Q1

Audit Risk Audit Response

“ Borrowed 1m “ The Split between current liabilities and non
“ The Directors have borrowed 1m from the current liabilities and disclosure for this loan
bank “ should be reviewed whether it has been
complied with relevant accounting standards.
“ The loan needs to be correctly split between
the current liabilities and Non Current Liabilities
in order to ensure correct disclosure. “
“ Interest for the Borrowed Amount “ Recalculate the interest and agree with the loan
As the level of debt increased there should be documentation
additional finance costs. However there is a risk
that it has been omitted leading to
understatement of finance costs and
Overstatement of Profit.
“ Directors Bonus “ The Auditor should maintain professional
The Directors Bonus will be paid based on the skepticism throughout the audit and should
target profit of 0.5m. assign more experienced audit members to
significant estimates and Judgmental areas.
The Directors will try to Overstate the profit to
0.5m in order to receive bonus which may
result in Overstatement of Profit and
Understatement of Expense.
“ Appropriateness of Asset Lives “ Inquire with the Management why there is an
“ The Directors have extended the plant and increase in Asset Lives from 3 to 5 years.
machinery life from 3 years to 5 years “

“ Under IAS 16 the Asset lives should be

reviewed annually and if asset lives has been
increased as a result of this review such change
is reasonable however if it is increased in order
to reduce depreciation it may result in
Overstatement of Asset and Overstatement of
profit “
“ Receivable Days “ Extended post year end cash receipt testing and
The Receivable Days has been increased from review the aged receivable ledger to be
49 to 91 days which may be due to the performed to asses valuation and need for
extended credit period offered to the customer allowance of receivables
resulting in Overstatement of receivables.