Suggested solution 17 - Jambo Co.
(b) Audit Risk & Responses
Audit Risk
Jambo Communications Co (Jambo) is a
new client for Poa & Co.
As the team is not so familiar with the
accounting policies, transactions and
balances of Jambo, there will be an
increased detection risk on the audit.
The finance director of Jambo is planning
to capitalise the full $2.2 million of
development expenditure incurred.
However in order to be capitalised it must
meet all of the criteria under IAS 38
Intangible Assets.
There is a risk that some projects may not
reach final development stage and hence
should be expensed rather than
capitalised.
Intangible assets could be overstated and
expenses understated leading to a risk of
overstatement of profits.
Jambo purchases goods from a supplier
in Central Africa and these goods are
shipped to the company’s central
warehouse. The goods are usually in
transit for two weeks and the company
correctly records the goods when
received.
There is a risk that goods may have been
recorded yet they are still in transit or well
received in the following year leading to
cut-off issues with inventory, purchases
and payables.
There is also a risk of inventory been
overstated because of receiving goods
that have not been received.
Manufacturers regularly bring out new
models of mobile phones. When this
happens, the old models have to be sold
at a significant discount, as customers
usually want the latest model. Jambo has
a number of older models in inventory.
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Auditor’s Responses
Poa & 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.
Obtain a breakdown of the development
Expenditure from the respective invoice
and review and test in detail to ensure
that only projects which meet the
capitalisation criteria are included as an
intangible asset within the asset register,
with the balance being expensed.
The audit team should undertake detailed
cut-off testing of goods in transit from the
suppliers in Central Africa by taking a
sample of inventory received and
recorded in the inventory sheet one week
before and one week after the year-end
and agreeing them to their respective
GDNs to ensure that the cut-off is
complete and accurate.
From a sample of old models recorded,
obtain their sales invoices to determine
the NRV.
Obtain the purchase invoices from the
same sample to determine cost.
 For the items sampled and tested,
The fact that there are many old models Confirm whether they were recorded at
and they have to be sold at a discount the lower of cost and NRV or not in the
means that the NRV of inventory will inventory listing.
reduce. In accordance to IAS 2 Inventory,
inventory should be valued at the lower of
cost and NRV. There is a risk that
inventory has been valued at cost and not
NRV and hence leading to a risk of
overvalued inventory.
Management was disappointed with 20X4 Throughout the audit, the team will need
results and hence undertook strategies to to be alert to this risk. They will need to
improve the 20X5 trading results. carefully review judgmental decisions and
compare treatment against prior years
There is a risk that management might through analytical procedures of the
feel under pressure to manipulate the amounts.
results through the judgments taken.
There is a risk of material misstatement of
the financial statements to improve the
trading results
A generous sales-related bonus scheme Increased sales cut-off testing will be
has been introduced in the year. performed through obtaining GDNs for a
This may lead to sales cut-off errors with sample of sales recorded pre and post
employees aiming to maximise their year-end along with a review of post year-
current year bonus. end sales returns as they may indicate
There is a risk that sales are overstated. cut-off errors.
As market conditions are difficult for their Extended post year-end cash receipts
customers, they have extended the credit testing and a review of the aged
period given to them. receivables ledger to be performed to
Receivables may not be recoverable. assess valuation.
There is a risk that receivables are
overstated.
The directors have each been paid a Discuss this matter with management and
significant bonus and separate disclosure review the disclosure in the financial
of this in the financial statements is statements to ensure compliance with
required by local legislation. local legislation.
The directors’ remuneration disclosure
will not be complete and accurate if the
bonus paid is not disclosed in accordance
with the relevant local legislation.
During the year, whilst calculating Discuss with the directors the rationale for
depreciation, the directors extended the extending the useful lives. Also, the five
useful lives of plant and machinery from year life should be compared to how often
three years to five years. This reduced these assets are replaced, as this
the annual depreciation charge. provides evidence of the useful life of
assets.

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Under IAS 16 Property, Plant and
Equipment, useful lives are to be
reviewed annually, and if asset lives have
genuinely increased, then this change is
reasonable.

However, there is a risk that this

reduction could lead to plant and
machinery been overvalued and profit
overstated.
The reporting timetable for audit The timetable should be confirmed with
completion of Jambo Co is quite short, the financial director. If it is to be reduced
and the finance director would like to then consideration should be given to
report results even earlier this year. performing an interim audit earlier, this
would then reduce the pressure on the
Any further reductions will increase final audit.
detection risk and place additional
pressure on the team in obtaining
sufficient and appropriate evidence. This
increases detection risk.
Jambo Co. provides a two-year repairs Review the level of the warranty provision
warranty to its customers on its phones of in light of the increased level of claims to
which the finance manager has created a confirm completeness of the provision.
provision of $0.2m for it. To try to improve
profits, Jambo changed their main
material supplier to a cheaper alternative.
This has resulted in some customers
claiming on their repairs warranties.

If the overall number of people claiming

on the warranty is likely to increase, then
the warranty provision should possibly be
higher.

If the directors have not increased the

level of the provision, then there is a risk
the provision is understated.