ACCA F8 - AUDIT RISK by Alan Biju Palak ACCA
ACCA F8 - AUDIT RISK by Alan Biju Palak ACCA
ACCA F8 - AUDIT RISK by Alan Biju Palak ACCA
2. Ordered plant and machinery, but half of the 2. Discuss with management as to whether the
remaining plant and machinery ordered have arrived; if
order have not yet been delivered.
so, physically verify a sample of these assets to ensure
Only assets which physically exist at the year-end should
existence and ensure only appropriate assets are
be included in property, plant and equipment. If items
recorded in the non-current asset register at the year
not yet delivered have been capitalised, PPE will be
end.
overstated.
Determine if the asset received is in
Consideration will also need to be
use at the year-end by physical observation and if so, if
given to depreciation and when this should commence.
depreciation has commenced at an appropriate point.
If depreciation is not appropriately charged when the
asset is available for use, this may result in assets and
profit being over or understated.
4. Company has taken a new loan. 4. During the audit, the team would need to confirm
The loan needs to be correctly split between current and that the loan finance was received. In addition, the split
non-current liabilities in order to ensure correct between current and non-current liabilities and the
disclosure. disclosures for this loan should be reviewed in detail to
Also, as the level of debt has increased, ensure compliance with relevant accounting standards.
there should be additional finance costs. There is a risk
that this has been omitted from the statement of profit The finance costs should be recalculated
or loss leading to understated finance costs and and any increase agreed to the loan documentation for
overstated profit. confirmation of interest rates. 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.
5. Company outsources the payroll work. 5. Discuss with management the extent of records
A detection risk arises as to whether sufficient and maintained by the service entity and any monitoring of
appropriate evidence is available at Company to confirm controls undertaken by management over the payroll
the completeness and accuracy of controls over payroll. charge.
If not, another auditor may be required to undertake Consideration should be given to contacting
testing at the service organisation. the service organisation’s auditor to confirm the level of
controls in place.
The payroll processing had transferred to Discuss with management the transfer process
service entity. If any errors occurred during the transfer undertaken and any controls put in place to ensure the
process, these could result in the payroll charge and completeness and accuracy of the data.
related employment tax liabilities being
under/overstated.
Where possible, undertake tests of controls to confirm
the effectiveness of the transfer controls.
6. Land and buildings will be revalued at the year 6. Discuss with management the process adopted for
end. undertaking the valuation, including whether the whole
The land and buildings are to be revalued at the year- class of assets was revalued and if the valuation was
end; it is likely that the revaluation surplus/deficit will be undertaken by an expert. This process should be
material. reviewed for compliance with IAS 16.
The revaluation needs to be carried out and
recorded in accordance with IAS 16 Property, Plant and
Equipment, otherwise non-current assets may be
incorrectly valued.
7. Receivables for the year to date are considerably 7. Discuss with management the reasons for the
higher than the prior year. increase in receivables and management’s process for
If this continues to the year end, there is a risk that identifying potential irrecoverable debt. Test controls
some receivables may be overvalued as they are not surrounding management’s credit control processes.
recoverable. 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.
8. Company is planning to make some employees
8. Discuss with management the status of the
redundant after the year end.
redundancy announcement; if before the year end,
Once the timing of this announcement has been
review supporting documentation to confirm the timing.
confirmed and if it is announced to the staff before the
In addition, review the basis of and recalculate the
year end, then under IAS 37 Provisions, Contingent
redundancy provision.
Liabilities and Contingent Assets a redundancy provision
will be required at the year end. Failure to provide will
result in an understatement of provisions and expenses.
9. Goods in transit.
9. The audit team should undertake detailed cut-off
At the year end, there is a risk that the cut-off of
testing of purchases of goods at the year end and the
inventory, purchases and payables may not be accurate
sample of GRNs from before and after the year end
and may be under/overstated.
relating to goods from suppliers should be increased to
ensure that cut-off is complete and accurate.
13. A number of reconciliations, including the bank 13. Discuss this issue with the finance director and
reconciliation, were not performed at the year end, request that control account reconciliations are
Control account reconciliations provide comfort that undertaken.
Accounting records are being maintained completely
and accurate.
At the year end, it is important to All reconciling items should be tested in
confirm that balances including bank balances are not detail and agreed to supporting documentation.
under or overstated. This is an example of a control
procedure being overridden by management and raises
concerns over the overall emphasis placed on internal
control.
14. Company’s previous finance director left after it 14. Discuss with the new finance director what
was discovered that he had been committing fraud procedures they have adopted to identify any further
with regards to expenses claimed. frauds by the previous finance director.
There is a risk that he may have undertaken other
fraudulent transactions; these would need to be written In addition, the team should maintain their
off in the statement of profit or loss. If these have not professional scepticism and be alert to the risk of further
been uncovered, the financial statements could include fraud and errors.
errors.
15. There have been a significant number of sales 15. Review a sample of the post year-end sales returns
returns made subsequent to the year end. and confirm if they relate to pre year-end sales, that the
As these relate to pre year-end sales, they should be revenue has been reversed and the inventory included
removed from revenue in the draft financial statements in the year-end ledgers.
and the inventory reinstated.
In addition, the reason for the increased
If the sales returns have not been correctly recorded, level of returns should be discussed with management.
then revenue will be overstated and inventory This will help to assess if there are underlying issues with
understated. the net realisable value of inventory.
16. During year-end inventory count there were 16. During the final audit, the goods received notes and
movements of goods in and out. goods despatched notes received during the inventory
If these goods in transit were not carefully controlled, count should be reviewed and followed through into the
then goods could have been omitted or counted twice. inventory count records as correctly included or not.
This would result in inventory being under or
overstated.
17. The audit client is a new client for the auditors. 17. Audit Company should ensure they have a suitably
As the audit team is working with the client for the first experienced team. Also, adequate time should be
time they may not be familiar with the Accounting allocated for team members to obtain an understanding
policies, transactions and balances, there will be an of the company and the risks of material misstatement.
increased detection risk on the audit.
18. The company undertakes continuous (perpetual) 18. The completeness of the continuous (perpetual)
inventory counts. inventory counts should be reviewed. In addition, the
Under such a system all inventory must be counted at level of adjustments made to inventory should be
least once a year with adjustments made to the considered to assess whether reliance on the inventory
inventory records. records at the year-end will be acceptable.
19. A sales-related bonus scheme has been introduced 19. Increased sales cut-off testing will be performed
in the year; this may lead to sales cut-off errors with along with a review of any post year-end cancellations
employees aiming to maximise their current year bonus. of contracts as they may indicate cut-off errors.
20. Out of the customers who bought goods on credit 20. A review of the aged receivables ledger to be
there are concerns about the creditworthiness of some performed to assess valuation. Also consider the
customers. There is a risk that some receivables may be adequacy of any allowance for receivables.
overvalued as they are not recoverable.
21. Company has incurred expenditure on updating, 21. The auditor should review a breakdown of these
repairing and replacing a significant amount of the costs to ascertain the split of capital and revenue
production process machinery. expenditure, and further testing should be undertaken
If this expenditure is of a capital nature, it should be to ensure that the classification in the financial
capitalised as part of property, plant and equipment statements is correct.
(PPE) in line with IAS 16 Property, Plant and Equipment.
However, if it relates more to repairs, then it should be
Expensed to the statement of profit or loss (income
Statement). If the expenditure is not correctly classified,
Profit and PPE could be under or overstated.
22. Inventory held at different warehouses. 22. The auditor should assess which of the inventory
At the year-end there will be inventory counts sites they will attend the counts for. This will be any with
undertaken in all warehouses. It is unlikely that the material inventory or which have a history of significant
auditor will be able to attend at all inventory counts and errors.
therefore they need to ensure that they obtain sufficient For those not visited, the auditor will
evidence over the inventory counting controls, and need to review the level of exceptions noted during the
completeness and existence of inventory for any count and discuss with management any issues which
warehouses not visited. arose during the count.
Inventory is stored within all warehouses; if some are The auditor should review supporting documentation
owned by company and some rented from third parties. for all warehouses included within PPE to confirm
Only warehouses owned by company should be included ownership by company and to ensure non-current
within PPE. There is a risk of overstatement of PPE and assets are not overstated.
understatement of rental expenses if company has
capitalised all warehouses.
23. During the year an asset has been disposed of at a 23. Review the non-current asset register to ensure that
profit. the asset has been removed. Also confirm the disposal
The asset needs to have been correctly removed from proceeds as well as recalculating the profit on disposal.
property plant and equipment to ensure the non-
current asset register is not overstated, and the profit Consideration should be given as to whether
on disposal should be included within the income the profit on disposal is significant enough to warrant
statement. separate disclosure within the income statement.
24. The company values inventory as selling price less 24. Testing should be undertaken to confirm cost and
average profit margin (any other methods). NRV of inventory and that on a line-by-line basis the
Inventory should be valued at the lower of cost and net goods are valued correctly.
realisable value (NRV) and if this is not the case, then In addition, valuation testing
inventory could be under or overvalued. should focus on comparing the cost of inventory to the
selling price less margin to confirm whether this method
IAS 2 Inventories allows this as an inventory valuation is actually a close approximation to cost.
method as long as it is a close approximation to cost. If
this is not the case, then inventory could be under or
overvalued.
25. Branches maintained their own financial 25. Discuss with management the process undertaken to
records and submitted returns monthly to transfer the data and the testing performed to confirm
head office. the transfer was complete and accurate.
The opening balances for each branch have been
transferred into the head office’s accounting. There is a Computer-assisted audit techniques
risk that if this transfer has not been performed could be utilised by the team to sample test the transfer
completely and accurately, the opening balances may of data from each supermarket to head office to identify
not be correct. any errors.