increased risk
In addition, the finance team of Hurling Co of errors occurring.
will have less time to prepare the financial
information leading to an increased risk of
errors arising in the financial statements
The company is intending to propose a final Discuss the issue with management and The company is intending to propose a final
dividend once the financial statements are confirm that the dividend will not be dividend once the financial statements are
finalised. This amount should not be included within liabilities in the 20X7 finalised. This amount should not be
provided for in the 20X7 financial financial statements. provided for in the 20X7 financial
statements, as the obligation only arises statements, as the obligation only arises
once the dividend is announced, which is The financial statements need to be once the dividend is announced, which is
post year end. reviewed to ensure that adequate disclosure post year end.
of the proposed dividend is included.
In line with IAS 10 Events after the
Reporting Date the dividend should only be
disclosed. If the dividend is included, this
will result in an overstatement of liabilities
and understatement of equity.
 Audit risk Response
1) An increased detection risk on the audit 1) Assign suitably experienced team to the
audit
2) Less assurance over opening balances as
the audit team did not perform the audit last 2) Ensure adequate time is allowed for team
yea members to obtain an understanding of the
company and the risks of material
misstatement

3) Increased audit procedures should be

performed over opening balances.

There is a risk that the directors will try to
overstate the profit, and therefore their
bonuses by increasing the revenue and
income recorded and decreasing expenses
1) Maintain professional scepticism and be
alert to the increased risk of manipulation.
2) Increased testing should be performed
relating to adjusting journal entries
The deposits should not be recognised as 1) Obtain a copy of the contracts with
revenue immediately and instead should be customers and review them to understand
recognised as deferred income (contract the performance obligations.
liabilities) within current liabilities until the
performance obligations, as per the 2) Discuss with management the criteria for
contracts, have been satisfied determining whether performance
obligations have been satisfied and the
-> There is a risk that revenue is overstated treatment of deposits received to ensure it is
and current liabilities understated if the appropriate and consistent with relevant
deposits have been recorded within standards.
revenue.

WIP is a material balance and the valuation
of WIP is a judgemental area.
-> As the audit team is not attending all
sites, detection risk is increased as the team
will be unable to directly obtain evidence
relating to WIP.
1) Assess which inventory counts the team
will attend _ the most material WIP
balances or which are assessed as having
the greatest risk of misstatement.
2) For those inventory counts not attended -
> +) obtain and review documentation
relating to the controls surrounding the
counts
+) discuss with management any issues
which arise during the count
There is a risk that the warranty provision 1) Discuss with management the basis of
could be understated, leading to understated the provision calculation and compare this
expenses and liabilities if the company does to industry averages and the level of post
not record enough warranty provision under year-end claims
IAS 37
2) Discuss the rationale behind reducing the
level of provision this year.

3) Compare the prior year provision with

the actual level of claims in the year, to
assess the reasonableness of the judgements
made by management.
There is a risk that intangible assets could
be overstated and research expenses
understated If research costs have been
incorrectly classified as development
expenditure because IAS 38 Intangible
Assets has strict criteria to capitalise with
development expenditure.
There is a risk that prepayments are
understated and PPE will be overstated if determine if the $1m paid in advance has
the deposit of $1m paid in advance has
been capitalised within PPE because only
assets which physically exist at the year end 2) Discuss the correct accounting treatment
should be capitalised as PPE
2) Obtain a breakdown of the research
expenditure recognised in profit or loss and
of the development costs capitalised and
review supporting documentation to
determine whether they have been correctly
classified. Any development expenditure
agreed must meet the relevant criteria for
capitalisation under IAS 38.
2) Discuss the accounting treatment with
the finance director and ensure it is in
accordance with IAS 38.
1) Review the non-current asset register to
been capitalised.
with management to confirm that the
amount paid in advance is recognised as a
prepayment and if incorrectly recognised
review the correcting journal entry.
1) There is a risk that the split between 1) Obtain legal documentation in support of
share capital and share premium has not the rights issue to agree the number of
been accounted for correctly and that these shares issued and the rights price.
balances are misstated
2) Recalculate the split of share capital and
share premium and agree this to the journal
entry to record the rights issue.

1) A detection risk arises as to whether 1) Discuss with management any changes

sufficient and appropriate evidence is
available at Hart Co to confirm the
completeness and accuracy of controls over
the payroll cycle and liabilities at the year
end.
to the extent of records maintained at Hart
Co since the prior year audit and any
monitoring of controls which has been
undertaken by management over payrol.

2) Consideration should be given to the 2) Consideration should be given to

level of controls in place at the service
organisation and whether the data is
reliable. If any errors occurred these could
result in the wages and salaries expense and
any accruals being misstated.
contacting the auditor of the service
organisation to confirm the level of controls
in place. Consider the extent to which
sufficient appropriate audit evidence can be
obtained from records held at Hart Co in
respect of the wages and salaries expense
and liabilities.
The directors’ remuneration disclosure will
not be complete if the additional
information is not disclosed as local
legislation
There is a risk that revenue will be
overstated and the refund liability
understated if the company has not
correctly accounted for the refund liability.
IFRS® 15 Revenue from Contracts with
Customers requires that revenue should
only be recognised to the extent that goods
will not be returned. The company should
recognise a refund liability for goods which
are expected to be returned.
Discuss this matter with management and
review the requirements of local legislation
to determine if the disclosure in the
financial statements is included
appropriately.
Enquire with the finance director how the
returns policy has been applied at the year
end and whether the provisions in IFRS 15
have been reflected.
Review the assumptions underpinning the
refund liability for reasonableness and
whether they meet the historic 5% value of
returns.
Compare the level of post year-end returns
to the refund liability and discuss any
significant differences with management
There is the risk that liabilities and
expenses may be understated if the
company has reduced the warranty
provision excessively at the year end.

Because the company does not manufacture

the goods (they only sell them) and
therefore this is not a reasonable reason for
reduction

1) There is a risk that the cut-off of 1) Discuss with management the point at
purchases may not be accurate as they may which inventory is recorded and review the
not correctly recognise the goods from the contract with the supplier to verify the
point of dispatch at the year end. requirements in place.

2) There is also a risk that inventory and 2) Review the controls the company has in
trade payables are understated at the year place to ensure that inventory is recorded
end. from the point of dispatch.

3) The audit team should undertake detailed

cut-off testing of purchases of goods at the
year end and the sample of shipping
documentation immediately before and
after the year end relating to goods from its
main supplier in Asia should be increased
to ensure that cut-off is complete and
accurate.
It is unlikely that the auditor will be able to The audit team should assess which of the
attend all sites which increases detection inventory counts they will attend. This
risk. It may not be possible to gain should include the count for the central
sufficient appropriate audit evidence over warehouse and a sample of branches which
the inventory counting controls and contain the most material balances of
completeness and existence of inventory for inventory and those which have historically
those sites which are not visited. had exceptions reported during the
inventory count.

For those not visited, the auditor will need

to review the level of exceptions noted
during the count and discuss any issues
which arose during the count with
management.

There is the risk that receivables will be
overstated and the allowance for
receivables understated if some receivables
may not be recoverable and if an additional
allowance for receivables is not included in
the financial statements.
Review and test the controls surrounding
the way in which the finance director
assesses the recoverability of receivables
balances and other credit control processes
to ensure that they are operating effectively.
Perform extended post year-end cash
receipts testing and a review of the aged
receivables ledger in order to assess
valuation and the need for an increased
allowance for irrecoverable receivables.

Discuss with the finance director whether

an additional allowance for receivables will
be required against balances older than the
company’s credit terms.
1) There is a risk that expenses being
understated and payables being overstated
If additional frauds committed by the
payables ledger supervisor are not
discovered.
2) Control risk is also increased if the fraud Discuss with the finance director the details
has gone undetected for a period of time.
There is a risk that the purchases and trade
payables balance at the year end will be
understated if these invoices are not logged
onto the payables ledger before closing
accounting data
The audit team should undertake additional
substantive procedures over the payables
balance, particularly the fictitious supplier
set up on the payables ledger to ensure this
has been removed.
of the fraud perpetrated by the payables
ledger supervisor and what procedures have
been adopted to date to identify any further
adjustments which are needed in the
financial statements. In addition, discuss
with the finance director what additional
controls have been put in place to prevent
any similar frauds.
In addition, the team should maintain
professional scepticism and be alert to the
risk of further fraud.
Review the unprocessed invoices file at the
year end to identify any invoices which
relate to the supply of pre year-end goods
and ensure they have been properly accrued
for in the year-end financial statements and
recognised as a liability.
Discuss with the finance director the
approach to be adopted to resolve the issue
of unprocessed purchase invoices.
There is a risk that PPE and profits are Discuss the accounting treatment with the
overstated because the training costs should finance director and request that the
be charged to profit or loss. training costs are written off to profit or
loss to ensure treatment is in accordance
IAS 16 does not allow staff training costs to with IAS 16.
be capitalised as part of the cost of a non-
current asset If adjusted, review the journal entry for
accuracy.

If the bank refuses to continue to support
the company, there may be doubts as to the
company’s ability to continue as a going
concern. The uncertainties may not be
adequately disclosed in the financial
statements.
Discuss with the finance director the
availability of alternative financing if the
bank is unwilling to continue to support the
company and review the adequacy of any
going concern disclosures in the financial
statements.

The audit team should undertake detailed

going concern testing, in particular,
reviewing the impact of a non-renewal of
the overdraft facility.
The audit engagement team will be
unfamiliar with the accounting policies,
transactions and balances of the client,
hence there will be increased detection risk
on the audit.
In addition, there is less assurance over
opening balances as Orange & Co did not
perform last year’s audit.
There is an increased risk of errors in the
financial statements as the temporary
financial accountant may not be familiar
with the company’s activities and so
errors/omissions may go unnoticed.
Orange & Co should ensure that it has
suitably experienced team deployed on
audit.
In addition, sufficient time must be set
aside so that the team members can
familiarise themselves with the new client,
document its systems and controls and
understand the risks of material
misstatement.
Increased audit procedures should be
performed on the opening balances to
confirm their reasonableness.
Discuss with management the technical
competency and experience of the
temporary financial accountant.
In addition, the audit engagement team
should ensure that increased substantive
procedures are undertaken on the material
areas of the financial statements to reduce
audit risk, particularly those requiring
judgement.
This increases the risk that the directors The audit engagement team should
may manipulate the financial statements, by maintain professional scepticism
overstating profits and assets and throughout the course of the audit.
understating liabilities.
Detailed cut-off testing on areas such as
revenue, inventory and payables should be
performed to ensure that cut-off has been
correctly applied and substantive
procedures performed on estimates and
judgements to ensure accuracy.

There is a risk that profits and property,
plant and equipment will be overstated, and
expenses understated if the training costs
are not written off to the statement of profit
or loss.
IAS® 16 prohibits training costs from
being capitalised and
Discuss the accounting treatment with the
directors and request that an adjustment is
made to ensure appropriate treatment of the
training costs. Obtain a breakdown of the
remaining capitalised costs and agree to
supporting documentation to ensure that
they meet the recognition criteria in IAS 16.
There is a risk that inventory is not
recorded on dispatch and therefore
inventory and liabilities are understated at
the year end.
There is a risk that some receivables may
not be recoverable and an allowance for
receivables is required, hence receivables
may be overstated and the allowance for
receivables understated.
Discuss with management the point at
which inventory is recorded and review the
contract with the supplier to verify the
requirements in place.
Review the controls the company has in
place to ensure that inventory is recorded
from the point of dispatch.
Extend cut-off testing by reviewing pre and
post year-end GRNs and supplier dispatch
notes to verify that inventory is recorded at
the correct point.
Extend post year-end cash receipts testing
and perform a review of the aged
receivables listing to assess the valuation of
receivables.
Discuss with management the adequacy of
any allowance for receivables.
There is a risk that profit would be
overstated and liabilities and payables
would be understated if a provision is not
recognised.
As there is a present obligation for which
the costs can be reliably measured, and
which will result in an outflow of funds,
IAS 37 Provisions, Contingent Assets and
Contingent Liabilities would require this
provision to be recognised in the financial
statements.
The directors’ remuneration disclosure will
be incomplete and inaccurate if the bonus
paid is included in the payroll charge for
the year and not separately disclosed in
accordance with the local legislation.
Obtain the calculation of the redundancy
payments and agree that a provision has
been included as a liability in the year-end
financial statements.
Agree the redundancy payments have been
paid post year end.
Discuss this matter with management and
review the disclosure in the financial
statements to ensure it complies with local
legislation.
There is a risk that revenue and receivables Inspect a copy of the credit note and
are overstated if the credit note is not
correctly recorded prior to the year end.
There is a risk that understated payables
and bank balances.
confirm an adjustment to revenue and
receivables has been recorded pre- year
end.
Request that the bank reconciliation is
amended to remove the supplier payments
at the year-end as these should be
accounted for in the 31 May 20X6 financial
statements.
Review the journal entry correcting the
payables and bank balances at the year end.
There is a risk that revenue and cost of Discuss the basis of the revised assumption
sales may be overstated and liabilities of a 5% return rate with the finance
understated if reducing the rate of return director. Review a period of 60 days to
goods quantify the levels of return in the specified
period and compare this to the assumed rate
of 5%. Discuss any significant variations
IFRS® 15 Revenue from Contracts with with the finance director.
Customers provides that revenue and cost
of sales should only be accounted for to the
extent that the company foresees that the
goods will not be returned. For the goods
which may be returned, the company
should recognise a refund liability. If, after
60 days, the goods are not returned, then
this liability is reversed and revenue is
recognised.

There is a risk that intangible assets and Agree the useful life of the patent is four
profits are overstated if that management years to supporting documentation.
has correctly accounted for the
amortisation. The amortisation charge should be
calculated and the appropriate journal
IAS® 38 Intangible Assets, this intangible adjustment discussed with management, in
asset should be amortised over its four-year order to ensure the accuracy of the charge
life. and that the intangible is correctly valued at
the year end.
Significant profits or losses on disposal are
an indication that the depreciation policy of
plant and machinery may not be
appropriate. Therefore depreciation may be
understated and profit and assets overstated
There is a risk that she may have
undertaken a significant level of fraudulent
transactions leading to an increased control
risk which has not yet been identified.
These would need to be written off to the
statement of profit or loss. If these have not
been uncovered by the year end, the
financial statements could include errors
resulting in the misstatement of profits.
Recalculate the loss on disposal
calculations and agree all items to
supporting documentation.
Discuss the depreciation policy for plant
and machinery with the finance director to
assess its reasonableness.
Review for other significant gains or losses
on disposal of property, plant and
equipment to assess the reasonableness
of the company’s depreciation policies.
Discuss with the finance director the details
of the fraud perpetrated by the financial
controller and what procedures have been
adopted to date to identify any adjustments
which are needed in the financial
statements.
Additional substantive testing should be
conducted over the affected areas of the
accounting records.
In addition, the team should maintain their
professional scepticism and be alert to the
risk of further fraud and errors.
If it is probable that Harlem Co will make
payment to the financial controller, a
provision for unfair dismissal is required to
comply with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. If the
payment is possible rather than probable, a
contingent liability disclosure would be
necessary. If Harlem Co has not done this,
there is a risk over the completeness of any
provisions or contingent liabilities
disclosures.
Inventory may be overvalued as its net
realisable value (NRV) may be below its
cost. If the tyres can be rectified, the
rectification costs may mean that cost
exceeds net realisable value. If the tyres
cannot be rectified, the inventory may need
to be written off completely.
The audit team should discuss with
management and request confirmation from
the company’s lawyers of the existence and
likelihood of success of any claim from the
former financial controller.
Discuss with the finance director whether
any write downs will be made to the
affected tyres, and what, if any,
modifications may be required with regards
to the quality.
Testing should be undertaken to confirm
cost and NRV of the affected products in
inventory and that all inventory on a
line-by-line basis is valued correctly.
There is a risk that receivables will be
overvalued; some balances may not be
recoverable and so will be overstated if not
adequately provided for
If these deficiencies have not been rectified, Discuss with management whether the
the controls over purchases and payables
may continue to be weak leading to
increased control risk and risk of
misstatements arising. Cost of sales,
expenses and trade payables may not be
complete or accurate.
Discuss with the director the rationale for
maintaining the allowance for receivables at
the same level as the prior year, despite the
increase in receivables collection period
and the payment break granted to a large
customer.
Extended post year-end cash receipts
testing and a review of the aged receivables
ledger to be performed to assess valuation
and the need for an increased level of
allowance for receivables.
purchases cycle recommendations
suggested by Brooklyn & Co were
implemented successfully this year. If so,
undertake tests of these controls to assess if
they are operating efficiently.
If the controls are not in place or operating
efficiently, adopt a fully substantive
approach for confirming the completeness
and accuracy of cost of sales and other
expenses and trade payables.
In order to maximise the chances of
securing the debt finance restructure,
Harlem Co will need to present financial
statements which show the best possible
position and performance. The worsening
interest cover and gearing ratio increases
the risk that the directors may manipulate
the financial statements, by overstating
profits and assets and understating debt
liabilities
Brooklyn & Co should ensure that there is a
suitably experienced audit team. Also,
adequate time should be allocated for team
members to obtain an understanding of the
company and the significant risks of
overstatement of profits and assets and
understatement of debt, including
attendance at an audit team briefing.
The team needs to maintain professional
scepticism and be alert to the increased risk
of manipulation.

Significant estimates and judgements

should be carefully reviewed in light of the
misstatement risk.

If the company has not accounted for a Review the treatment of the bonus issue and
bonus issue before, there is a risk that it agree the increase in shares to the share
could have been incorrectly treated with register and share certificates, and agree
equity being under or overstated. In that the corresponding reduction in reserves
addition, legal issues may arise if the shares is correct.
have not been issued in accordance with the
company’s statutory constitution. Review board minutes for authorisation and
terms of the bonus issue and review if the
Additionally, bonus issues require transaction has been conducted in line with
disclosure in the financial statements and this approval. Review the statutory
there is a risk that these may be incomplete constitution documents to confirm the
or inaccurate. legality of the share issue.

Review the adequacy of the bonus issue

disclosures in the financial statements.
If reliance is placed on irrelevant or poorly
performed testing, then the external audit
team may form an incorrect conclusion on
the strength of the internal controls at
Peony Co. This could result in them
performing insufficient levels of
substantive testing, thereby increasing
detection risk
The external audit team should meet with
IA staff, read their reports and review their
files relating to store visits to ascertain the
nature of the work undertaken.
Before using the work of IA, the audit team
will need to evaluate and perform audit
procedures on the entirety of the work
which they plan to use, in order to
determine its adequacy for the purposes of
the audit. In addition, the team will need to
re-perform some of the testing carried out
by IA to assess its adequacy.
There is a risk that costs may have been
omitted or included in operating expenses
rather than cost of sales because this
movement in gross margin is significant
and inconsistent with the fall in operating
margin.
Misclassification of expenses would result
in understatement of cost of sales and
overstatement of operating expenses.
There is a risk that inventory could be
under or overvalued because inventory
should be valued at the lower of cost and
net realisable value (NRV).
The classification of costs between cost of
sales and operating expenses should be
reviewed in comparison to the prior year
and any inconsistencies investigated.
Testing should be undertaken to confirm
cost and NRV of inventory and that on a
line-by-line basis the goods are valued
correctly.
In addition, valuation testing should focus
on comparing the cost of inventory to the
selling price less margin for a sample of
items to confirm whether this method is
actually a close approximation to cost.
Inventory could be under or overstated if The timetable of the perpetual inventory
the perpetual inventory counts are not all counts should be reviewed and the controls
completed, such that some inventory lines over the counts and adjustments to records
are not counted in the year. should be tested.

During the interim audit, it was noted that In addition, the level of adjustments made
there were significant exceptions with the to inventory should be considered to assess
inventory records being higher than the their significance. This should be discussed
inventory in the warehouse. As the year-end with management as soon as possible as it
quantities will be based on the records, this may not be possible to place reliance on the
is likely to result in overstated inventory inventory records at the year end, which
could result in the requirement for a full
year-end inventory count.

This is an indication that the company’s Discuss the depreciation policy for non-
depreciation policy of non-current assets current assets with the finance director and
may not be appropriate, as depreciation in assess its reasonableness.
the past appears to have been understated.
Enquire of the finance director if the
If an asset is obsolete, it should be written obsolete assets have been written off. If so,
off to the statement of profit or loss. review the adjustment for completeness
Therefore depreciation may be understated
and profit and assets overstated
The costs were incurred and adverts shown
in the year ending 20X9 and there is no
basis for including them as a current asset
at the year end. The costs should be
recognised in operating expenses in the
current year financial statements.
If these costs are not expensed, current
assets and profits will be overstated.
A detection risk arises as to whether
sufficient and appropriate evidence is
available at Peony Co to confirm the
completeness and accuracy of controls over
the payroll cycle and liabilities at the year
end.
Discuss with management the rationale for
including the advertising as a current asset.
Request evidence to support the
assessment of probable future cash flows,
and review for reasonableness.
Review supporting documentation for the
advertisements to confirm that all were
shown before the 20X9 year end.
Request that management remove the
current asset and record the amount as an
expense in the statement of profit or loss.
Discuss with management the extent of
records maintained at Peony Co for the
period since January 20X9 and any
monitoring of controls which has been
undertaken by management over payroll.
Consideration should be given to contacting
the service organisation’s auditor to
confirm the level of controls in place, a
type 1 or type 2 report could be requested.
If any errors occurred during the transfer
process, these could result in wages and
salaries being under/overstated
The loan needs to be allocated between
non-current and current liabilities. Failure
to classify the loan correctly could result in
misclassified liabilities
Discuss with management the extent of
records maintained at Peony Co for the
period since January 20X9 and any
monitoring of controls which has been
undertaken by management over payroll.
Consideration should be given to contacting
the service organisation’s auditor to
confirm the level of controls in
place, a type 1 or type 2 report could be
requested.
Re-perform the company’s calculations to
confirm that the split of the loan note is
correct between non-current and current
liabilities and that total financing proceeds
of $3m were received.
In addition, the disclosures for this loan
note should be reviewed in detail to ensure
compliance with relevant accounting
standards
The timing of this announcement has not
been confirmed; if it is announced to the
staff before the year end, then under IAS 37
Provisions, Contingent Liabilities and
Contingent Assets, a redundancy provision
will be required at the year end as a
constructive obligation will have been
created.
Discuss with management the status of the
redundancy announcement; if before the
year end, review supporting documentation
to confirm the timing. In addition, review
the basis of and recalculate the redundancy
provision.

Failure to provide or to provide an

appropriate amount will result in an
understatement of provisions and expenses.
If research costs have been incorrectly Obtain a breakdown of the expenditure and
classified as development expenditure, verify that it relates to the development of
there is a risk that intangible assets could be the new products. Review expenditure
overstated and expenses understated. documentation to determine whether the
costs relate to the research or development
This expenditure is classed as research and stage. Discuss the accounting treatment
development under IAS® 38 Intangible with the finance director and ensure it is in
Assets. The standard requires research costs accordance with IAS 38.
to be expensed to profit or loss and only
development costs to be capitalised as an
intangible asset.
If the service for 20X8 has been carried out, Review the purchase documentation for the
then $0·1m ($0·5m/5) should be charged to new manufacturing line to confirm the
profit or loss. Therefore property, plant and exact cost of the servicing and that it does
equipment (PPE) and profits are overstated relate to a five-year period.
and prepayments are understated.
Discuss the accounting treatment with the
finance director and the level of any
necessary adjustment to ensure treatment is
in accordance with IAS 16.
This loan needs to be correctly split During the audit, the team would need to
between current and non-current liabilities confirm that the $4 million loan finance
in order to ensure correct disclosure. was received.

In addition, the split between current and

non-current liabilities and the disclosures
for this loan should be reviewed in detail to
ensure compliance with relevant accounting
standards and local legislation.

Details of security should be agreed to the

bank confirmation letter.

There is a risk that this has been omitted The finance costs should be recalculated
from the statement of profit or loss leading and any increase agreed to the loan
to understated finance costs and overstated documentation for confirmation of the 5%
profit. interest rate.

Interest payments should be agreed to the

cash book and bank statements to confirm
the amount was paid and is not therefore a
year-end payable.
There is a risk that the directors have an
incentive to manipulate the financial
statements, by overstating revenue, profits
and assets because in order to maximise the
success of the potential listing, Darjeeling
Co will need to present financial statements
which show the best possible position and
performance.
Earl & Co should ensure that there is a
suitably experienced audit team. Also,
adequate time should be allocated for team
members to obtain an understanding of the
company and the significant risks of
overstatement of revenue, profits and
assets, including attendance at an audit
team briefing.

The team needs to maintain professional

scepticism and be alert to the increased risk
of manipulation.

Significant estimates and judgements

should be carefully reviewed in light of the
misstatement risk.

The increase in receivable days could be
solely due to these increased credit terms.
However, it could also be due to an
increased risk over recoverability of
receivables as they may be overvalued and
expenses understated.
Review and test the controls surrounding
how Darjeeling Co identifies receivables
balances which may not be recoverable and
procedures around credit control to ensure
that they are operating effectively.
Extended post year-end cash receipts
testing and a review of the aged receivables
ledger to be performed to assess valuation.
Also consider the adequacy of any
allowance for receivables.
There is a risk that overstated revenue, Discuss with management the basis of the
under/overstated profits and liabilities if refund liability of $0·25m and obtain
company did not recored appropriate refund supporting documentation to confirm the
liablity reasonableness of the assumptions and
calculations.
This product recall will result in Darjeeling
Co paying refunds to customers. The sales
will need to be removed from the 20X8
financial statements and a refund liability
recognised. Also inventory will need to be
reinstated, albeit at a possibly written down
value. Failing to account for this correctly
could result in overstated revenue,
understated liabilities and misstated
inventory.
Review the list of sales of the paint product
made between June and the date of the
recall, agree that the sales have been
removed from revenue and the inventory
included. If the refunds have not been paid
before the year end, review the draft
financial statements to confirm that it is
included within current liabilities.

There is a risk that this inventory may be Discuss with the finance director whether
overvalued as its net realisable value may any write downs will be made to this
be below cost. product, and what, if any, modifications
will be required to rectify the quality of the
Due to the issue with the paint consistency, product.
the quality of these products is questionable
and management is investigating whether Testing should be undertaken to confirm
these products can be rectified. cost and NRV of the affected paint products
held in inventory and that on a line by line
basis the goods are valued correctly.
This is a significant increase in revenue
and, along with the increase in gross
margin, may be related to the increased
credit period and price promise promotion
or could be due to an overstatement of
revenue.
During the audit a detailed breakdown of
sales will be obtained, discussed with
management and tested in order to
understand the sales increase. Also
increased cut-off testing should be
undertaken to verify that revenue is
recorded in the right period and is not
overstated.

These are all indicators that the company Detailed going concern testing to be
could be experiencing a reduction in its performed during the audit, including the
cash flow which could result in going review of cash flow forecasts and the
concern difficulties or uncertainties. underlying assumptions. These should be
discussed with management to ensure that
These uncertainties may not be adequately the going concern basis is reasonable.
disclosed in the financial statements.
The general overheads do not meet
requirement to record in inventory cost. If
these are included in inventory cost, then
this will result in over-valued inventory.
There is a risk that the year-end inventory
could be under or overstated if the
adjustments are not completed accurately
Discuss with management the nature of the
overheads included in inventory valuation.
If general overheads are included, request
management remove them from the
valuation to be included in the draft
financial statements.
Review supporting documentation to verify
those overheads deemed to be of a
production nature are valid.
The auditor should attend the inventory
count held after the year end and note
details of goods received and despatched
post year end, in order to agree to the
reconciliation.
During the final audit, the year-end
inventory adjustments schedule should be
reviewed in detail and agreed to supporting
documentation obtained during the
inventory count for all adjusting items.
The audit team should increase the extent of
inventory cut-off testing at the year end and
at the date of the count.
In accordance with IAS 38 Intangible
Assets, this should have been included as
an intangible asset and amortised over its
three-year life. As the sum has been fully
expensed and not treated in accordance
with IAS 38, intangible assets and profits
are understated.
This needs to be accounted for correctly,
with adequate disclosure made and the
equity finance needs to be allocated
correctly between share capital and share
premium.
If this is not done, then the accounts may be should be reviewed in detail to ensure
misstated due to a lack of disclosure or
share capital and share premium may be
misstated.
The audit team will need to agree the
purchase price to supporting documentation
and confirm the useful life is three years as
per the contract.
Discuss with management the reason for
fully expensing the $1·1m paid, and request
they correct the treatment.
The correcting journal should be reviewed
and the amortisation charge should be
recalculated in order to ensure the accuracy
of the charge and that the intangible is
correctly valued at the year end.
The audit team should confirm that
proceeds of $1·2m were received and that
the split of share capital and share premium
is correct and appropriately recorded.
In addition, the disclosures for this finance
compliance with relevant accounting
standards and local legislation.
There is a risk that the full impact of the
fraud has not been quantified and any
additional fraudulent transactions would
need to be written off in the statement of
profit or loss. If these have not been
uncovered, the financial statements could
be misstated.
In addition, individual receivable balances
may be under/overstated as customer
receipts have been misallocated to other
receivable balances.
A detection risk arises as to whether
sufficient and appropriate evidence is
available at Blackberry Co to confirm the
completeness and accuracy of controls over
the sales and receivables cycle and balances
at the year end.
Discuss with the finance director what
procedures they have adopted to fully
identify and quantify the impact of the
teeming and lading fraud. In addition,
discuss with the finance director, what
controls have been put in place to identify
any similar frauds.
Review the receivables listing to identify
any unusual postings to individual
receivable balances as this could be further
evidence of fraudulent transactions.
In addition, the team should maintain their
professional scepticism and be alert to the
risk of further fraud and errors.
Discuss with management the extent of
records maintained at Blackberry Co for the
period since February 20X8 and any
monitoring of controls undertaken by
management over sales and receivables.
Consideration should be given to contacting
the service organisation’s auditor to
confirm the level of controls in place.
There is a risk that sales and receivables Discuss with management the transfer
being under/overstated if any errors process undertaken and any controls put in
occurred during the transfer process. place to ensure the completeness and
accuracy of the data.

Where possible, undertake tests of controls

to confirm the effectiveness of the transfer
controls. In addition, perform substantive
testing on the transfer of information from
the old to the new system.

If it is probable that Blackberry Co will The audit team should request confirmation
make a payment to the financial accountant, from the company’s lawyers of the
a provision for unfair dismissal is required. existence and likelihood of success of any
claim from the former financial accountant.
If the payment is possible rather than
probable, a contingent liability disclosure
would be necessary.

If Blackberry Co has not done this, there is

a risk over the completeness of any
provisions or contingent liabilities.
This a key control which is being
overridden and as such there is an increased
risk of errors within trade payables and the
year-end payables balance may be under or
overstated.
To comply with IAS 37 Provisions,
Contingent Liabilities and Contingent
Assets, this should not be recognised until
the receipt is virtually certain. With no firm
response to date, the inclusion of this sum
overstates profit and current assets.
The audit team should increase their testing
on trade payables at the year end, including
performing supplier statement
reconciliations, with a particular focus on
completeness of trade payables.
Request management prepare a year-end
purchase ledger control account
reconciliation. The audit team should
undertake a detailed review of this
reconciliation with a focus on any unusual
reconciling items
Discuss with management whether any
notification of payment has been received
from the liquidators and review the related
correspondence. If virtually certain, the
treatment adopted is correct. If payment has
been received, agree to post-year end cash
book.
If receipt is not virtually certain,
management should be requested to remove
it from profit and receivables. If the receipt
is probable, the auditor should request
management include a contingent asset
disclosure note.
As the team is not familiar with the
accounting policies, transactions and
balances of the company, there will be an
increased detection risk on the audit.
The level of work in progress will need to
be assessed at the year end. Assessing the
percentage completion for partially
constructed buildings is likely to be quite
subjective, and the team should consider if
they have the required expertise to
undertake this. If the percentage completion
is not correctly calculated, the inventory
valuation may be under or overstated.
Cupid & Co should ensure they have a
suitably experienced team. In addition,
adequate time should be allocated for team
members to obtain an understanding of the
company and the risks of material
misstatement including a detailed team
briefing to cover the key areas of risk.
The auditor should discuss with
management the process they will
undertake to assess the percentage
completion for work in progress at the year
end. This process should be reviewed by
the auditor while attending the year-end
inventory counts.
In addition, consideration should be given
as to whether an independent expert is
required to value the work in progress or if
a management expert has been used. If the
work of an expert is to be used, then the
audit team will need to assess the
competence, capabilities and objectivity of
the expert.
The increase in inventory may be due to an
increased level of pre year-end orders.
Alternatively, it may be that Prancer
Construction Co is struggling to sell
completed properties, which may indicate
that they are overvalued. IAS 2
Inventories requires that inventory should
be stated at the lower of cost and NRV.
It is unlikely that the auditor will be able to
attend all of these inventory counts,
increasing detection risk, and therefore they
need to ensure that they obtain sufficient
evidence over the inventory counting
controls, and completeness and existence of
inventory for any sites not visited.
Detailed cost and net realisable value
(NRV) testing to be performed at the year
end and the aged inventory report to be
reviewed to assess whether inventory
requires to be written down.
The auditor should assess for which of the
building sites they will attend the counts.
This will be those with the most material
inventory or which according to
management have the most significant risk
of misstatement.
For those not visited, the auditor will need
to review the level of exceptions noted
during the count and discuss with
management any issues, which arose during
the count.
A warranty provision will be required under Discuss with management the basis of the
IAS 37 Provisions, Contingent Liabilities provision calculation, and compare this to
and Contingent Assets. the level of post year-end claims, if any,
made by customers. In particular, discuss
Calculating warranty provisions requires the rationale behind reducing the level of
judgement as it is an uncertain amount. provision this year.

The finance director anticipates this Compare the prior year provision with the
provision will be lower than last year as the actual level of claims in the year, to assess
company has improved its building the reasonableness of the judgements made
practices and the quality of its finished by management.
properties. However, there is a risk that this
provision could be understated,
especially in light of the overdraft covenant
relating to a minimum level of net assets
and is being used as a mechanism to
manipulate profit and asset levels.
There is a risk that overstated revenue and Discuss with management the treatment of
understated liabilities if management may deposits received in advance, to ensure it is
have incorrectly treated the deferred income appropriate.
as revenue.
During the final audit, undertake increased
These deposits should not be recognised as testing over the cut-off of revenue and
revenue in the statement of profit or loss completeness of deferred income.
until the performance obligations as per the
contracts have been satisfied, which is
likely to be when the building is finished
and the sale process is complete. Instead,
they should be recognised as deferred
income within current liabilities.

There is a risk that receivables will be
overvalued; some balances may not be
recoverable and so will be overstated if not
provided for.
In addition, reducing the allowance for
receivables will increase asset values and
would improve the covenant compliance,
which increases the manipulation risk
further.
Review and test the controls surrounding
how the finance director identifies old or
potentially irrecoverable receivables
balances and credit control to ensure that
they are operating effectively.
Discuss with the director the rationale for
reducing the allowance for receivables.
Extended post year-end cash receipts
testing and a review of the aged receivables
ledger to be performed to assess valuation
and the need for an allowance for
receivables.
If the company does not have sufficient
cash to meet this repayment, then there
could be going concern implications.
In addition, there is a risk of manipulation
of profit and net assets to ensure that
covenants are met.
The forecast profit is higher than last year,
indicating an increase in trade, also the
company’s cash position has continued to
deteriorate and therefore, it is unusual for
payable days to have decreased.
There is an increased risk of errors within
trade payables and the year-end payables
may be understated.
Review the covenant calculations prepared
by the company at the year end and identify
whether any defaults have occurred; if so,
determine the effect on the company.
The team should maintain their professional
scepticism and be alert to the risk that profit
and/or net assets have been overstated to
ensure compliance with the covenants.
The audit team should increase their testing
on trade payables at the year end, with a
particular focus on completeness of
payables. A payables circularisation or
review of supplier statement reconciliations
should be undertaken.
The costs incurred should be correctly
allocated between revenue and capital
expenditure. As the website has been
upgraded, there is a possibility that the new
processes and systems may not record data
reliably and accurately.
This may lead to a risk over completeness
and accuracy of data in the underlying
accounting records.
Review a breakdown of the costs and agree
to invoices to assess the nature of the
expenditure and if capital, agree to
inclusion within the asset register or agree
to the statement of profit or loss.
The audit team should document the
revised system and undertake tests over the
completeness and accuracy of data recorded
from the website to the accounting records.

Only assets which physically exist at the Discuss with management as to whether the
year end should be included in property, warehouse purchase was completed by the
plant and equipment. If the transaction has year end. If so, inspect legal documents of
not been completed by the year end, there is ownership, such as title deeds ensuring
a risk that assets are overstated if the these are dated prior to 1 April 20X7 and
company incorrectly includes the are in the company name.
warehouse at the year end.
There is a risk that understated equity and
overstated non-current liabilities if
irredeemable preference shares are
classified incorrectly into non-current
liabilities, not equity.
Review share issue documentation to
confirm that the preference shares are
irredeemable. Confirm that they have been
correctly classified as equity within the
accounting records and that total financing
proceeds of $5m were received.

In addition, the disclosures for this share

issue should be reviewed in detail to ensure
compliance with relevant accounting
standards.

Under IAS 16 Property, Plant and Discuss with the directors the rationale for
Equipment, useful lives are to be reviewed any extensions of asset lives and reduction
annually, and if asset lives have genuinely of depreciation rates. Also, the four-year
increased, then this change is reasonable. life should be compared to how often these
assets are replaced, to assess the useful life
However, there is a risk that this reduction of assets.
has occurred in order to boost profits. If this
is the case, then fixtures and fittings are
overvalued and profit overstated.
If the customer is experiencing difficulties, Review the revised credit terms and
there is an increased risk that the receivable identify if any after date cash receipts for
is not recoverable and hence is overvalued. this customer have been made.

Discuss with the finance director whether

he intends to make an allowance for this
receivable. If not, review whether any
existing allowance for uncollectable
accounts is sufficient to cover the amount
of this receivable.

Sales staff seeking to maximise their
current year bonus may result in new
accounts being opened from poor credit
risks leading to irrecoverable receivables.
In addition, there is a risk of sales cut-off
errors as new customers could place orders
within the two-month introductory period
and subsequently return these goods post
year end.
Increased sales cut-off testing will be
performed along with a review of any post
year-end returns as they may indicate cut-
off errors. In addition, increased after date
cash receipts testing to be undertaken for
new customer account receivables.
If there are issues with the quality of the Discuss with the finance director whether
Luge product, inventory may be overvalued any write downs will be made to this
as its NRV may be below its cost. product, and what, if any, modifications
may be required with regards the quality.

Testing should be undertaken to confirm

cost and NRV of the Luge products in
inventory and that on a line-by-line basis
the goods are valued correctly

The sale will need to be removed; a refund
liability should be recognised along with
the reinstatement of inventory, although the
NRV of this inventory could be of a
minimal value. Failing to account for this
correctly could result in overstated revenue
and understated liabilities and inventory.
Review the list of sales made of product
Luge prior to the recall, agree that the sale
has been removed from revenue and the
inventory included. If the refund has not
been paid pre year end, agree it is included
within current liabilities.
If it is probable that the company will make Caving & Co should write to the company’s
payment to the customer, a legal provision lawyers to enquire of the existence and
is required. If the payment is possible rather likelihood of success of any claim from
than probable, a contingent liability Petanque Co. The results of this should be
disclosure would be necessary. If Hurling used to assess the level of provision or
Co has not done this, there is a risk over the disclosure included in the
completeness of any provisions or the financial statements.
necessary disclosure of contingent
liabilities.

A reduction in the audit timetable will The timetable should be confirmed with the
increase detection risk and place additional finance director. If it is to be reduced, then
pressure on the team in obtaining sufficient consideration should be given to
and appropriate evidence. performing an interim audit in late March
or early April; this would then reduce the
In addition, the finance team of Hurling Co pressure on the final audit.
will have less time to prepare the financial
information leading to an increased risk of The team needs to maintain professional
errors arising in the financial statements scepticism and be alert to the increased risk
of errors occurring.
In line with IAS 10 Events after the
Reporting Date the dividend should only be
disclosed. If the dividend is included, this
will result in an overstatement of liabilities
and understatement of equity.
Discuss the issue with management and
confirm that the dividend will not be
included within liabilities in the 20X7
financial statements.
The financial statements need to be
reviewed to ensure that adequate disclosure
of the proposed dividend is included.
2021 - Mar, Jun
(a) Preconditions required for an audit
Auditors should only accept a new audit engagement or continue an existing audit engagement if the preconditions for an
audit are present.

ISA 210 Agreeing the Terms of Audit Engagements requires the auditor to:
– Determine whether the financial reporting framework to be applied in the preparation of the financial statements is
acceptable (for example IFRS® Standards). In considering this, the auditor should have assessed the nature of the entity,
the nature and purpose of the financial statements and whether law or regulation prescribes the applicable reporting
framework.
– Obtain the agreement of management that it acknowledges and understands its responsibilities for the
following:
1 preparing the financial statements in accordance with the applicable financial reporting framework;
2 internal control necessary for the preparation of the financial statements to be free from material misstatement whether
due to fraud or error; and
3 providing the auditor with access to information relevant for the audit and access to staff within the entity to obtain audit
evidence.

2021 - Mar, Jun

(c) Professional scepticism and examples where professional scepticism should be applied

Professional scepticism is defined in ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit
inAccordance with International Standards on Auditing as an attitude which includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

Examples where the auditor should apply professional scepticism for Corley Appliances Co are as follows:

Revenue recognition
ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements contains a rebuttable
presumption that fraud in relation to revenue is high risk and hence the auditor must apply professional scepticism to
Corley Appliances Co’s revenue recognition policies, especially in relation to the company’s returns policy which due to
the judgement involved may be used as a way to manipulate revenue.

Warranty provision

Accounting for warranty provisions will include an element of estimation based on previous experiences of the costs
incurred by the company to repair defective goods. The auditor should maintain professional scepticism keeping in mind
that warranty provisions may include management bias to either deliberately over or understate the provision.
Management has reduced the warranty provision in the year on the grounds they feel the goods they sell are built to a
high standard. As the company is not involved in the manufacturing of the goods they sell, it may be unreasonable to
reduce the warranty provision on this basis.

Fraud
As a fraud has been committed during the year, the auditor must maintain professional scepticism recognising the fact
that internal controls may be weak, hence allowing for employee manipulation of such internal control deficiencies. The
auditor must also consider the possibility that other frauds may have taken place during the year through management
override of the entity’s internal controls.

Bank overdraft
The company is reliant on its bank overdraft due to the significant levels of expenditure which it has incurred during the
year on the new dispatch system. Management may want to deliberately overstate profit and understate liabilities so that
the bank renews the overdraft facility.

Receivables valuation
 The receivables collection period has been increasing over the past six months, but the finance director does not
envisage that an increase in the allowance for receivables is required. The auditor must apply professional scepticism in
considering whether management’s assessment of recoverability is reasonable, as any increase in the allowance will
reduce profits.

2020 - Mar, Jun

(a) Engagement letters
Purpose of an engagement letter
The letter of engagement outlines the responsibilities of both the audit firm and the audit client. Its purpose is to:
1 minimise the risk of any misunderstanding between the auditor and the client;
2 confirm acceptance of the engagement; and
3 forms the basis of the contract by outlining the terms and conditions of the engagement.

Items to be included in an engagement letter

1 the objective and scope of the audit;
2 the responsibilities of the auditor;
3 responsibilities of management;
4 identification of the financial reporting framework used in the preparation of the financial statements;
5 expected form and content of any reports to be issued;
6 elaboration of the scope of the audit with reference to legislation;
7 the form of any other communication of the results of the audit;
8 the fact that some material misstatements may not be discovered;
9 arrangements concerning the planning and performance of the audit, including the composition of the audit team;
10 the expectation that management will provide written representations;
11 the basis on which the audit firm will calculate its fees;
a request for management to agree to the terms of the audit engagement and acknowledge receipt of the letter of
12 engagement;
13 arrangements concerning the involvement of internal audit and other staff employed at the company;
14 any obligations to provide audit working papers to third parties;
15 any restrictions on the auditor’s liability; and
16 arrangements to make available draft financial statements and any other information.

(b) Factors to consider prior to accepting Scarlet Co as a new audit client

1 The outgoing auditor’s response
2 Management integrity
3 Pre-conditions for an audit
4 Independence and objectivity
5 Resources available at the time of the audit

The outgoing auditor’s response

Prior to accepting an audit engagement, the auditor is required to contact the previous auditors, after obtaining permission
from Scarlet Co, to ask for all information relevant to the decision as to whether or not the firm should accept appointment.
The auditor should consider the outgoing auditor’s response to assess whether there are any ethical or professional
reasons why the firm should not accept appointment.

Management integrity
If Orange & Co’s audit engagement partner has reason to believe that Scarlet Co’s management lack integrity, there is a
greater risk of fraud and intimidation. Orange & Co need to consider management integrity because if there are serious
concerns regarding this, Orange & Co must not accept the audit engagement.

Pre-conditions for an audit

Orange & Co can only accept an audit engagement if the preconditions are present.
 The preconditions confirm that management will use an acceptable financial reporting framework under which they will
prepare the financial statements and confirms that management acknowledges and understands its responsibilities for:
1 Preparing the financial statements in accordance with the applicable financial reporting framework;
2 Internal
Providingcontrol necessary
the auditor for the preparation
with access of relevant
to information the financial statements
for the audit andtoaccess
be freetofrom
staffmaterial misstatement;
within the entity to obtain audit
3 evidence.
If the preconditions are not present, Orange & Co cannot accept the audit engagement.

Independence and objectivity

The auditor must consider whether there are any threats to independence and objectivity which cannot be reduced to an
acceptably low level by the use of appropriate safeguards, such as if any of Orange & Co’s staff have shares in Scarlet
Co or are related to staff employed at Scarlet Co. If such threats are present and cannot be sufficiently mitigated, Orange
& Co must not accept the audit engagement.

Resources available at the time of the audit

Orange & Co must have adequate resources with the relevant experience available at the time the audit of Scarlet Co is
likely to be carried out. All audit staff deployed to the audit of Scarlet Co must be capable of carrying out the audit in
accordance with International Standards on Auditing (ISAs). If adequate resources will not be available, Orange & Co
must not accept the audit engagement.

2019 - Sep, Dec

(a) Audit responsibility with prevention and detection Fraud and Errors
Auditors conduct an audit in accordance with ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements and are responsible for obtaining reasonable assurance that the financial statements taken
as a whole are free from material misstatement, whether caused by fraud or error.

In order to fulfil this responsibility, the auditor is required to identify and assess the risks of material misstatement of the
financial statements due to fraud.

The auditor needs to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement
due to fraud through designing and implementing appropriate responses. In addition, the auditor must respond
appropriately to fraud or suspected fraud identified during the audit.

When obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the
audit, considering the potential for management override of controls and recognising the fact that audit procedures which
are effective in detecting error may not be effective in detecting fraud.

To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and error, ISA 240 requires
that a discussion is held within the team. For members not present at the meeting, the audit engagement partner should
determine which matters should be communicated to them.

2019 - Sep, Dec

(b) Report to management
Board of directors
Amberjack Co
21 Under the Sea, Shorelife City, Shark Country
1 July 20X5

Dear Sirs,
Audit of Amberjack Co for the year ended 30 April 20X5
Please find enclosed the report to management on deficiencies in internal controls identified during the audit for the year
ended 30 April 20X5. The appendix to this report considers deficiencies in the sales and dispatch system and
recommendations to address those deficiencies.
 Please note that this report only addresses the deficiencies identified during the audit and if further testing had been
performed, then more deficiencies may have been reported.

This report is solely for the use of management and if you have any further questions, then please do not hesitate to
contact us.

Yours faithfully
An audit firm
Appendix

2019 - Mar, Jun

(a) Materiality and performance materiality
Materiality and performance materiality are dealt with under ISA 320 Materiality in Planning and Performing an Audit.
Auditors need to establish the materiality level for the financial statements as a whole, as well as assess performance
materiality levels, which are lower than the overall materiality for the financial statements as a whole.

Materiality
Materiality is defined in ISA 320 as follows: ‘Misstatements, including omissions, are considered to be material if they,
individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the
basis of the financial statements.

If the financial statements include a material misstatement, then they will not present fairly (give a true and fair view) the
position, performance and cash flows of the entity.

A misstatement may be considered material due to its size (quantitative) and/or due to its nature (qualitative) or a
combination of both. The quantitative nature of a misstatement refers to its relative size. A misstatement which is material
due to its nature refers to an amount which might be low in value but due to its prominence and relevance could influence
the user’s decision, for example, directors’ transactions.

As per ISA 320, materiality is often calculated using benchmarks such as 5% of profit before tax or 1% of total revenue or
total assets. These values are useful as a starting point for assessing materiality, however, the assessment of what is
material is ultimately a matter of the auditor’s professional judgement. It is affected by the auditor’s perception of the
financial information, the needs of the users of the financial statements and the perceived level of risk; the higher the risk,
the lower the level of overall materiality.

In assessing materiality, the auditor must consider that a number of errors each with a low value may, when aggregated,
amount to a material misstatement.

Performance materiality
Performance materiality is defined in ISA 320 as follows: ‘The amount set by the auditor at less than materiality for the
financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as a whole.’

Hence performance materiality is set at a level lower than overall materiality for the financial statements as a whole. It is
used for testing individual transactions, account balances and disclosures. The aim of performance materiality is to
reduce the risk that the total of all of the errors in balances, transactions and disclosures exceeds overall materiality.

2018 - Sep, Dec

a) Explain why analytical procedures are used during THREE stages of an audit.
 Analytical procedures can be used at all stages of an audit, however, ISA 315 Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity and Its Environment and ISA 520 Analytical Procedures identify
three particular stages.
During the planning stage, analytical procedures must be used as risk assessment procedures in order to help the
auditor to obtain an understanding of the entity and assess the risk of material misstatement.
During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence. Substantive
procedures can either be tests of detail or substantive analytical procedures.

At the final review stage, the auditor must design and perform analytical procedures which assist them when forming an
overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.

(b) Calculate THREE ratios, for BOTH years, which would assist you in planning the audit of Darjeeling Co.
Ratios to assist the audit supervisor in planning the audit:
20X8 20X7
Gross margin 7,410/19,850 = 37·3% 6,190/16,990 = 36·4%
Inventory holding period 1,850/12,440 * 365 = 54 days 1,330/10,800 * 365 = 45 days
OR
Inventory turnover 12,440/1,850 = 6·7 10,800/1,330 = 8·1
Receivables collection period 2,750/19,850 * 365 = 51 days 1,780/16,990 * 365 = 38 days
Payables payment period 1,970/12,440 * 365 = 58 days 1,190/10,800 * 365 = 40 days
Current ratio 4,600/(1,970 + 810) = 1·65 3,670/1,190 = 3·08
Quick ratio 2,750/(1,970 + 810) = 0·99 (3,670 – 1,330)/1,190 = 1·97

2018 - Sep, Dec

(a) (i) Importance of communicating with those charged with governance
In accordance with ISA 260 Communication with Those Charged with Governance, it is important for the auditors to report
to those charged with governance as it helps in the following ways:
– It assists the auditor and those charged with governance in understanding matters related to the audit, and in
developing a constructive working relationship. This relationship is developed while maintaining the auditor’s
independence and objectivity.

– It helps the auditor in obtaining, from those charged with governance, information relevant to the audit. For example,
those charged with governance may assist the auditor in understanding the entity and its environment, in identifying
appropriate sources of audit evidence and in providing information about specific transactions or events.
– It helps those charged with governance in fulfilling their responsibility to oversee the financial reporting process, thereby
reducing the risks of material misstatement of the financial statements.
– It promotes effective two-way communication between the auditor and those charged with governance.

(ii) Matters to be communicated to those charged with governance

1 – The auditor’s responsibilities with regards to providing an opinion on the financial statements and that they have carried
out their work in accordance with International Standards on Auditing.
2 – The auditor should explain the planned approach to the audit as well as the audit timetable.
3 – Any key audit risks identified during the planning stage should be communicated.
4 – In addition, any significant difficulties encountered during the audit should be communicated.
5 – Also significant matters arising during the audit, as well as significant accounting adjustments.
6 – During the audit, any significant deficiencies in the internal control system identified should be communicated in writing
or verbally.
7 – How the external auditor and internal auditor may work together and any planned use of the work of the internal audit
function.
8 – Those charged with governance should be notified of any written representations required by the auditor.
9 – Other matters arising from the audit which are significant to the oversight of the financial reporting process.
10 – If any suspected frauds are identified during the audit, these must be communicated.
 11 – If the auditors are intending to make any modifications to the audit opinion, these should be communicated to those
charged with governance.
– For listed entities, a confirmation that the auditors have complied with ethical standards and appropriate safeguards
12 have been put in place for any ethical threats identified.

2018 - Mar, Jun

16(c) Describe assignments the internal audit department of Raspberry Co could carry out.
Value for money review – The IAD could be asked to assess whether Raspberry Co is obtaining value for money in areas
such as capital expenditure.

Review of financial/operational controls – The IAD could undertake reviews of controls at head office and the power
station and make recommendations to management over such areas as the purchasing process as well as the payroll
cycle.

Monitoring asset levels – The IAD could undertake physical verification of property, plant and equipment (PPE) at the
production site and head office and compare the assets seen to the PPE register. There is likely to be a significant level of
PPE and the asset register must be kept up to date to ensure continuous production. If significant negative differences
occur, this may be due to theft or fraud.

Regulatory compliance – Raspberry Co produces electricity and operates a power station, hence it will be subject to a
large number of laws and regulations such as health and safety and environmental legislation. The IAD could help to
monitor compliance with these regulations.

IT system reviews – Raspberry Co is likely to have a relatively complex computer system linking production data to head
office.

The IAD could be asked to perform a review over the computer environment and controls.

Cash controls – Raspberry Co’s internal auditors could undertake controls testing over cash payments. 70% of
employees are paid in cash rather than bank transfer, therefore on a weekly basis cash held is likely to be significant,
therefore the cash controls in payroll should be tested to reduce the level of errors.

Fraud investigations – The IAD can be asked to investigate any specific cases of suspected fraud as well as review the
controls in place to prevent/detect fraud.

(b) Areas to be included in the audit strategy document

The audit strategy sets out the scope, timing and direction of the audit and helps the development of the audit plan. ISA
300 Planning an Audit of Financial Statements sets out areas which should be considered and documented as part of the
audit strategy document and are as follows:

Main characteristics of the engagement

The audit strategy should consider the main characteristics of the engagement, which define its scope. For
Prancer Construction Co, the following are examples of things which should be included:
– Whether the financial information to be audited has been prepared in accordance with the relevant financial reporting
framework.
– Whether computer-assisted audit techniques will be used and the effect of IT on audit procedures.
– The availability of key personnel at Prancer Construction Co.
Reporting objectives, timing and nature of communication
It should ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the
communications required, such as:
– The audit timetable for reporting including the timing of interim and final stages.
– Organisation of meetings with Prancer Construction Co’s management to discuss any audit issues arising.
– Any discussions with management regarding the reports to be issued.
 – The timings of the audit team meetings and review of work performed.

Significant factors affecting the audit

The strategy should consider the factors which, in the auditor’s professional judgement, are significant in directing Prancer
Construction Co’s audit team’s efforts, such as:
– The determination of materiality for the audit.
– The need to maintain a questioning mind and to exercise professional scepticism in gathering and evaluating audit
evidence.
Preliminary engagement activities and knowledge from previous engagements
It should consider the results of preliminary audit planning activities and, where applicable, whether knowledge gained on
other engagements for Prancer Construction Co is relevant, such as:
– Results of any tests over the effectiveness of internal controls.

– Evidence of management’s commitment to the design, implementation and maintenance of sound internal controls.

– Volume of transactions, which may determine whether it is more efficient for the audit team to rely on internal controls.
– Significant business developments affecting Prancer Construction Co, such as the improvement in building practices
and construction quality.

Nature, timing and extent of resources

The audit strategy should ascertain the nature, timing and extent of resources necessary to perform the audit, such as:
– The selection of the audit team with experience of this type of industry.
– Assignment of audit work to the team members.
– Setting the audit budget.

18 (a) Steps in undertaking a positive receivables circularisation for Dashing Co

The following steps should be undertaken in carrying out a positive receivables circularisation:
– Obtain consent from the finance director of Dashing Co in advance of undertaking the circularisation.
– Obtain a list of trade receivables at the year end, cast this and agree it to the sales ledger control account total.
– Select a sample from the receivables list ensuring that a number of nil, old, credit and large balances are selected.
– Circularisation letters should be prepared on Dashing Co’s letterhead paper, requesting a confirmation of the year-end
receivables balance, and for replies to be sent directly to the audit team using a pre-paid envelope.
– The finance director of Dashing Co should be requested to sign all the letters prior to them being sent out by a member
of the audit team.
– Where no response is received, follow this up with another letter or a phone call and where necessary alternative
procedures should be performed
– When replies are received, they should be reconciled to Dashing Co’s receivables records, any differences such as
cash or goods in transit should be investigated further.

2017 MJ
a) Audit risk and the components of audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially
misstated. Audit risk is a function of two main components, being the risk of material misstatement and detection risk. Risk
of material misstatement is made up of a further two components, inherent risk and control risk.

1 Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement which could be material, either individually or when aggregated with other misstatements, before
consideration of any related controls.

2 Control risk is the risk that a misstatement which could occur in an assertion about a class of transaction, account balance
or disclosure and which could be material, either individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by the entity’s internal control.
3 Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will
not detect a misstatement which exists and which could be material, either individually or when aggregated with other
misstatements. Detection risk is affected by sampling and non-sampling risk.
AUDIT PLANNING
2020 - Dec, Sep
1) Explain the benefits of audit planning

1
2
3

5
6
AUDIT PLANNING
2020 - Dec, Sep
1) Explain the benefits of audit planning
Audit planning is addressed by ISA 300 Planning an Audit of Financial
Statements. It states that adequate planning benefits the audit of financial statements in several ways:
- Helping the auditor to devote appropriate attention to important areas of the audit.
- Helping the auditor to identify and resolve potential problems on a timely basis.
- Helping the auditor to properly organise and manage the audit engagement so that it is performed in an
effective and efficient manner.
- Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks and the proper assignment of work to them.
- Facilitating the direction and supervision of engagement team members and the review of their work.
- Assisting, where applicable, in coordination of work done by experts.
AUDIT PLANNING
2019 - Mar, June - (d) Corporate governance weaknesses and recommendations 2019 - Mar, June - (d) Corporate governance weaknesses and recommendations
The fact Weakness Recommendation
The finance director is a member of The audit committee should be made up entirely of independent NEDs. The audit committee must be comprised of independent NEDs only; therefore
the audit committee. the finance director should resign from the committee.
The role of the committee is to maintain objectivity with regards to
financial reporting; this is difficult if the finance director is a member
of the committee as the finance director will be responsible for the
preparation of the financial statements

The remuneration for directors is set No director should be involved in setting their own remuneration as There should be a fair and transparent policy in place for setting remuneration
by the finance director. this may result in excessive levels of pay being set. levels. The NEDs should form a remuneration committee to decide on the
remuneration of the executives. The board as a whole should decide on the pay
of the NEDs

Executive remuneration includes a Remuneration should motivate the directors to focus on the long-term The remuneration of executives should be restructured to include a significant
significant annual profit related growth of the business, however, annual targets can encourage short- proportion based on long-term company performance. For example, executives
bonus. term strategies rather than maximising shareholder wealth. could be granted share options, as this would encourage focus on the longer
term position.
The chairman has sole responsibility This is a role which the board as a whole should undertake. All members of the board should be involved in ensuring that satisfactory
for liaising with the shareholders and dialogue takes place with shareholders, for example, all should attend meetings
answering any of their questions. with shareholders such as the annual general meeting.

The board should state in the annual report the steps they have taken to ensure
that the members of the board, and in particular the non-executive directors,
develop an understanding of the views of major shareholders about the
company
GOING CONCERN
(d) Going concern procedures
1 – Obtain the company’s cash flow forecast and review the cash in and outflows. Assess the assumptions for
reasonableness and discuss the findings with management to understand if the company will have sufficient cash
flows.
2 – Perform a sensitivity analysis on the cash flows to understand the margin of safety the company has in terms of its
net cash in/outflow.
3 – Evaluate management’s plans for future actions, including their contingency plans in relation to ongoing financing
and plans for generating revenue, and consider the feasibility of these plans.
4 – Review the company’s post year-end sales and order book to assess if the levels of trade are likely to increase and
if the revenue figures in the cash flow forecast are reasonable.
5 – Review any agreements with the bank to determine whether any covenants have been breached, especially in
relation to the overdraft.
6 – Review any bank correspondence to assess the likelihood of the bank renewing the overdraft facility.
7 – Review post year-end correspondence with suppliers to identify if any have threatened legal action or any others
have refused to supply goods.
8 – Obtain a written representation confirming the directors’ view that Marlin Co is a going concern.
9 – Inspect any contracts or correspondence with suppliers to confirm supply of the company’s specialist equipment. If
no new supplier has been confirmed, discuss with management their plans to ensure the company can continue to
meet customer demand.
10 – Enquire of the lawyers of Marlin Co as to the existence of any litigation.
11 – Perform audit tests in relation to subsequent events to identify any items which might indicate or mitigate the risk
of going concern not being appropriate.
12 – Review the post year-end board minutes to identify any other issues which might indicate further financial
difficulties for the company.
13 – Review post year-end management accounts to assess if in line with cash flow forecast.
14 – Consider whether any additional disclosures as required by IAS 1 Presentation of Financial Statements in relation
to material uncertainties over going concern should be made in the financial statements.
15 – Consider whether the going concern basis is appropriate for the preparation of the financial statements.
16 – Obtain a written representation confirming the directors’ view that Marlin Co is a going concern.

2019 - Sep, Dec

(c) Going concern indicators

Marlin Co has paid some of its suppliers considerably later than usual and only after many reminders; hence some of
them have withdrawn credit terms meaning the company must pay cash on delivery. This suggests that the company
was struggling to meet their liability as they fell due and will also put significant additional pressure on the
company’s cash flow, because the company will have to pay for goods on delivery but is likely to have to wait for
cash from its receivables due to credit terms.

Marlin Co’s main supplier who provides over 60% of the company’s specialist equipment has just stopped trading. If
the equipment is highly specialised, there is a risk that Marlin Co may not be able to obtain these products from other
suppliers which would impact on the company’s ability to trade. More likely, there are other suppliers available but
they may be more expensive or may not offer favourable credit terms which will increase the outflows of Marlin Co
and worsen the cash flow position.

Marlin Co’s overdraft has grown significantly during the year and is due for renewal within the next month. If the
bank does not renew the overdraft and the company is unable to obtain alternative finance, then it may not be able to
continue to meet its liabilities as they fall due, especially if suppliers continue to demand cash on delivery, and the
company may not be able to continue to trade. In order to conserve cash, Marlin Co has decided not to pay a final
dividend for the year ended 30 April 20X5. This may result in shareholders losing faith in the company and they may
attempt to sell their shares; in addition, they are highly unlikely to invest further equity, and Marlin Co may need to
raise finance to repay their overdraft.
AUDIT REPORT
I) Make provision, Wrong recording non-tangible asset instead of expenses
This is material matter

If the directors refuse to make a provision -> should issue a modified opinion on the grounds that there is a
material misstatement of profit and liabilities. As this is material but not pervasive a qualified opinion
would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph.

This would explain the material misstatement in relation to the non-recognition of the provision and the
effect on the financial statements. The opinion paragraph would be qualified ‘except for’.

II) Disclosure

Adequate disclosure

If Purrfect Co adequately discloses the issue, then an unmodified audit opinion should be given but the
auditor’s report should include an emphasis of matter paragraph. This would draw attention to the disclosure
in the financial statements by cross-referencing the user to the note in the financial statements which
discloses the possible claims, emphasising that the audit opinion is unmodified.

Inadequate disclosure

If there is no disclosure in the financial statements or the disclosure is considered to be inadequate, then this
indicates that the financial statements are materially misstated. As this lack of adequate disclosure is likely to
be material but not pervasive, then a qualified opinion will be given. A basis for qualified opinion paragraph
will be added to the auditor’s report discussing the matter and the opinion paragraph will be modified to state
that ‘except for’ the failure to adequately disclose the matter, the financial statements give a true and fair
view.

2020 - Dec, Sep

d) Impact on Auditor’s report - Restructuring provision

The restructuring provision of $2.1 million includes $270,000 of costs which do not meet the criteria for
inclusion as per IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Hence by including this
amount the provision and expenses for this year are overstated and profits understated.

The error is material as it represents 2.3% of total equity and liabilities/ total assets (0·27m/11.6m) and hence
the finance director should adjust the financial statements by removing this cost from the provision and
instead expensing it to profit or loss as it is incurred. The argument that the provision is judgemental and has
been deemed reasonable by the board is not valid. IAS 37 has strict criteria for what can and cannot be
included within a restructuring provision. For example, training costs for existing staff must be specifically
excluded.

If the finance director refuses to amend this error the audit opinion will be modified due to a material
misstatement. As management has not complied with IAS 37 and the error is material but not pervasive, a
qualified opinion would be appropriate.

A basis for qualified opinion paragraph would be included after the opinion paragraph and would explain the
material misstatement in relation to the incorrect treatment of the restructuring provision and the effect on the
financial statements. The opinion paragraph would be qualified ‘except for’

2020 - Mar, Jun

(d) Issue and impact on auditor’s report - Contamination event
 According to IAS 37, the possibility of additional claims should be disclosed as a contingent liability as it is
possible but not probable and quantifiable.
As the claims may be significant, this issue represents a matter which is fundamental to users’ understanding
of the financial statements. The impact on the auditor’s report depends on whether this matter is deemed to
be adequately disclosed in the financial statements.

Adequate disclosure
If Purrfect Co adequately discloses the issue, then an unmodified audit opinion should be given but the
auditor’s report should include an emphasis of matter paragraph. This would draw attention to the disclosure
in the financial statements by cross-referencing the user to the note in the financial statements which
discloses the possible claims, emphasising that the audit opinion is unmodified.

Inadequate disclosure

If there is no disclosure in the financial statements or the disclosure is considered to be inadequate, then this
indicates that the financial statements are materially misstated. As this lack of adequate disclosure is likely to
be material but not pervasive, then a qualified opinion will be given. A basis for qualified opinion paragraph
will be added to the auditor’s report discussing the matter and the opinion paragraph will be modified to state
that ‘except for’ the failure to adequately disclose the matter, the financial statements give a true and fair
view.

2020 - Mar, Jun

d) Auditor’s report - Breach regulation

The breaches in regulations and the initial investigation into the breaches occurred before the year end. The
announcement by the authorities that they are taking legal action provides further evidence regarding these
conditions which existed at the year end date therefore IAS 10 Events after the Reporting Period would
classify this as an adjusting subsequent event. As it seems probable that the fine will be payable, a provision
must be included rather than merely the disclosure. Failure to make such a provision will cause profits to be
overstated and provisions to be understated.

The potential fine of $850,000 (17 x $50,000) is 16% ($850k/$5.3m) of profit before tax and 2.1%
($850k/$40.1m) of total assets. It is therefore material.

If the directors refuse to make a provision, then Velo & Co should issue a modified opinion on the grounds
that there is a material misstatement of profit and liabilities. As this is material but not pervasive a qualified
opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph.

This would explain the material misstatement in relation to the non-recognition of the provision and the
effect on the financial statements. The opinion paragraph would be qualified ‘except for’.

2018 - Sep, Dec

(d) Discuss the issue and describe the impact on the auditor’s report of Jasmine Co of adequate AND
inadequate going concern disclosure.
As the outcome regarding the negotiations for the overdraft facility renewal will not be known at the time of
signing the auditor’s report, there is a material uncertainty which may cast significant doubt on the
company’s ability to continue as a going concern.
The impact on the auditor’s report depends on whether this uncertainty is deemed to be adequately disclosed
in the financial statements.

Disclosure adequate
 If the disclosures are adequate, then the auditor’s report will need to include a material uncertainty related to
going concern section. The section will state that the audit opinion is not modified, indicate that there is a
material uncertainty and will cross reference to the disclosure note made by management. It would be
included after the opinion and basis for opinion paragraph.

Disclosure inadequate

If the disclosures made by management are not adequate, the audit opinion will need to be modified as there
is a material misstatement relating to inadequate disclosure. The failure to adequately disclose is likely to be
material but not pervasive due to the ongoing nature of the negotiations and so a qualified opinion will be
issued.

The opinion paragraph will state that ‘except for’ the failure to adequately disclose the uncertainty, the
financial statements give a true and fair view. The report will contain a basis for opinion paragraph,
subsequent to the opinion paragraph, explaining that a material uncertainty exists and that the financial
statements do not adequately disclose this matter.

2018 - Mar, Jun

(d) Impact on auditor’s report - R&D expenses

One of the new health and beauty products Gooseberry Co has developed in the year does not meet the
recognition criteria under IAS 38 Intangible Assets for capitalisation but has been included within intangible
assets. This is contrary to IAS 38, as if the criteria are not met, then this project is research expenditure and
should be expensed to the statement of profit or loss rather than capitalised.

The error is material as it represents 6·9% of profit before tax (0·44m/6·4m) and 1·2% of net assets
(0·44m/37·2m) and hence management should adjust the financial statements by removing this amount from
intangible assets and charging it to the statement of profit or loss instead. IAS 38 requires costs to date to be
expensed; if the project meets the recognition criteria in 20X9, then only from that point can any new costs
incurred be capitalised. Any costs already expensed cannot be written back to assets.

If management refuses to amend this error, then the auditor’s opinion will need to be modified. As
management has not complied with IAS 38 and the error is material but not pervasive, then a qualified
opinion would be necessary.

A basis for qualified opinion paragraph would be needed after the opinion paragraph and would explain the
material misstatement in relation to the incorrect treatment of research and development and the effect on the
financial statements. The opinion paragraph would be qualified ‘except for’.

2017 SD
(d) Impact on auditor’s report - Redundancy provision

The company has included a redundancy provision of $110,000 in the draft financial statements, however,
audit fieldwork testing has confirmed that the provision should actually be $305,000. The provision is
understated and profit before tax overstated if the finance director does not amend the financial statements.

The provision included is $110,000, it should be $305,000 hence an adjustment of $195,000 is required
which represents 7·5% of profit before tax (195/2,600) or 1·1% of total assets (195/18,000) and hence is a
material matter.

If management does not adjust the redundancy provision, the auditor’s report will need to be modified. As
provisions are understated and profit overstated, there is a material misstatement, which is not pervasive.
Therefore, a qualified opinion would be necessary, stating that the opinion is qualified ‘except for’. A basis
for qualified opinion paragraph would also need to be included subsequent to the opinion paragraph. This
would explain the material misstatement in relation to the redundancy provision and the effect on the
financial statements.
Specimen - Impact of misstatement on auditor's report

Dicuss with the management of Vieri why they are refusing to make the amendment to WIP. Assesss the
materiality of the error, if immaterial, it should be added to the schedule of unadjusted differences. The audit
should then assess whether this erros results in the total of unadjusted differences becoming material; if so,
this should be discussed with management; if not, there would be no impact on the audit report

If the erros is material and management refused to amend the fianancial statement, the the audit report will
need to be modified. It is unlikely that any error would be perasive as although WIP in total is material, it
would not have a pervasive effect on the financial statement as a whole. As management has not complied
with IAS 2 Inventories and if the error is material but not pervasive, the a qualified opinion would be
necessary. The opinion paragraph would be qualiied "exept for".

As basis for qualified opinion paragraph would need to be included after the opinion paragraph. This would
explain the material misstatement in realtion to the valuation of WIP and the effect on the FS
AUDIT REPORT

Case 1: Audit issue -> disagreement with customer

Materiality and NOT Pervasive
=> QUALIFIED OPINION (Except… for)

Case 2: Audit issue -> disagreement with customer

Materiality and Pervasive
=> ADVERSE

Case 3: Audit issue -> Limitation on scope

Materiality and NOT Pervasive
=> QUALIFIED OPINION (Except… for)

Audit issue -> Limitation on scope

Materiality and Pervasive
Case 4: => DISCLAIMER
2019 - MAR, JUN - (D) SUBSEQUENT EVENT Subsequent even
A flood has occurred at the off-site warehouse and property, plant and equipment and inventory valued at $0·7 million
have been damaged and now have no scrap value. The directors do not believe they are likely to be able to claim on the
company’s insurance for the damaged assets. This event occurred after the reporting period and is not an event which
provides evidence of a condition at the year end and so this is a non-adjusting event.

The damaged assets of $0·7 million are material as they represent 10·9% ($0·7m/$6·4m) of profit before tax and 3·0%
($0·7m/$23·2m) of total assets. As a material non-adjusting event, the assets do not need to be written down to zero in
this financial year. However, the directors should consider including a disclosure note detailing the flood and the value
of assets impacted.
The following audit procedures should be applied to form a conclusion on any amendment:
1 – Obtain a schedule showing the damaged property, plant and equipment and agree the net book value to the non-
current assets register to confirm the total value of affected assets.
2
– Obtain a schedule of the water damaged inventory, visit the off-site warehouse and physically inspect the impacted
inventory. Confirm the quantity of goods present in the warehouse to the schedule; agree the original cost to pre year-
end production costs.
3 – Review the condition of other PPE and inventory to confirm all damaged assets identified.
4 – Review the damaged property, plant and equipment and inventory and discuss with management the basis for the zero
scrap value assessment.
5
– Discuss with management why they do not believe that they are able to claim on their insurance; if a claim were to be
made, then only uninsured losses would require disclosure, and this may be an immaterial amount.
6 – Discuss with management whether they will disclose the effect of the flood, as a non-adjusting event, in the year-end
financial statements.

SAFEGUARDS
2020 - Dec, Sep: Khi kiểm toán cho 2 khách hàng là đối thủ của nhau
1 • Both Hart Co and its competitor should be notified that Morph & Co would be acting as auditors for each company and
consent should be obtained from management of each company.
2 • Morph & Co should consider advising one or both clients to seek additional independent advice.
3
• Morph & Co must ensure it appoints separate engagement teams, with different engagement partners and team
members to each client; once an employee has worked on one audit, such as Hart Co, then they should be prevented
from being on the audit of the competitor for a period of time.
4 • Adequate procedures should be in place within the firm to prevent access to information, for example, strict physical
separation of both teams, confidential and secure data filing.
5 • Morph & Co must set out clear guidelines for members of each engagement team on issues of security and
confidentiality. These guidelines could be included within the audit engagement letters sent to each client.
6 • Morph & Co should consider the use of confidentiality agreements signed by all members of the engagement teams of
Hart Co and the competitor.
7 • Work performed should be reviewed by an appropriate reviewer who is not involved in the audit to assess whether key
judgements and conclusions are appropriate.
8 • Regular monitoring of the application of the above safeguards should be undertaken by a senior individual in Morph &
Co not involved in either audit.
equent event
2017 MJ 2017 MJ
(c) Ethical threats and safeguards
The fact (i) Ethical threat (ii) Possible safeguard

The engagement partner should discuss the timing of the audit with the
finance director to understand if the audit can commence earlier, so as to
ensure adequate time for the team to gather evidence.
This may create an intimidation threat on the team as
The finance director is keen to report Hurling
they may feel under pressure to cut corners and not If this is not possible, the partner should politely inform the finance director
Co’s financial results earlier than normal and
raise issues in order to satisfy the deadlines and this that the team will undertake the audit in accordance with all relevant ISAs
has asked if the audit can be completed in a
could compromise the objectivity of the audit team and and quality control procedures. Therefore the audit is unlikely to be
shorter time frame.
quality of audit performed. completed earlier.

If any residual concerns remain or the intimidation threat continues, then

Caving & Co may need to consider resigning from the engagement.

A non-executive director (NED) of Hurling Co
has just resigned and the directors have
asked whether the partners of Caving & Co
can assist them in recruiting to fill this
vacancy.
Caving & Co is able to assist Hurling Co in that they can undertake roles
such as reviewing a shortlist of candidates and reviewing qualifications and
This represents a self-interest threat as the audit firm suitability.
cannot undertake the recruitment of members of the
board of Hurling Co, especially a NED who will have a However, the firm must ensure that they are not seen to undertake
key role in overseeing the audit process and audit firm. management decisions and so must not seek out candidates for the position
or make the final decision on who is appointed.

This represents a familiarity threat as the partner will

The engagement quality control reviewer As Hurling Co is a listed company, then the previous audit engagement
have been associated with Hurling Co for a long period
(EQCR) assigned to Hurling Co was until last partner should not be involved in the audit for at least a period of two years.
of time and so may not retain professional scepticism
year the audit engagement partner. An alternative EQCR should be appointed instead.
and objectivity

Caving & Co should assess whether audit, recruitment and taxation fees
would represent more than 15% of gross practice income for two consecutive
years.

There is a potential self-interest or intimidation threat If the recurring fees are likely to exceed 15% of annual practice income this
as the total fees could represent a significant year, additional consideration should be given as to whether the recruitment
Caving & Co provides taxation services, the
proportion of Caving & Co’s income and the firm could and taxation services should be undertaken by the firm.
audit engagement and possibly services
become overly reliant on Hurling Co, resulting in the
related to the recruitment of the NED.
firm being less challenging or objective due to fear of In addition, if the fees do exceed 15%, then this should be disclosed to those
losing such a significant client. charged with governance at Hurling Co.

If the firm retains all work, it should arrange for a pre-issuance (before the
audit opinion is issued) or post-issuance (after the opinion has been issued)
review to be undertaken by an external accountant or by a regulatory body.

Contingent fees give rise to a self-interest threat and

The finance director has suggested that the Caving & Co will not be able to accept contingent fees and should
are prohibited under ACCA’s Code of Ethics and
audit fee is based on the profit before tax of communicate to those charged with governance at Hurling Co that the
Conduct. If the audit fee is based on profit, the team
Hurling Co which constitutes a contingent fee. external audit fee needs to be based on the time spent and levels of skill and
may be inclined to ignore audit adjustments which
experience of the required audit team members
could lead to a reduction in profit.
 A self-interest threat can arise if the fees remain Caving & Co should discuss with those charged with governance the reasons
At today’s date, 20% of last year’s audit fee is outstanding, as Caving & Co may feel pressure to why the final 20% of last year’s fee has not been paid.
still outstanding and was due for payment agree to certain accounting adjustments in order to
three months ago. have the previous year and this year’s audit fee paid. They should agree a revised payment schedule which will result in the fees
being settled before much more work is performed for the current year audit.
In addition, outstanding fees could be perceived as a
loan to a client which is strictly prohibited.