No.
Issue Audit risk
1 Refurbish all its mini mart
2 Increased/high workload
3 Use a number of strategies
4 Company has been your client,
for two years
5 Company intends to undertake,
stock exchange listing
6 New accounting system was introduced,
and Post Implementation testing,
has not been conducted.
7 The company is a new client,
Of the audit firm
Auditors respon
1) Wrong recording of capex and revex.
1) There may be errors that is material,
to the FS.
1) There may be manipulation of FS. 1) Maintain professional sce
[To show favourable results]
2) On guard with matter of j
1) To maximise the success of 1) The company should emp
potential listing, the company need to, more experienced audit team
present FS to show preferable: with adequate time to perfo
# Performance (SOPL) [To obtain an understanding
# Financial Position (SOFP) and its RMM]
2) There may be manipulation of FS.
[To show favourable results]
Ex: By Overstating asset/profit/revenue.
1) There may be a risk that, 1) The audit team should un
opening balance may be misstated
and possible loss of data. [To confirm that all balances
completely & accurately to t
[If it is not transferred properly,
from the old system]
1) The audit team is not familliar with, 1) The audit firm should emp
the accounting policies and transactions with adequate time to perfo
of the company.
[To obtain an understanding
2) There will be an increased in and the RMM]
Detection risk in the audit.
2) Maintain professional ske
3) There also less assurance on And be alert to any possible
the Opening Bal. of the company,
 as the audit firm did not perform an
audit for the company before.

8 The directors are paid bonus, 1) There is a risk that the director, 1) The audit firm should emp
based on the percentage of PBT. may overstate profits. for the audit.

[To investigate significant es

and Judgemental areas (whi

9
 Auditors response

1) Maintain professional scepticism.

2) On guard with matter of judgement.

1) The company should employ,

more experienced audit team,
with adequate time to perform an audit.

[To obtain an understanding of the company,

and its RMM]

1) The audit team should undertake detailed testing.

[To confirm that all balances has been transferred,

completely & accurately to the new accounting system.]

1) The audit firm should employ experienced audit team,

with adequate time to perform an audit.

[To obtain an understanding of the company,

and the RMM]

2) Maintain professional skepticism by maintaining a questioning mind,

And be alert to any possible existence of errors or fraud.
1) The audit firm should employ experienced audit team,
for the audit.

[To investigate significant estimates,

and Judgemental areas (which can be manipulated by the directors)]
No. Issue
1 Generous sales bonus,
for salesmen
2 Revenue increase by 28% but,
COS only increase by 10%,
from 2019 to 2020.
3 Company has a return policy,
[Allows a customer to return goods
within 28 days if dissatisfied with the
product.]
4 Cutomer pay 25% deposit,
on signing a contract to purchase
the playgrounds.
5
Audit risk
1) Possibility of sales may be overstated.
[Via sales cut off errors.]
1) There may be increase in sales,
due to sales bonus scheme.
2) Sales may be overstated.
1) According to IFRS 15,
[Revenue should only be recognise,
to the extent that goods will not be
returned]
2) Company should recognise a
refund liability for goods that are
expected to be returned.
3) If not,
# Revenue may be overstated.
# Refund Liability may be understated.
1) There may be a risk that,
# Revenue is overstated
# CL is understated
[If the deposits have been recorded,
as a revenue]
Audit response
1) Perform more cut-off testi
2) Review post-year end retu
adjusted to prior years.
1) The auditor needs to acqu
breakdown of sales during th
2)Inquire with management
to obtain an understanding r
1) Discuss with management
[regarding the assumptions u
the reasonableness of the re
1) The audit team should ob
a copy of the contract.
[To obtain an understanding
performance obligations be
the 2 parties]
2) Perform cut-off testing on
[To confirm the amount disc
are Complete and Accurate]
 Audit response
1) Perform more cut-off testing.

2) Review post-year end returns if,

adjusted to prior years.
1) The auditor needs to acquire,
breakdown of sales during the audit.

2)Inquire with management/Obtain written representation/Review Board Minutes,

to obtain an understanding regarding the increase in sales.

1) Discuss with management,

[regarding the assumptions used in determining
the reasonableness of the refund liability]

1) The audit team should obtain

a copy of the contract.

[To obtain an understanding of the

performance obligations between
the 2 parties]

2) Perform cut-off testing on revenue.

[To confirm the amount disclosed in the FS,

are Complete and Accurate]
No. Issue Audit risk
1 Suplier is from Asia (other countries) 1) There may be a risk that,
the company may not take into
[Ask miss ####] consideration the foreign exchange and
currency value when purchasing goods
from its supplier in Asia.
Audit response
1) Reperform calculation on
[to confirm the amount discl
are Complete and Accurate.]

2) There may be a risk that the purchase

are overstated or understated.
 Audit response
1) Reperform calculation on the purchase,
[to confirm the amount disclosed in FS,
are Complete and Accurate.]
No. Issue
1 Year end inventory count at,
all (25/many) warehouses.
2 Inventory is valued at,
[Selling price less average profit margin.] as it might not be a close approximation,
3 Inventory valuation policy,
include overheads
4 Company holds inventory of $227k,
that can no longer sell in home market.
[Believes it can be sold to international
customer, but there will be significant
additional cost needed to be incurred]
5 Company purchase their goods
from it supplier in Asia and has
responsibility for goods at the point
of dispatch by the supplier.
[The goods are in transit,
for up to one month]
6
Audit risk Audit response
1) The auditor may not be able, 1) The audit team should ass
to attend all warehouse, which of the inventory coun
year end inventory count. [The warehouse should be a
for other inventory counts]
1)Inventory may be incorrectly valued,
to IAS 2 Inventories.
2) The inventories might be understated,
or overstated
1) Inventory may be incorrectly valued, 1) Inquire with managemen
as it might not be a close approximation, whether the overheads are
to IAS 2 inventories. to production.
2) The inventories might be understated, 2) Obtain written representa
or overstated. to confirm whether the over
are related to production.
1) There may be a risk that NRV, 1) Review if necessary adjust
of the inventory is less than cost. has been made.
[Applied to items affected by
2) The inventory may be overstated, accounting policies]
the COS may be understated. [Ask miss ######]
1) There may be a risk that the cut-off, 1) Review the internal contro
for the purchases may not be accurate. [To ensure inventory is recor
from the point of dispatch]
[This is due to the fact that the company,
may not correctly recognise the
goods from the point of dispatch]
2) Hence,
#Inventory and trade payables may
be understated.
 Audit response
1) The audit team should assess,
which of the inventory counts they will attend.
[The warehouse should be a representative
for other inventory counts]
2) The auditors most likely required to,
attend inventory counts which has,
the great risk of material misstatemets.(RMM)

1) Inquire with management,

whether the overheads are related,
to production.

2) Obtain written representation from the management,

to confirm whether the overheads,
are related to production.

1) Review if necessary adjustment,

has been made.
[Applied to items affected by
accounting policies]
[Ask miss ######]

1) Review the internal controls of the company.

[To ensure inventory is recorded,
from the point of dispatch]
No. Issue
1 Disposal of warehouse
2 Renting 2 warehouse
3 Purchased a manufacuring line(NCA).
The cost include:
# Purchase price $2.2m.
# Installation cost $0.4m.
# Not DAC:
a) 5 years service &
mainatanance cost $0.5m
b)
4 Company included in wages expenses,
staff costs involved in site preparation,
and testing of new machinery.
5 Directors extend the UL of PPE,
by average 5 years.
[Despite the fact that the machinery
was disposed at a loss.]
Audit risk Audit resp
1) The asset is not recorded in,
NCA register.
2) Incorrect treatment of depreciation.
[Dep. should be recorded, but
currently not.]
1) The capex might be treated as revex.
[V1] 1) Review the purchase
1) According to IAS 16, for the purchase of man
the cost of the asset only includes, to confirm the exact cos
[Purchase price + Direct attribute cost (DAC)]
2) Discuss with manage
2) IAS 16, does not allow, [regarding the accounti
service and maintanance cost to and review if disclosure
be capitalised as NCA. with the IAS 16]
3)The expense should be treated,
as revex.
4) If not adjusted, the assets/profits,
may be overstated
1) According to IAS 16, 1) The auditors should d
[Costs that directly attribute (needed), [regarding the accounti
to bring the asset to necessary condition,
for its intended use are to be capitalised.] 2) Review if any necessa
has been made.
2) Hence, the staff cost has been incorrectly
treated as revex intead of capex.
3)if not adjusted,
# Wages exp. may be overstated.
# NCA may be understated
1) According to IAS 16, 1) The auditors should d
[regarding the rationale
# UL of assets should be reveiewed annually.
[Ask miss #####]
# If assets UL has genuinely increased. 2)

6 The company purchased/installed
a new dispatch system (NCA)
[The cost capitalised includes
staff training cost.]
# Reducing the Dep. Should be appropriate.
[Dep.(down)=Cost/UL(up)]
2) However, the assets was disposed
at a loss, which contradicts the decision,
of increasing the UL of the assets.
3) The asset may be overstated,
and the Dep. may be understated.
1) According to IAS 16, 1) The auditors should d
[regarding the accounti
# The cost of an asset only includes:
[Purchase price+ Directly Attribute Cost] 2) Review if any necessa
has been made.
# Cost required to bring NCA to its,
necessary condition and intended use, ###
are to be capitalised.
[Ask miss ###]
2) The training cost should not be
capitalised as it does not bring NCA
to its necessary condition and intended use.
3) The training cost should be expensed
to SOPL. (revex)
4) If not adjusted:
# NCA/profits may be overstated.
 Audit response

1) Review the purchase documents,

for the purchase of manufacturing line,
to confirm the exact cost of the asset.

2) Discuss with management

[regarding the accounting treatment,
and review if disclosures made comply
with the IAS 16]

1) The auditors should discuss with management,

[regarding the accounting treatment applied.]

2) Review if any necessary adjustment,

has been made.

1) The auditors should discusswith the directors (management).

[regarding the rationale of extending the UL of the machinery]

[Ask miss #####]

Review Board Minutes/Written Representation.
1) The auditors should discuss with management,
[regarding the accounting treatment applied.]

2) Review if any necessary adjustment,

has been made.

[Request to finance director that,

training cost are expensed to SOPL,
to ensure compliance with IAS 16]

[Ask miss ###]

No. Issue
1 Company spent $0.9m on,
developing new products,
which on early stage of development
cycle.
[There may be research cost involved,
especially on early development cycle.]
# If approved by authorities:
Before research:
After research:
2 Based on the above issue, if the
research expense incorrectly capitalised,
as development cost (IA).
[Higher IA=Higher amortisation]
Audit risk Audit res
1) The expense is classed as, 1) Obtain a breakdown
Research and Development expense, to verify expenditures
under IAS 38 "IA". development of the ne
2) Research expense, 2) Discuss with manag
[should be expensed to SOPL] regarding the accounti
in identifying research
3) Development cost,
[Should be capitalised as IA]
4) The company included all expense,
as capital expenditure(IA).
5) There may be a possibility that,
research expense incorrectly treated,
as capital expenditure(IA).
6) If not adjusted,
# The IA may be overstated
# Research exp. may be understated
1) The amortisation expense may be, 1) Reperform the amo
incorrectly calculated. to confirm that the am
2) Capitalised expense should be,
amortised over its useful life.
[starting when the process is brought
into use.]
[Ask miss ########]
3) If not adjusted,
# Amortisation expense may be
overstated.
# Profits may be understated.
 Audit response
1) Obtain a breakdown of the capitalized expenditure,
to verify expenditures relevant to the,
development of the new product.

2) Discuss with management,

regarding the accounting policy applied,
in identifying research and development stage.

1) Reperform the amortisation calculations,

to confirm that the amounts are accurate
No. Issue
1 Repayment of bank loan
2 [V1]
Company borrowed $4m,
from the bank via eight-year loan.
[V2]
Company obtained interest bearing,
bank loan in the year,
repayable over 3 years times.
3 The level of debt has increased,
[There should be additional finance cost, additional finance cost is ommited/
as the loan has interest rate of 5%]
4 Finance cost are paid in arrears.
Audit risk
1) The interest on loan may,
be deemed as capex.(loan repayment)
1) There may be a risk that,
the loan is incorrectly disclosed,
in the FS.
[Which may lead to classification errors,
and liabilities being misstated.]
2) The loan need to be correctly,
splitted into NCL and CL,
to ensure correct disclosure.
1) There may be a risk that,
not recorded in SOPL.
2) Finance cost is understated,
and profit is overstated.
1) There may be a risk that,
Finance cost incorrectly accrued
during the year end.
2) As a result,
#Accruals/Finance cost may be
understated or overstated.
Audit response
1) Review the disclosure of t
in the FS.
[To ensure it is in compliance
accounting standards/local l
2) Review Loan Agreement/C
[To ensure it is in compliance
accounting standards/local l
3) Recalculate calculations.
[To confirm the loan has bee
into CL and NCL accurately]
1)Finance cost should be rec
and agreed to the loan agree
[To confirm the finance cost
based on 5% interest rate]
1)Finance cost should be rec
and agreed to accruals sched
 Audit response

1) Review the disclosure of the loan, [Ask miss ####]

[To ensure it is in compliance with,

accounting standards/local legislation]

2) Review Loan Agreement/Covenant.

[To ensure it is in compliance with,
accounting standards/local legislation]

3) Recalculate calculations.
[To confirm the loan has been splitted,
into CL and NCL accurately]

1)Finance cost should be recalculated,

and agreed to the loan agreement.

[To confirm the finance cost is calculated,

based on 5% interest rate]

1)Finance cost should be recalculated,

and agreed to accruals schedule.
No. Issue Audit risk
1 Extended credit period, 1) Risk of being unable to recover,
to customers receivables amount.

Signs/Clues: 2) TR may be overstated.

# Increased TR days
# [Increased TR collection
period]

2 Receivables collection period has 1) Risk of being unable to recover,

increased, and the allowance for receivables receivables amount.
remain the same as the prior years.
2) TR may be overstated.

3) If additional allowance for receivables,

are not included in FS:

[The allowance for receivables

may be understated]

3
 Audit response
1) Extend post-year end,
cash receipt testing.(to recover TR as much as possible.)

2) Obtain a breakdown of receivables from debtors list.

[To identify receivables that may not be recoverable]
[Then, plan for required provisions/write-off]
No. Issue
1 The directors have not accounted,
costs under the new contract,
as no amounts are due to be paid,
until after year-end.
2
Audit risk
1) There is a risk that the cost
incurred to date are not recognised.
2) Hence,
# Cost/Liabilities may be
understated.
# Profits are overstated.
Audit response
1) The auditor should perfor
[To ensure the amount disclo
are Complete and Accurate.]
2) The auditor should review
[To understand the amounts
 Audit response
1) The auditor should perform cut-off testing.

[To ensure the amount disclosed in FS

are Complete and Accurate.]

2) The auditor should review the terms of the contract.

[To understand the amounts payable and terms of payment.]

No. Issue
1 Supplier has launced legal claims
against the company.
[Claim is not settled, but the company's
lawyer believe that they are likely to
pay $0.3m]
2 The company provides a six-month
warranty on its product which
require defects to be repaired at
the company own's expense.
[Directors reduced this provision,
on the grounds/basis that the products
they sell are built to a high standard.]
3 The company offer to its customers,
a warranty at no extra cost.
[Which guarantees the playground
will function as expected for 3 years]
[The provision is calculated as
2% of the revenue in current year
against 6% in prior year]
[Despite there is no change,
in the construction technique or
level of claims]
Audit risk
1) It is probable that the company,
need to pay to supplier.
2) According to IAS 37,
# A provision is required to be made,
for the payment.
3) There is a risk that the,
provisions and expenses are understated.
[If company does not recognise the
liability (provision) related to the
legal claims from the supplier.]
1) This concept only applies for a
manufacturing company.
2) This company is a company,
that only sells the product.
3) Hence,
[if company has reduced the warranty
provision in excess:]
# Liabilities/expenses may be understated.
1) The may be a risk that,
# Warranty provision is understated
causing:
# Liabilities/expenses may be understated.
Audit respon
1) The audit team should r
from the company's lawye
[To obtain an understandi
of the supplier winning the
the amount of payment re
1) Discuss with manageme
[Regarding the reasonable
in reducing the warranty p
2) Reperform calculation o
[To ensure the amount dis
is complete and accurate]
1) Discuss with manageme
[Regarding the reasonable
in reducing the warranty p
2) The audit team should c
prior year provisions again
[To assess the reasonablen
made by the management
 Audit response
1) The audit team should review correspondence,
from the company's lawyer (company's expert).

[To obtain an understanding on the likelihood

of the supplier winning the case and,
the amount of payment required]

1) Discuss with management,

[Regarding the reasonableness of directors decision,
in reducing the warranty provision]

2) Reperform calculation of the warranty provision.

[To ensure the amount disclosed in FS
is complete and accurate]

1) Discuss with management,

[Regarding the reasonableness of directors decision,
in reducing the warranty provision]

2) The audit team should compare

prior year provisions against current year claims.

[To assess the reasonableness of judgement,

made by the management, regarding the current year warranty provision.
No. Issue Audit risk Audit respon
1 Financial controller left and, 1) The Internal Control is weak.
his replacement will start late,
in August. 2) There may be errors that,
are material to FS.

2 A member of the company, 1) There may be a risk that,
purchased assets for personal use. NCA are overstated due to,
addition of personal assets purchased.
The reconciliation of physical assets,
to NCA register will be on-going at year end. 2) Control risk increased,
[If fraud was undetected for
a long time.]
1) The auditors must discu
# To understand how(proc
was detected and correcte
2) To understand the inter
# To prevent fraud from re

3 The payables ledger supervisor was
dismissed due to a fraud.
The value of the fraud was recognised
as an expense in draft SOPL
1) If additional frauds commited by
payable ledger supervisor are
not discovered:
# The expense may be overstated
# The payables may be overstated.
2) Control risk increased,
1) The auditors must discu
# To understand how(proc
was detected and correcte
# maintain professional ske
more potential frauds and

[If fraud was undetected for 3) Do more Substantive Pr

a long time.]

4
 Audit response

1) The auditors must discuss with management.

# To understand how(procedure) the fraud,

was detected and corrected.

2) To understand the internal controls of the company.

# To prevent fraud from reoccurring in the future.

1) The auditors must discuss with management.

# To understand how(procedure) the fraud,

was detected and corrected.

# maintain professional skeptical and alert to

more potential frauds and error.

3) Do more Substantive Procedure on the payable ledgers.

No. Issue Audit risk Audit response
1
Audit response
No. Issue
1 Company has no cash,
resorted to borrowings.
2 The company breached the term of its
overdraft facility.
[The bank will confirm the decision
whether to continue to support the
business in November 20X5,
which is after Auditor's report
will be signed.]
Audit risk
1) The company may be not GC,
but prepared FS based on GC basis
1) If the bank refuse to continue to
support the business, there may be
doubts on the company's ability
to be going concern.
2) There may be a risk that,
uncertainties may not be adequately
disclosed in the FS.
Audit response
1) The auditor need to review
1) Review the adequacy of g
disclosures in the FS.
2) The audit team should pe
detailed GC testing.
[To review the impact of non
of the overdraft facility]
[Ask miss ####]
 Audit response
1) The auditor need to review the FS.

1) Review the adequacy of going concern

disclosures in the FS.

2) The audit team should perform

detailed GC testing.

[To review the impact of non-renewal

of the overdraft facility]

[Ask miss ####] [Employ a more experienced audit team]