Q1)

Audit Risk Audit Response

“ 5 year Loan = 3m “ The Split between Current and Non current
Liabilities should be reviewed and ensure that
The company has obtained a 3m loan for five whether it has been complied with relevant
years ethical requirements.

The loan of 3m needs to be split between the

Current liabilities and Non Current Liabilities
over the next five years in order to ensure
correct disclosure.
“ Interest on the Bank Loan “ Recalculate the finance costs and agree with
the loan documentation.
As the level of debt increases there must be
additional finance costs. However there is a risk
that company may omit the finance costs
resulting in understatement of finance costs
and Overstatement of profit.
“ Loss on Disposal “ Recalculate the loss on disposal and agree all
An old equipment was sold at a significant loss items to supporting documentation.
on disposal.

Significant loss 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 asset overstated.
“ Revaluation of Factory premises “
The Company has revalued the factory
premises to 3 months before the year end to
5m
The Revaluation needs to be carried out and
record in accordance with IAS 16. However
there is a risk that Non current asset may be
incorrectly valued resulting in Overstatement of
asset.
“ Comparison of GP Ratio and NP Ratio “
The GP Ratio has increased from 35.5% to
35.85% from 2004 to 2005 and NP Ratio has
decreased from 23% to 20.20% from 2004 to
2005.
Discuss with management the process adopted
for undertaking the valuation whether the
whole class of assets was revalued and
valuation was undertaken by the expert. This
process should be reviewed in compliance with
IAS 16
The classification of cost between cost of sales
and operating expenses will be compared with
the prior year to ensure consistency. Also
increase cut off testing should be performed at
the year end to ensure consistency.

The Movement in the GP Ratio is significant and

there is a risk that cost may have omitted or
included in operating expenses rather than cost
of sales.