GOOD LUCK

SUBSTANTIVE PROCEDURE INTERNAL CONTROL AUDIT RISK

1 Sub sales, AR 1 Control deficiency 1 Audit risk 2 1
2 Sub Payroll 2 Test of contrl 2 Audit risk 1 2
3 Sub inventory 3 IC 1 3
4 Sub R&D exp 4 IC 3 (Narrative note) 4
5 Sub provision 5
6 Sub PPE x Full control deficiency 6
7 Sub AP 7
8 Sub Tax
9 Sub Loan, Claim
10 Sub bank
OTHERS
Audit report
Audit planning
Subsequent event, Safeguard
Safeguard
Going concern
Coperate governance
Others
2020 - Dec, Sep
(c) Substantive procedures for directors’ bonuses
• Obtain a schedule of the directors’ bonus and cast the schedule to ensure its
accuracy. Agree the amount to that disclosed in the financial statements.
• Review the schedule of current liabilities and confirm the bonus accrual is
included as a year-end liability.
•
• Agree the individual
Recalculate the bonusbonus payments
payments to the the
and agree postcriteria
year-end payroll records.
to supporting
documentation and the percentage rates to be paid to the directors’ service
contracts.
• Confirm the amount of each bonus paid by agreeing to the post year-end cash
book and bank statements.
• Compare the profit before tax used in the bonus calculation to the final profit
before tax figure to confirm whether any adjustment is required to the bonus
paid andthe
• Agree discuss any differences
amounts paid to eachwith management.
director to board minutes and contracts to
ensure the amounts included in the current year financial statements are fully
accrued and disclosed.
• Review the board minutes to identify whether any additional payments
relating to this year have been agreed for any directors.
• Obtain a written representation from management confirming the
completeness of directors’ remuneration including the bonus.
• Review the disclosures made regarding the bonus paid to directors and assess
whether these are in compliance with local legislation

(a) Substantive procedures for Vega Vista Co’s income

– Obtain a schedule of all Vega Vista Co’s income and cast to confirm
completeness
– Compare theand accuracy
individual of the balance
categories andof
of income agree to the
festival trialsales,
ticket balance.
sundry
sales and donations against prior years and investigate any significant
differences.
– For the annual festival, construct a proof-in-total calculation of the number of
tickets sold, approximately 15,000, multiplied by the ticket price of $35.
Compare this to the income recorded and discuss any significant differences
with
– Formanagement.
tickets sold on the day of the festival reconcile from ticket stubs the
number of tickets sold multiplied by $35 and agree these sales to cash banked
in the bank statement.
– Discuss with management their procedures for ensuring advance ticket sales
for the September 20X5 festival are excluded from income and instead
recognised as deferred
– Select a sample income
of advance in the
ticket statement
sales of financial
made online, agreeposition.
that the
transaction has been excluded from current year income and follow through to
–inclusion in deferred
Agree journal entry income.
to transfer prior year deferred income relating to the 20X4
festival to current year income to the ledger and agree figures to prior year
financial statements.
– For sundry sales, obtain a breakdown of the income received per stall and
agree to supporting documentation provided by each stall holder. Recalculate
the fixed percentage received is as per the agreement/contract made with Vega
Vista Co.
– Compare sundry sales per stall holder to prior year sales data and investigate
any significant differences.
– For monthly donations, trace a sample of donations from sign up
documentation to the bank statements, cash book and income listing to ensure
that they are recorded completely and accurately.
– For a sample of new donors in the year, agree the monthly sum and start date
from their completed forms and trace to the monthly donations received
account and agree to the cash book and bank statements.

(b) Substantive procedures for Canopus Co’s restructuring provision

 – Cast the breakdown of the restructuring provision to ensure it is correctly
calculated and agree the total to the trial balance.
– Review the board minutes where the decision to restructure the production
process
– Reviewwas
the taken and confirm
announcement the decision was
to shareholders andmade in March
employees 20X5.
in late March, to
confirm
that this was announced before the year end.
– Obtain a breakdown of the restructuring provision and confirm that only direct
expenditure
– Review therelating to thetorestructuring
expenditure confirm that is included
there are no retraining costs of
existing staff included.
– For the costs included within the provision, including acquisitions of plant and
machinery, agree to supporting documentation, such as purchase invoices, to
confirm
– Reviewvalidity andend
post year value of items included.
payments/invoices relating to the expenditure and
compare the actual costs incurred to the amounts provided to assess whether
–the amount
Obtain of the representation
a written provision is reasonable.
confirming management discussions in
relation to the announcement of the restructuring and to confirm the
completeness of the provision.
– Review the adequacy of the disclosures of the restructuring provision in the
financial statements and assess whether these are in accordance with IAS® 37
Provisions, Contingent Liabilities and Contingent Assets

(c) Substantive procedures for Canopus Co’s bank loans

- Obtain a schedule of opening and closing loans detailing any changes during
the year. Cast the schedule to confirm its accuracy and agree the closing
balances to the trial balance and draft financial statements.
- For the new loan taken out in the year, review the loan agreement to confirm
the amount borrowed, the repayment terms and the interest rate applicable.
- For the new loan taken out in the year, agree the loan proceeds of $4.8 million
per the loan agreement to the cash book and bank statements.
- For loans repaid, agree the final settlement amount per bank correspondence
to payments out during the year in the cash book and bank statements.
- Agree the quarterly repayment of the new loan of $150,000 paid on 31 March
20X5 to the cash book and bank statement.
- Recalculate the split of the loan repayment made on 31 March 20X5 between
interest and principal, recalculate interest and agree to inclusion in statement of
profit or loss, and outstanding loan balance reduced by principal amount repaid.
- Review the bank correspondence and loan agreements for confirmation of any
early settlement charges incurred on the loans repaid. Agree that these were
charged to the confirmation
- Obtain direct statement of at
profit
the or loss as from
year-end a finance charge.
the loan provider of the
outstanding balances and any security provided. Agree confirmed amounts to
the loans schedule.
- review all loan agreements For details of covenants and Recalculate all
covenants to identify any potential or actual breaches.
- review the disclosure of non-current liabilities in the draft financial statements,
including any security provided and assess whether these are in accordance
with accounting standards and local legislation. Additionally, confirm that the
split of current and non-current loans in the financial statements is correct

2021 - Mar, Jun

(d) Substantive procedures
– Cast a sample on payroll
of payroll records expense
to confirm completeness and accuracy and
agree the total wages and salaries expense per the payroll system to the trial
balance.
– Recalculate the gross and net pay figures for a sample of employees and
agree to the payroll records.
 – For a sample of wage payments, agree the total net pay per the payroll
records
– Performto athe bank
proof in transfer listing and
total of wages and salaries,
to the cash book.
incorporating joiners and
leavers and the pay increase/bonuses. Compare this to the actual wages and
salaries expense in the financial statements and investigate any significant
differences.
– Compare the total payroll figure this year to the prior year, identify any
significant differences and discuss with management.
– Review monthly payroll charges, compare this to the prior year and budgets
and discuss any significant differences with management.
– Calculate overtime costs as a percentage of total wages. Compare this to the
prior year and discuss any significant differences with management.
– Agree a sample of individual wages and salaries per the payroll to personnel
records and records
– Reperform of hoursofworked
the calculation perdeductions
statutory the clocking-in system.
and agree to supporting
documentation to confirm whether correct deductions for this year have been
made in athe
– Select payroll.
sample of joiners and leavers, agree their start/leaving date to
supporting documentation, recalculate their first/last salary to ensure it is
accurate.
– Recalculate holiday pay for a sample of employees and agree to holiday
records and daily rate applied.
– Select a sample of employees from HR records and agree salaries per HR
records to the payroll records to confirm the accuracy of the payroll expense.
– Agree the payroll control account reconciliation to accounting records and
investigate any differences.

2021 - Mar, Jun

a) Substantive procedure for Inventory - (a) Inventory of Vego Dog
1 – Obtain and cast the inventory listing of Vego Dog products and agree the total
cost of $2·4m to inventory records.
2 – Agree the quantity of Vego Dog products shown as held at the year end to the
year-end inventory count records.
3 – Request a breakdown of the cost calculation of each unit of this product and
discuss with management how the standard cost was derived.
4 – Recalculate the cost calculations to confirm that the quantity multiplied by the
standard cost is $2·4m.
5 – For a sample of finished goods items, obtain standard cost cards and agree:
raw material costs to recent purchase invoices;
labour costs to time sheets or wage records;
overheads allocated to invoices and that they are of a production nature.
6 - Compare sales prices over time to establish if the price has been reduced
because
– Compare of actual
falling sales
demand to per
units determine whether
month to an allowance
budgeted is required.
sales per month from
7 before and after the year end to establish how much lower actual sales are than
expected
– Select a and
samplediscuss with included
of items management.
in inventory of Vego Dog and review post
8 year-end sales invoices to ascertain if net realisable value (NRV) is above cost or
if an adjustment is required.

b) Substantive procedure for

– Review correspondence Receivable
with Ellah Co to -establish
Receivable due
if there from
was Ellah Co
a discussion
about payment difficulties and whether Ellah Co intends to fully settle the
outstanding amount.
– Review the age of the outstanding debt with Ellah Co and discuss the
circumstances with the credit controller to establish if it has exceeded the
agreed credit
– Review post terms andreceipts
year-end considerfrom
if anEllah
allowance is required.
Co to establish how much of the debt
was recovered by the audit completion date and to assess how much of the
year-end balance remains outstanding.
 – Inspect board minutes to identify whether there are any significant concerns in
relation to payments by Ellah Co.
– Discuss with management of Purrfect Co why no allowance has been made in
respect of this debt and assess the justification.

C) Substantive procedure - Contamination – legal claims

– Review customer correspondence to establish the details of the claims and the
amounts
– Review being claimed. with Purrfect Co’s lawyers or, with the client’s
correspondence
permission, contact the lawyers to establish the likely outcome of the customer
claims made to date.
– Discuss with the lawyers the likelihood and amount of potential future claims.
– Inspect board minutes to establish details of the circumstances of the
contamination and to ascertain management’s view as to the likelihood that the
existing claims will be successful and the extent of possible future claims.
– Compare levels of returns and claims to date against sales volumes of the
product
– Reviewtopost-year
assess the potential
end paymentslevel
forof future claims.
damage settlements and compare with
any amounts provided at the year end to assess the reasonableness of the
provision.
– Obtain written representations from management that there have been no
other contamination incidents and no other product liability claims of which
management are aware and for which provision may be required.
– Review the draft financial statements to establish that the legal claims have
been appropriately provided for or disclosed in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

2020 - Mar, Jun

(d) Substantive procedures for the redundancy costs
 Review the board minutes for evidence of the decision to discontinue the
brand of chemicals prior to the year-end.
 Review supporting documentation to confirm that the decision to discontinue
the brand was notified to the four members of staff prior to the year end.
 Obtain details of the redundancy calculated by employee, cast the schedule
and agree to the
 Recalculate thetrial balance/financial
redundancy provisionstatements.
to confirm completeness and agree
components of the cost to supporting documentation such as employee
contracts.
 Agree the redundancy payments made in July 20X5 to the cash book/payroll
records
 Obtainand compare
a written these to the from
representation provision in the financial
management statements.
confirming the
completeness
 of the costs.
Review the disclosures included in the financial statements to verify they are
in compliance with requirements of IAS 37 Provisions, Contingent Assets and
Contingent Liabilities.

2020 - Mar, Jun

(a) Substantive procedure
 Cast the schedule for Vehicles
of additions additions
to vehicles, cast it and disposals
and agree the total to the
disclosure note for property, plant and equipment. Agree the cost of the vehicles
given in part-exchange to the disclosure note to confirm that they have been
removed from cost
 For a sample carried
of new forward.
vehicles on the schedule of additions agree the cost to
the purchase invoice, ensuring that the recorded cost includes the cash amount
paid plus the trade-in allowance for the old vehicle. Confirm that the invoice is
made out to Encore Co.
 Physically inspect a sample of additions, confirming that the registration
number of the vehicle agrees to that on the non-current assets register.
 Review the non-current assets register to confirm that the 20 old vehicles
were removed and that the 20 new vehicles were included.
  Recalculate the loss on disposal of $1.1m ($1.8 - ($4.6m - $3.9m) and agree to
the trial balance and statement of profit or loss.

 Agree the cash
Recalculate the payment of $3.9m
depreciation to the
expense, cash book
confirming andthe
that bank statement.
depreciation
expense was based on the old vehicles until 1 February and on the cost of the
new vehicles after that date.
 Recalculate accumulated depreciation on the vehicles disposed of and confirm
that this has been removed from accumulated depreciation carried forward.
 In light of the loss on disposal, review depreciation rates on existing vehicles
to establish
 Discuss if the
with carrying amount
management EncoreofCo’s
other vehicles
history may bereplacement
of vehicle overstated. to
establish if vehicles are being used for the entire period of their estimated
useful life.with management why trade-in allowances were so much lower than
 Discuss
the carrying amounts of the vehicles to provide further evidence as to whether
depreciation
 Review the policies
notes toare
thereasonable.
financial statements to ensure that disclosure of the
additions and disposals is in accordance with IAS 16 Property, Plant and
Equipment.

(b) Substantive procefure for Valuation of trade receivables

 Review the aged receivables listing to identify slow moving or old balances.
Discuss the status of these balances with the credit controller to assess whether
the customers
 Review are there
whether likely are
to pay
anyor if an allowance
after-date for receivables
cash receipts for slow is required.
moving/old
receivable balances.
 Review correspondence with customers in order to identify any balances
which are in dispute or unlikely to be paid and discuss with management
whether
 Reviewany allowance
board minutesistorequired.
identify whether there are any significant concerns in
relation to outstanding receivables balances and assess whether the allowance
is reasonable.
 Obtain a breakdown of the allowance for trade receivables. Recalculate it and
compare it to any potentially irrecoverable balances to assess if the allowance is
adequate.
 Review the payment history for evidence of slow paying by any customers
who were granted credit in the period when there was no credit controller and
who may not,
 Discuss withtherefore,
the financehave beenthe
director properly scrutinised.
rationale for maintaining the allowance at
the same level in light of the increase in the receivables collection period and
the absence of a credit controller.
 Inspect post year-end sales returns/credit notes and consider whether an
additional allowance against receivables is required.

(c) Substantive procedure for Potential breach of transport regulations

 Review correspondence with the transport authority to establish details of the
complaint and the number of times the breach has allegedly occurred.
 Enquire of the directors why they are unwilling to provide or make disclosure,
whether they accept that any breaches took place but believe that the effect is
immaterial or whether
 Review Encore they dispute
Co’s policies their occurrence.
and procedures to record driving hours and rest
periods and compare to the regulations to determine the likelihood that
breaches have occurred and how frequently.
 Review correspondence with the transport authority to establish if there have
been discussions about other instances of potential non-compliance.
 Review correspondence with Encore Co’s legal advisers or, with the client’s
permission, contact the lawyers to establish their assessment of the likelihood of
the breach being proven and any fines that would be payable.
 Review the board minutes to ascertain management’s view as to the
likelihood of payment to the transport authority.
 Obtain a written representation to the effect that the directors are not aware
of any other breaches of laws or regulations that would require a provision or
disclosure in the financial statements.
  Inspect the post year-end cash book and bank statements to identify whether
any fines have been paid.

2019 - Sep, Dec

(d) Substantive procedures for valuation of trade receivables
– Discuss with the finance director the rationale for not increasing the allowance
for trade areceivables
– Obtain breakdownand review
of the its overall
opening adequacy.
allowance and consider if the receivables
provided for in the prior year have been recovered to assess the reasonableness
of the prior levels of allowances.
– Review the aged trade receivables ledger to identify any slow moving or old
receivable balances and discuss the status of these balances with the credit
controllers to assess
– Review whether whether
there they
are any are likely
after-date to be
cash received.
receipts for slow moving/old
receivable balances.
– Review customer correspondence with the significant customer and others to
identify any balances which are in dispute or are unlikely to be paid.
– Review board minutes to identify whether there are any significant concerns in
relation to payments by customers.
– Calculate the potential level of trade receivables which are not recoverable
and assess whether this is material or not and discuss with management.

2019 - Sep, Dec

(e) Substantive procedures for disposals of plant and machinery
– Obtain a breakdown of disposals, cast the list and review the non-current
assets register to confirm that all assets have been removed.
– Select a sample of disposals and agree sale proceeds to supporting
documentation such as sundry sales invoices.
– Recalculate the profit/loss on disposal and agree to the trial balance and
statement of profit or loss.
– Recalculate the depreciation charge for a sample of disposals to confirm the
calculations are correctly applied as per the company policy of a pro rata basis
or a full year in the year of acquisition and none in the year of disposal.
– Review the disclosure of the disposals in the draft financial statements and
ensure it is in line with IAS 16 Property, Plant and Equipment.

2019 - Sep, Decthe auditor should perrform to resolve the exxceptions noted
Procedures
for each customer during the positive receivable circularisation

Albacore Co
– For the non-response from Albacore Co, with the client’s permission, the team
should arrange to send a follow-up circularisation.
– If Albacore Co does not respond to the follow up, then with the client’s
permission, the auditor should telephone the customer and ask whether they
are able to
– If there is respond in writingthen
still no response, to the circularisation
the auditor shouldrequest.
undertake alternative
procedures to confirm the balance owing from Albacore Co. Such as detailed
testing of the balance by agreeing to sales invoices and goods dispatched notes
(GDN).

Flounder Co
– For the response from Flounder Co, with a difference of $5,850 the auditor
should identify any disputed amounts, and identify whether these relate to
timing differences or whether there are possible errors in the records of
Triggerfish.
– If the difference is due to timing, such as cash in transit, this should be agreed
to
– Ifpost year-end cash
the difference receipts
relates in the
to goods in cash book.
transit, then this should be agreed to a pre
year-end GDN.
 Menhaden
– The reasonCo for the credit balance with Menhaden should be discussed with the
credit controller or finance department to understand how a credit balance has
arisen.
– Review the payables ledger to identify if Menhaden is a supplier as well as a
customer; if so, a purchase invoice may have been posted in error to the
receivables rather than payables ledger.
– If the difference is due to credit notes, this should be agreed to pre year-end
credit notes dispatched around the year-end date.
– The receivables ledger should be reviewed to identify any possible mis-
postings as this could be a reason for the difference with Menhaden Co.

2019 - Sep, Dec

(b) Substantive procedures for allowance for trade receivables
– Discuss with the finance director the rationale for not providing against any
receivables and consider
– Obtain a breakdown the opening
of the reasonableness of the
allowance allowance.
of $125,000 and consider if the
receivables provided for in the prior year have been fully recovered as a result
of the additional credit control procedures or if they have now been fully written
off.
– Inspect the aged trade receivables ledger to identify any slow moving or old
receivable balances and discuss the status of these balances with the credit
controllers to assess whether they are likely to be received.
– Review whether there are any after-date cash receipts for identified slow
moving/old receivable
– Review customer balances.
correspondence to identify any balances which are in dispute
or are unlikely to be paid and confirm if these have been considered when
determining theminutes
– Inspect board allowance.
to identify whether there are any significant concerns in
relation to payments by customers and assess if these have been considered
when determining the allowance.
– Recalculate the potential level of trade receivables which are not recoverable
and compare to allowance and discuss differences with management.

2019 - Mar, Jun

(c) Substantive for Accrual
Substantive procedures thefor employment
auditor tax in
should adopt payable
respect of auditing this
accrual include:
– Compare the accrual for employment tax payable to the prior year, investigate
any significant
– Agree differences.
the year-end employment tax payable accrual to the payroll records to
–confirm accuracy.
Re-perform the calculation of the accrual for a sample of employees to confirm
the accuracy.
– Undertake a proof in total test for the employment tax accrual by multiplying
the payroll cost for June 20X9 with the appropriate tax rate. Compare this
expectation to the actual accrual and investigate any significant differences.
– Agree the subsequent payment to the post year-end cash book and bank
statements
– Review any tocorrespondence
confirm completeness.
with tax authorities to assess whether there are
any additional outstanding payments due. If so, confirm they are included in the
year-end accrual.
– Review any disclosures made of the employment tax accrual and assess
whether these are in compliance with accounting standards and legislation.

2019 - Mar, Jun

(a) Substantive procedureoffor
– Obtain the breakdown WIPInventory
and agreevaluation
a sample of WIP assessed during the
inventory count to the WIP schedule, agreeing the percentage completion to
that
– Forrecorded
a sampleat
ofthe inventory
inventory count.
items (finished goods and WIP), obtain the relevant
cost sheets and agree raw material costs to recent purchase invoices, labour
costs to time sheets or payroll records and confirm overheads allocated are of a
production related nature.
 – Examine post year-end credit notes to determine whether there have been
returns
– Selectwhich could
a sample of signify
year-endthat a writegoods
finished down and
is required.
compare cost with post year-
end sales invoices to ascertain if net realisable value (NRV) is above cost or if an
adjustment
– Discuss theis basis
required.
of WIP valuation with management and assess its
reasonableness.
– Select a sample of items included in WIP at the year end and ascertain the
final unit cost price by verifying costs to be incurred to completion to relevant
supporting documentation. Compare to the unit sales price included in sales
–invoices
Reviewpost
agedyear-end toreports
inventory assess and
NRV.identify any slow moving goods, discuss
with management why these items have not been written down or if an
–allowance is required.
For the defective batch of product Crocus, review board minutes and discuss
with management their plans for selling these goods, and why they believe
–these goods
If any Crocushave a NRV have
products of $90,000.
been sold post year end, review the sales invoice
to assess NRV.
– Agree the cost of $450,000 for product Crocus to supporting documentation to
confirm the raw material cost, labour cost and any overheads attributed to the
cost.
– Confirm if the final adjustment for the damaged product is $360,000
($450,000 – $90,000) and discuss with management if this adjustment has been
made. If so, follow through the write down to confirm

2019 - Mar, Jun

sufficient and appropriate audit evidence in relation to the VALUATION of
Hyacinth
– Obtain theinventory.
Co’s breakdown of WIP and agree a sample of WIP assessed during the
inventory count to the WIP schedule, agreeing the percentage completion to
that
– Forrecorded
a sampleat
ofthe inventory
inventory count.
items (finished goods and WIP), obtain the relevant
cost sheets and agree raw material costs to recent purchase invoices, labour
costs to time sheets or payroll records and confirm overheads allocated are of a
production related nature.
– Examine post year-end credit notes to determine whether there have been
returns
– Selectwhich could
a sample of signify
year-endthat a writegoods
finished down and
is required.
compare cost with post year-
end sales invoices to ascertain if net realisable value (NRV) is above cost or if an
–adjustment
Discuss theis basis
required.
of WIP valuation with management and assess its
reasonableness.
– Select a sample of items included in WIP at the year end and ascertain the
final unit cost price by verifying costs to be incurred to completion to relevant
supporting documentation. Compare to the unit sales price included in sales
invoices
– Reviewpostagedyear-end toreports
inventory assess and
NRV.identify any slow moving goods, discuss
with management why these items have not been written down or if an
allowance is required.
– For the defective batch of product Crocus, review board minutes and discuss
with management their plans for selling these goods, and why they believe
–these goods
If any Crocushave a NRV have
products of $90,000.
been sold post year end, review the sales invoice
to assess NRV.
– Agree the cost of $450,000 for product Crocus to supporting documentation to
confirm the raw material cost, labour cost and any overheads attributed to the
cost.
– Confirm if the final adjustment for the damaged product is $360,000
($450,000 – $90,000) and discuss with management if this adjustment has been
made. If so, follow through the write down to confirm.
sufficient and appropriate audit evidence in relation to Hyacinth Co’s
research and development expenditure.
– Obtain and cast a schedule of intangible assets, agree the closing balances to
the general ledger, trial balance and draft financial statements.
– Discuss with the finance director the rationale for the four-year useful life and
consider its reasonableness.
– Recalculate the amortisation charge for a sample of intangible assets which
have commenced production and confirm that it is in line with the amortisation
policy of straight line over four years and that amortisation only commenced
from the point of production.
 – For the three new computing software projects, discuss with management the
details of each project along with the stage of development and whether it has
been capitalised or expensed.
– For those expensed as research, agree the costs incurred to invoices and
supporting documentation and to inclusion in profit or loss.
– For those capitalised as development, agree costs incurred to invoices.
– Confirm technically feasible and intention to complete the project by
discussion with development managers or review of feasibility reports.
– Review market research reports to confirm Hyacinth Co has the ability to sell
the product
– Review theonce complete
costs, and
projected probable
revenue andfuture
cash economic benefits
flow budgets will
for the arise.
each of the
three projects to confirm Hyacinth Co has adequate resources to complete the
development stage and that probable future economic benefits exist. Agree the
budgets to supporting documentation.
– Review the disclosures for intangible assets in the draft financial statements to
verify that they are in accordance with IAS 38 Intangible Assets.
sufficient and appropriate audit evidence in relation to Hyacinth Co’s year-
end–sales
Agreetax
the liability.
year-end sales tax liability in the trial balance to the tax
return/reconciliation submitted to the tax authority and cast the
return/reconciliation.
– Agree the quarterly sales tax charged equates to 15% of the last quarter’s
sales as per the sales day book.
– Recalculate the sales tax incurred as per the reconciliation is equal to 15% of
the final quarter’s purchases and expenses as per the purchase day book.
– Recalculate the amount payable to the tax authority as being sales tax
charged less sales tax incurred.
– Compare the year-end sales tax liability to the prior year balance or budget
and investigate
– Agree any significant
the subsequent payment differences.
to the post year-end cash book and bank
statements to confirm completeness and that it has been paid in line with the
terms of the tax authority.
– Review any current and post year-end correspondence with the tax authority
to assess whether there are any additional outstanding payments due. If so,
confirm
– Reviewthey
any are includedmade
disclosures in theof
year-end liability.
the sales tax liability to ensure that it is shown
as a current liability and assess whether disclosures are in compliance with
accounting standards and legislation.

2018
(d)- Describe
Sep, Dec substantive procedures the auditor should perform in relation
to the faulty paint products held in inventory at the year end.
– Obtain a breakdown of the damaged goods held in inventory and returned
from customers and cast to confirm its accuracy.
– From the breakdown, agree the damaged goods quantities manufactured
since June
– Agree ontoa production records;
sample basis and agree
the returns from to sales records
customers as perthe
thequantities
breakdown sold.
back to sales returns documentation to confirm the existence of the returns
quantities.
– Discuss with management the current status of their plans for this product line
and whether they are able to rectify the damage and then sell the goods on. If
so, agree the costs of rectification to supporting documentation.
– If the damaged inventory has been rectified and sold post year end, agree to
the sales invoice to assess NRV in line with the new cost of the product.
– Agree the cost of damaged goods to supporting documentation to confirm the
raw material cost, labour cost and any overheads attributed to the cost.
– Discuss with management if the goods have been written down; if so, follow
through the write down to the inventory valuation to confirm.
– Inspect monthly board meeting minutes from June 20X8 onwards to obtain
further information regarding the faulty paint and its possible resale value.
 (e) Describe substantive procedures the auditor should perform to obtain
sufficient and appropriate evidence in relation to Darjeeling Co’s revenue.
1 – Compare the overall level of revenue against prior years and budget for the
year and investigate any significant fluctuations.
2 – Obtain a schedule of sales for the year broken down into the main product
categories and compare this to the prior year breakdown and for any unusual
movements, discuss with management.
3 – Calculate the final gross profit margin for Darjeeling Co and compare this to
the prior a
– Select year and investigate
sample any significant
of sales invoices fluctuations.
for customers and agree the sales prices
4 back to the price list or customer master data information to ensure the
accuracy of invoices.
– For a sample of invoices, recalculate invoice totals including discounts and
5 sales tax.
6 – Select a sample of customer orders and agree these to the despatch notes
and sales invoices through to inclusion in the sales ledger and revenue general
ledger accounts
– Select a sample to of
ensure completeness
despatch notes bothofpre
revenue.
and post year end and follow
7 these through to sales invoices in the correct accounting period to ensure that
cut-off has abeen
– Perform correctly
proof applied.
in total calculation for revenue, creating an expectation of the
8 average price for the main paint products multiplied by the increased sales
volumes for this year. This expectation should be compared to actual revenue
and any significant fluctuations should be investigated.
9 – Select a sample of credit notes raised, trace through to the original invoice
and ensure the invoice has been correctly removed from sales.
10 – For sales made under the price promise, compare the level of claims made to
date
– Forwith the refund
a sample liability
of sales recognised
invoices and assess
issued between whether
June and theitproduct
is reasonable.
recall,
11 trace to subsequent credit notes to confirm that the sale has been removed
from revenue.

2018 - Sep, Dec

18(a) Substantive procedures for trade receivables
– Obtain the aged receivables listing and agree to the balance on the sales
1 ledger control
– Review account
the aged and
trade trial balance.
receivables ledger to identify any slow moving or old
balances, discuss the status of these balances with the credit controller to
2 assess whether
– Select they are likely
a representative to pay.
sample of trade receivables and review for any after-
date cash receipts. Ensure that a sample of slow moving/old receivable balances
3 is also selected.
– Review customer correspondence to identify any balances which are in
4 dispute or unlikely to be paid and discuss with management.
– Review board minutes to identify whether there are any significant concerns
5 in relation to payments by customers.
– Calculate the average receivables collection period and compare this to the
6 prior year and investigate any significant differences.
– Inspect post year-end sales returns/credit notes and consider whether an
7 additional
– Obtain aallowance
breakdown against
of the receivables is required.
allowance for trade receivables, recalculate and
compare to any potentially irrecoverable balances to assess if the allowance is
8 adequate.
– Select a sample of goods despatched notes (GDN) immediately before and
after the year end to ensure they are recorded in the correct accounting period
9 in the receivables
– Select a sample ledger
of year-end receivables balances and agree back to valid
supporting documentation of sales invoices, GDNs and sales orders to ensure
10 existence.

(b) Substantive
– Obtain a bankprocedures
confirmationfor bank
letter balances
from Jasmine Co’s bankers for all of its
accounts.
– Agree all accounts listed on the bank confirmation letter to the company’s
bank reconciliations or the trial balance/general ledger to ensure completeness
of bank balances.
 – For the current account, obtain Jasmine Co’s bank reconciliation and cast to
check the additions to ensure arithmetical accuracy.
– Agree the balance per the bank reconciliation to an original year-end bank
statement
– Agree the and to the bank confirmation
reconciliation’s balance per letter.
the cash book to the year-end cash
book.
– Trace all the outstanding lodgements to the pre year-end cash book, post
year-end bank
– Trace all statementcheques
unpresented and alsothrough
to the paying-in book precash
to a pre year-end year book
end. and post
year-end bank statement. For any unusual amounts or significant delays, obtain
explanations
– Examine any from
oldmanagement.
unpresented cheques to assess whether they need to be
written back.
– Review the cash book and bank statements for any unusual items or large
transfers
– Examinearound the confirmation
the bank year end, as this could
letter be evidence
for details of any of windowprovided
security dressing.
by
Jasmine Co, with regards to the bank overdraft or any legal right of set-off as
this may require disclosure.
– For the savings bank accounts, review any reconciling items on the year-end
bank reconciliations
– Review the financialand agree to supporting
statements documentation.
to ensure that the disclosure of bank
balances is complete and accurate and classified appropriately between current
assets and current liabilities.

2018 - Mar,
16(d) Jun
Substantive procefure for Accrual for income tax payable on
employment income
Procedures the auditor should adopt in respect of auditing this accrual include:
– Compare the accrual for income tax payable to the prior year, investigate any
significant differences.
– Agree the year-end income tax payable accrual to the general ledger and
payroll records to confirm accuracy.
– Re-perform the calculation of the accrual to confirm accuracy and discuss any
unexpected variances with management.
– Agree the subsequent payment to the post year-end cash book and bank
statements
– Review anyto correspondence
confirm completeness.
with tax authorities to assess whether there are
any additional outstanding payments due; if so, agree they are included in the
year-end accrual.
– Review any disclosures made of the income tax accrual and assess whether
these are in compliance with accounting standards and legislation.

2018 - Mar, Jun

18 (a) Substantive procedures for research and development
– Obtain and cast a schedule of intangible assets, detailing opening balances,
amounts capitalised
– Agree the in the current
closing balances to theyear, amortisation
general andbalance
ledger, trial closingand
balances.
draft
financial statements.
– Discuss with the finance director the rationale for the three-year useful life
and consider its
– Recalculate reasonableness.
the amortisation charge for a sample of intangible assets which
have commenced production and confirm it is in line with the amortisation
policy of straight line over three years and that amortisation only commenced
from
– Forthe
thepoint
nine of
newproduction.
projects, discuss with management the details of each
project along with the stage of development and whether it has been capitalised
or expensed.
– For those expensed as research, agree the costs incurred to invoices and
supporting
– For thosedocumentation and to inclusion
capitalised as development, in profit
agree costsorincurred
loss. to invoices and
confirm technically feasible by discussion with development managers or review
of feasibility reports.
– Review market research reports to confirm Gooseberry Co has the ability to
sell the product once complete and probable future economic benefits will arise.
 – Review the disclosures for intangible assets in the draft financial statements
to verify that they are in accordance with IAS 38 Intangible Assets.

(b) Substantive procedures for depreciation

– Discuss with management the rationale for the changes to property, plant and
equipment (PPE) depreciation rates, useful lives, residual values and
depreciation
– Confirm themethods and ascertain
reasonableness how
of these these changes
changes, were arrived
by comparing at.
the revised
depreciation rates, useful lives and methods applied to PPE to industry averages
and knowledge
– Review of theexpenditure
the capital business. budgets for the next few years to assess
whether the revised asset lives correspond with the planned period until
replacement of the relevant asset categories.
– Review the non-current asset register to assess if the revised depreciation
rates have been applied.
– Review and recalculate profits and losses on disposal of assets sold/scrapped
in the year,
– Select to assess
a sample the and
of PPE reasonableness of the
recalculate the revised depreciation
depreciation rates. that
charge to ensure
the non-current assets register is correct and ensure that new depreciation rates
have beena appropriately
– Obtain breakdown of applied.
depreciation by asset categories, compare to prior
year; where significant changes have occurred, discuss with management and
assess whether this change is reasonable.
– For asset categories where there have been a minimal number of additions
and disposals, perform a proof in total calculation for the depreciation charged
on PPE, discuss
– Review with management
the disclosure if significant
of the depreciation fluctuations
charges arise.in the draft
and policies
financial statements and ensure it is in line with IAS 16 Property, Plant and
Equipment.

(c) Substantive procedures

– Obtain a schedule for directors’
of the directors’ bonusbonuses
paid in February 20X8 and cast the
schedule to ensure accuracy and agree amount disclosed in the financial
statements.
– Review the schedule of current liabilities and confirm the bonus accrual is
included as a year-end liability.
– Agree the individual bonus payments to the payroll records.
– Recalculate the bonus payments and agree the criteria, including the
exclusion of intangible assets, to supporting documentation and the percentage
rates to be paid to the directors’ service contracts.
– Confirm the amount of each bonus paid post year end by agreeing to the cash
book andthe
– Agree bank statements.
amounts paid per director to board minutes to ensure the sums
included in the current year financial statements are fully accrued and
disclosed.
– Review the board minutes to identify whether any additional payments
relating to this year have been agreed for any directors.
– Obtain a written representation from management confirming the
completeness of directors’ remuneration including the bonus.
– Review the disclosures made regarding the bonus paid to directors and assess
whether these are in compliance with local legislation.

2017 SD
Substantive procedures for purchases and other expenses
– Calculate the operating profit and gross profit margins and compare them to
last year and budget and investigate any significant differences.
– Review monthly purchases and other expenses to identify any significant
fluctuations and
– Discuss with discuss withwhether
management management.
there have been any changes in the key
suppliers used and compare this to the purchase ledger to assess completeness
and accuracy of purchases.
 – Recalculate the accuracy of a sample of purchase invoice totals and related
taxes and ensure expense has been included in the correct nominal code.
– Recalculate the prepayments and accruals charged at the year end to ensure
the accuracy of the expense charge included in the statement of profit or loss.
– Select a sample of post year-end expense invoices and ensure that any
expenses relating to the current year have been included.
– Select a sample of payments from the cash book and trace to expense account
to ensure
– Select a the expense
sample has been
of goods included
received notesand classified
(GRNs) correctly. the year;
from throughout
agree them to purchase invoices and the purchase day book to ensure the
completeness of purchases.
– Select a sample of GRNs just before and after the year end; agree to the
purchase day book to ensure the expense is recorded in the correct accounting
period.

(b) Receivables substantive procedures

Accuracy,
– Review the valuation
after dateand
cashallocation
receipts and follow through to pre year-end
receivable balances.
– Inspect the aged receivables report to identify any slow moving balances,
discuss these with the credit control manager to assess whether an allowance or
write down is necessary.
– For any slow moving/aged balances review customer correspondence to
assess whether there are any invoices in dispute.
– Review board minutes of Dashing Co to assess whether there are any material
disputed receivables.
Completeness
– Select a sample of goods despatched notes from before the year end, agree to
sales invoices and to inclusion in the sales ledger and year-end receivables
ledger.
– Agree the total of individual sales ledger accounts to the aged receivables
listing
– Obtainand toprior
the the trial
yearbalance.
aged receivables listing and for significant balances
compare to the current year receivables listing for inclusion and amount due.
Discuss with management any missing receivables or significantly lower
balances.
– Review the sales ledger for any credit balances and discuss with management
whether these should be reclassified as payables.

Rights and obligations

– Review bank confirmations and loan agreements for any evidence that
receivables have been assigned as security for amounts owed by Dashing Co.
– Review board minutes for evidence that legal title to receivables has been sold
onto a third party such as a factor.
– For a sample of receivables, agree the balance recorded on the sales ledger to
the original
Tutorial name
note: of thewill
Marks customer on a sales
be awarded for order or a contract.
any other relevant receivables
tests.

(c) Substantive
– Discuss withprocedures
the directorsto
of confirm
Dashing Cotheasredundancy provision
to whether they have formally
announced their intention to close the production site and make their
employees redundant, to confirm that a present obligation exists at the year
end.
– If announced before the year end, review supporting documentation to verify
that the decision has been formally announced.
– Review the board minutes to ascertain whether it is probable that the
redundancy payments will be paid.
– Obtain a breakdown of the redundancy calculations by employee and cast it to
ensure completeness
– Recalculate and agree
the redundancy to trial balance.
provision to confirm completeness and agree
components of the calculation to supporting documentation such as employee
contracts.
 – Review the post year-end cash book to identify whether any redundancy
payments have been made, compare actual payments to the amounts provided
to assessawhether
– Obtain the provision isfrom
written representation reasonable.
management to confirm the
completeness of the provision.
– Review the disclosure of the redundancy provision to ensure compliance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

2017 MJ
sufficient and appropriate audit evidence in relation to the COMPLETENESS
of Airsoft Co’s trade payables and accruals.
– Compare the total trade payables and list of accruals against prior year and
investigate any
current year, significant
follow through differences
to the purchase ledger or accruals listing to ensure they
are recorded in the correct period.
– Obtain supplier statements and reconcile these to the purchase ledger balances, and
– Select a sample of payable balances and perform a trade payables’ circularisation,
– Review after date invoices and credit notes to ensure no further items need to be
– Enquire of management their process for identifying goods received but not invoiced or

(c) Substantive procedures for bank balances

– Obtain a bank confirmation letter from Airsoft Co’s bankers for all of its bank
accounts.
– Agree all accounts listed on the bank confirmation letter to Airsoft Co’s bank
reconciliations and the trial balance to ensure completeness of bank balances.
– For all bank accounts, obtain Airsoft Co’s bank account reconciliation and cast
to ensure arithmetical accuracy.
– Agree the balance per the bank reconciliation to an original year-end bank
statement and to the bank confirmation letter.
– Agree the reconciliations balance per the cash book to the year-end cash book.
– Trace all the outstanding lodgements to the pre year-end cash book, post
year-end bank statement and also to the paying-in-book pre year end.
– Trace all unpresented cheques through to a pre year-end cash book and post
year-end statement. For any unusual amounts or significant delays, obtain
explanations from management.
– Examine any old unpresented cheques to assess if they need to be written
back into the purchase ledger as they are no longer valid to be presented.
– Review the cash book and bank statements for any unusual items or large
transfers around the year end, as this could be evidence of window dressing.
– Examine the bank confirmation letter for details of any security provided by
Airsoft Co or any legal right of set-off as this may require disclosure.
– Review the financial statements to ensure that the disclosure of bank balances
is complete and accurate.
(d) Substantive procedures for directors’ remuneration
– Obtain a schedule of the directors’ remuneration, split by salary and bonus
paid in December and cast the schedule to ensure accuracy.
– Agree a sample of the individual monthly salary payments and the bonus
payment in December to the payroll records.
– Confirm the amount of each bonus paid by agreeing to the cash book and
bank statements.
– Review the board minutes to identify whether any additional payments
relating to this year have been agreed for any directors.
– Agree the amounts paid per director to board minutes to ensure the sums
included are genuine.
– Obtain a written representation from management confirming the
completeness of directors’ remuneration including the bonus.
– Review the disclosures made regarding the directors’ remuneration and assess
whether these are in compliance with local legislation.
 SUBSTANTIVE PROCEDURE FOR SALES - AR
(a) Substantive procedures for Vega Vista Co’s income
1 – Obtain a schedule of all Vega Vista Co’s income and cast to confirm completeness
and accuracy of the balance and agree to the trial balance.
2 – Compare the individual categories of income of festival ticket sales, sundry sales and
donations against prior years and investigate any significant differences.
3 – For the annual festival, construct a proof-in-total calculation of the number of tickets
sold, approximately 15,000, multiplied by the ticket price of $35. Compare this to the
income recorded
– For tickets andthe
sold on discuss
day ofany
thesignificant differences
festival reconcile fromwith management.
ticket stubs the number of
4 tickets sold multiplied by $35 and agree these sales to cash banked in the bank
statement.
5 – Discuss with management their procedures for ensuring advance ticket sales for the
September 20X5 festival are excluded from income and instead recognised as
deferred
– Select aincome
sampleinofthe statement
advance ofsales
ticket financial
madeposition.
online, agree that the transaction has
6 been excluded from current year income and follow through to inclusion in deferred
income.
– Agree journal entry to transfer prior year deferred income relating to the 20X4
7 festival to current year income to the ledger and agree figures to prior year financial
statements.
8 – For sundry sales, obtain a breakdown of the income received per stall and agree to
supporting documentation provided by each stall holder. Recalculate the fixed
percentage received
– Compare sundry is as
sales per
per theholder
stall agreement/contract made
to prior year sales with
data Vega
and Vista Co.any
investigate
9 significant
– For monthlydifferences.
donations, trace a sample of donations from sign up documentation to
10 the bank statements, cash book and income listing to ensure that they are recorded
–completely andof
For a sample accurately.
new donors in the year, agree the monthly sum and start date from
11 their completed forms and trace to the monthly donations received account and agree
to the cash book and bank statements.
(e) ...obtain sufficient and appropriate evidence in relation to Darjeeling Co’s
revenue.
1 – Compare the overall level of revenue against prior years and budget for the year and
investigate any significant fluctuations.
– Obtain a schedule of sales for the year broken down into the main product
2 categories and compare this to the prior year breakdown and for any unusual
movements, discuss with management.
3 – Calculate the final gross profit margin for Darjeeling Co and compare this to the
prior year and investigate any significant fluctuations.
4 – Select a sample of sales invoices for customers and agree the sales prices back to
the price list or customer master data information to ensure the accuracy of invoices.
5 –– Select
For a sample
a sampleof invoices, recalculate
of customer invoice
orders and totals
agree theseincluding discounts
to the despatch and sales
notes and tax.
6 sales invoices through to inclusion in the sales ledger and revenue general ledger
accounts
– Select atosample
ensureof completeness of revenue.
despatch notes both pre and post year end and follow these
7 through to sales invoices in the correct accounting period to ensure that cut-off has
been correctly
– Perform applied.
a proof in total calculation for revenue, creating an expectation of the
8 average price for the main paint products multiplied by the increased sales volumes
for this year. This expectation should be compared to actual revenue and any
significant fluctuations should be investigated.
9 – Select a sample of credit notes raised, trace through to the original invoice and
ensure the invoice has been correctly removed from sales.
10 – For sales made under the price promise, compare the level of claims made to date
with the refund liability recognised and assess whether it is reasonable.
11 – For a sample of sales invoices issued between June and the product recall, trace to
subsequent credit notes to confirm that the sale has been removed from revenue.

18(a) Substantive
– Obtain procedures
the AR aging foragree
report and tradetoreceivables
the balance on the sales ledger control
1 account and trial balance.
 – Review the AR aging report to identify any slow moving or old balances, discuss the
2 status of these balances with the credit controller to assess whether they are likely to
pay.
3 – Review customer correspondence to identify any balances which are in dispute or
unlikely to be paid and discuss with management.
4 – Review board minutes to identify whether there are any significant concerns in
relation to payments by customers.
5 – Calculate the average receivables collection period and compare this to the prior
year and investigate any significant differences.
6 – Inspect post year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.
7 – Obtain a breakdown of the allowance for trade receivables, recalculate and compare
to any potentially
– Select a sampleirrecoverable balancesnotes
of goods despatched to assess
(GDN)if immediately
the allowancebefore
is adequate.
and after the
8 year end to ensure they are recorded in the correct accounting period in the
receivables ledger of year-end receivables balances and agree back to valid
– Select a sample
9 supporting documentation of sales invoices, GDNs and sales orders to ensure
existence.
- Select a sample of goods despatch note and sales invoice to ensure they are recoded
10 into trade receivable

b) Substantive procedure for

– Review correspondence withReceivable - Receivable
Ellah Co to establish due
if there from
was Ellah Coabout
a discussion
1 payment difficulties and whether Ellah Co intends to fully settle the outstanding
amount.
– Review the age of the outstanding debt with Ellah Co and discuss the circumstances
2 with the credit controller to establish if it has exceeded the agreed credit terms and
consider
– Review ifpost
an allowance is required.
year-end receipts from Ellah Co to establish how much of the debt was
3 recovered by the audit completion date and to assess how much of the year-end
balance remains outstanding.
4 – Inspect board minutes to identify whether there are any significant concerns in
relation to payments by Ellah Co.
5 – Discuss with management of Purrfect Co why no allowance has been made in
respect of this debt and assess the justification.

(b) Substantive procefure for Valuation of trade receivables

1 Review the aged receivables listing to identify slow moving or old balances. Discuss
the status of these balances with the credit controller to assess whether the
customers
Review are likely
whether toare
there payany
or ifafter-date
an allowance
cashfor receivables
receipts is required.
for slow moving/old receivable
balances.
2 Review correspondence with customers in order to identify any balances which are in
3 dispute or unlikely to be paid and discuss with management whether any allowance is
required.
Review board minutes to identify whether there are any significant concerns in
4 relation to outstanding receivables balances and assess whether the allowance is
reasonable.
Obtain a breakdown of the allowance for trade receivables. Recalculate it and
5 compare it to any potentially irrecoverable balances to assess if the allowance is
adequate.
Review the payment history for evidence of slow paying by any customers who were
6 granted credit in the period when there was no credit controller and who may not,
therefore,
Discuss have
with thebeen properly
finance scrutinised.
director the rationale for maintaining the allowance at the
7 same level in light of the increase in the receivables collection period and the absence
of a credit controller.
8 Inspect post year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.

(d) Substantive procedures for valuation of trade receivables

1 – Discuss with the finance director the rationale for not increasing the allowance for
trade receivables
– Obtain and review
a breakdown its overall
of the opening adequacy.
allowance and consider if the receivables
2 provided for in the prior year have been recovered to assess the reasonableness of
the prior levels of allowances.
 3 – Review the aged trade receivables ledger to identify any slow moving or old
receivable balances and discuss the status of these balances with the credit
–controllers to assess
Review whether whether
there they
are any are likely
after-date to be
cash received.
receipts for slow moving/old
4 receivable balances.
5 – Review customer correspondence with the significant customer and others to
identify any balances which are in dispute or are unlikely to be paid.
6 – Review board minutes to identify whether there are any significant concerns in
relation to payments by customers.
7 – Calculate the potential level of trade receivables which are not recoverable and
assess whether this is material or not and discuss with management.

Procedures the auditor should perrform to resolve the exxceptions noted for
each customer during the positive receivable circularisation
Albacore Co
1 – For the non-response from Albacore Co, with the client’s permission, the team should
–arrange to send
If Albacore a follow-up
Co does circularisation.
not respond to the follow up, then with the client’s permission,
2 the auditor should telephone the customer and ask whether they are able to respond
in writing to the circularisation request.
3 – If there is still no response, then the auditor should undertake alternative procedures
to confirm the balance owing from Albacore Co. Such as detailed testing of the
balance by agreeing to sales invoices and goods dispatched notes (GDN).

Flounder Co
1 – For the response from Flounder Co, with a difference of $5,850 the auditor should
identify any disputed amounts, and identify whether these relate to timing differences
or whether there are possible errors in the records of Triggerfish.
2 – If the difference is due to timing, such as cash in transit, this should be agreed to
–post year-end
If the cashrelates
difference receipts in the cash
to goods book.then this should be agreed to a pre year-
in transit,
3 end GDN.

Menhaden Co
1 – The reason for the credit balance with Menhaden should be discussed with the credit
controller
– Review theor finance department
payables to understand
ledger to identify how aiscredit
if Menhaden balance
a supplier as has
well arisen.
as a
2 customer; if so, a purchase invoice may have been posted in error to the receivables
rather than payables ledger.
3 – If the difference is due to credit notes, this should be agreed to pre year-end credit
notes dispatched around the year-end date.
4 – The receivables ledger should be reviewed to identify any possible mis-postings as
this could be a reason for the difference with Menhaden Co.

(b) Substantive procedures for allowance for trade receivables

1 – Discuss with the finance director the rationale for not providing against any
receivables and consider the reasonableness of the allowance.
2 – Obtain a breakdown of the opening allowance of $125,000 and consider if the
receivables provided for in the prior year have been fully recovered as a result of the
additional credit control procedures or if they have now been fully written off.
3 – Inspect the aged trade receivables ledger to identify any slow moving or old
receivable balances and discuss the status of these balances with the credit
–controllers to assess
Review whether whether
there they
are any are likely
after-date to be
cash received.
receipts for identified slow moving/old
4 receivable balances.
– Review customer correspondence to identify any balances which are in dispute or
5 are unlikely to be paid and confirm if these have been considered when determining
the allowance.
– Inspect board minutes to identify whether there are any significant concerns in
6 relation to payments by customers and assess if these have been considered when
determining the allowance.
 7 – Recalculate the potential level of trade receivables which are not recoverable and
compare to allowance and discuss differences with management.

(b) Receivables substantive procedures

–Accuracy,
Review thevaluation
after dateand
cashallocation
receipts and follow through to pre year-end receivable
1 balances.
– Inspect the aged receivables report to identify any slow moving balances, discuss
2 these with the credit control manager to assess whether an allowance or write down is
necessary.
3 – For any slow moving/aged balances review customer correspondence to assess
–whether
Reviewthere
boardare any invoices
minutes in dispute.
of Dashing Co to assess whether there are any material
4 disputed receivables.
Completeness
1 – Select a sample of goods despatched notes from before the year end, agree to sales
–invoices andtotal
Agree the to inclusion in thesales
of individual salesledger
ledgeraccounts
and year-end
to thereceivables ledger.listing and
aged receivables
2 to the trial balance.
3 – Obtain the prior year aged receivables listing and for significant balances compare to
the current year receivables listing for inclusion and amount due. Discuss with
management any missing receivables or significantly lower balances.
4 – Review the sales ledger for any credit balances and discuss with management
whether these should be reclassified as payables.

Rights and obligations

1 – Review bank confirmations and loan agreements for any evidence that receivables
have been assigned as security for amounts owed by Dashing Co.
2 – Review board minutes for evidence that legal title to receivables has been sold onto
a third party such as a factor.
3 – For a sample of receivables, agree the balance recorded on the sales ledger to the
original name of the customer on a sales order or a contract.
PAYROLL, BONUS, REMUNERTATION
(c) Substantive procedures for directors’ bonuses
1 Obtain a schedule of the directors’ bonus and cast the schedule to ensure its accuracy. Agree the
amount
Review the to that disclosed
schedule in the liabilities
of current financial statements.
and confirm the bonus accrual is included as a year-end
2 liability.
3 Recalculate the bonus payments and agree the criteria to supporting documentation and the
percentage
Confirm the rates to be
amount paid to
of each the directors’
bonus service contracts.
paid by agreeing to the post year-end cash book and bank
4 statements.
5 Agree the amounts paid to each director to board minutes and contracts to ensure the amounts
includedthe
Review in the current
board yeartofinancial
minutes identify statements
whether anyare fully accrued
additional and disclosed.
payments relating to this year have been
6 agreed for any directors.
7 Review the disclosures made regarding the bonus paid to directors and assess whether these are in
compliance with local legislation
8 Agree the individual bonus payments to the post year-end payroll records.
Compare the profit before tax used in the bonus calculation to the final profit before tax figure to
9 confirm whether any adjustment is required to the bonus paid and discuss any differences with
management.
Obtain a written representation from management confirming the completeness of directors’
10 remuneration including the bonus.
(d) Substantive procedures for directors’ remuneration
1 – Obtain a schedule of the directors’ remuneration, split by salary and bonus paid in December and cast
–the schedule
Agree to ensure
a sample of theaccuracy.
individual monthly salary payments and the bonus payment in December to
2 the payroll records.
3 – Review
Confirmthe
theboard
amount of each
minutes tobonus paid
identify by agreeing
whether to the cash
any additional book and
payments bank statements.
relating to this year have
4 been agreed for any directors.
5 – Agree the amounts paid per director to board minutes to ensure the sums included are genuine.
6 – Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
7 – Review the disclosures made regarding the directors’ remuneration and assess whether these are in
compliance with local legislation.

(d) Substantive procedures on payroll expense

1 – Cast a sample of payroll records to confirm completeness and accuracy and agree the total wages
and salaries expense per the payroll system to the trial balance.
2 – For
Recalculate
a samplethe gross payments,
of wage and net payagree
figures
thefor a sample
total net payofper
employees andrecords
the payroll agree to the payroll records.
bank transfer
3 listing and to the cash book.
– Compare the total payroll figure this year to the prior year, identify any significant differences and
4 discuss with management.
5 – Review monthly payroll charges, compare this to the prior year and budgets and discuss any
significant differences with management.
6 – Calculate overtime costs as a percentage of total wages. Compare this to the prior year and discuss
any significant differences with management.
7 – Agree a sample of individual wages and salaries per the payroll to personnel records and records of
hours worked per the clocking-in system.
8 – Reperform the calculation of statutory deductions and agree to supporting documentation to confirm
whether correct deductions for this year have been made in the payroll.
9 – Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation,
recalculate
– Recalculate their first/last
holiday pay salary to ensure
for a sample it is accurate.
of employees and agree to holiday records and daily rate
10 applied.
11 – Select a sample of employees from HR records and agree salaries per HR records to the payroll
–records
Performto aconfirm
proof inthe accuracy
total of the
of wages andpayroll
salaries,expense.
incorporating joiners and leavers and the pay
12 increase/bonuses. Compare this to the actual wages and salaries expense in the financial statements
and investigate any significant differences.
13 – Agree the payroll control account reconciliation to accounting records and investigate any differences.
INVENTORY
a) Substantive procedure for Inventory - (a) Inventory of Vego Dog
– Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2·4m to
1 inventory records.
– Agree the quantity of Vego Dog products shown as held at the year end to the year-end inventory count
2 records.
3 – Request a breakdown of the cost calculation of each unit of this product and discuss with management
how the standard cost was derived.
4 – Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost is $2·4m.
5 – For a sample of finished goods items, obtain standard cost cards and agree:
raw material costs to recent purchase invoices;
labour costs to time sheets or wage records;
overheads allocated to invoices and that they are of a production nature.
6 - Compare sales prices over time to establish if the price has been reduced because of falling demand to
determine whether an allowance is required.
7 – Compare actual sales units per month to budgeted sales per month from before and after the year end
to establish how much lower actual sales are than expected and discuss with management.
8 – Select a sample of items included in inventory of Vego Dog and review post year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

(a) Substantive procedure for Inventory valuation

1 – Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to the WIP
schedule, agreeing the percentage completion to that recorded at the inventory count.
2 – For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and agree raw
material costs to recent purchase invoices, labour costs to time sheets or payroll records and confirm
overheads allocated are of a production related nature.
3 – Select a sample of year-end finished goods and compare cost with post year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
4 – Discuss the basis of WIP valuation with management and assess its reasonableness.
5 – Review aged inventory reports and identify any slow moving goods, discuss with management why
these items have not been written down or if an allowance is required.
6 – For the defective batch of product Crocus, review board minutes and discuss with management their
plans for selling these goods, and why they believe these goods have a NRV of $90,000.
7 – If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
8 – Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw material
cost, labour cost and any overheads attributed to the cost.
9 – Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and discuss
with management if this adjustment has been made. If so, follow through the write down to confirm
10 – Examine post year-end credit notes to determine whether there have been returns which could signify
that a write down is required.
11 – Select a sample of items included in WIP at the year end and ascertain the final unit cost price by
verifying costs to be incurred to completion to relevant supporting documentation. Compare to the unit
sales price included in sales invoices post year-end to assess NRV.

(d) Describe substantive procedures the auditor should perform in relation to the faulty paint
products held
– Obtain in inventory
a breakdown atdamaged
of the the yeargoods
end. held in inventory and returned from customers and cast to
1 confirm its accuracy.
2 – From the breakdown, agree the damaged goods quantities manufactured since June to production
records; and agree to sales records the quantities sold.
3 – Agree on a sample basis the returns from customers as per the breakdown back to sales returns
documentation to confirm the existence of the returns quantities.
– Discuss with management the current status of their plans for this product line and whether they are
4 able to rectify the damage and then sell the goods on. If so, agree the costs of rectification to supporting
documentation.
5 – If the damaged inventory has been rectified and sold post year end, agree to the sales invoice to
assess NRV in line with the new cost of the product.
6 – Agree the cost of damaged goods to supporting documentation to confirm the raw material cost, labour
cost and any overheads attributed to the cost.
7 – Discuss with management if the goods have been written down; if so, follow through the write down to
the inventory valuation to confirm.
8 – Inspect monthly board meeting minutes from June 20X8 onwards to obtain further information
regarding the faulty paint and its possible resale value.
R&D EXPENDITURE

(b) Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to Hyacinth Co’s research
and development expenditure.
1 – Obtain and cast a schedule of intangible assets, agree the closing balances to the
general
– Discussledger, trial
with the balance
finance and draft
director the financial
rationalestatements.
for the four-year useful life and
2 consider its reasonableness.
– Recalculate the amortisation charge for a sample of intangible assets which have
3 commenced production and confirm that it is in line with the amortisation policy of
straight line over four years and that amortisation only commenced from the point of
production.
4 – For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.
5 – For those capitalised as development, agree costs incurred to invoices.
6 – Review the disclosures for intangible assets in the draft financial statements to verify
that
– Forthey are innew
the three accordance
computingwith IAS 38 Intangible
software Assets.with management the details
projects, discuss
7 of each project along with the stage of development and whether it has been
capitalised or expensed.
8 – Confirm technically feasible and intention to complete the project by discussion with
development managers or review of feasibility reports.
9 – Review market research reports to confirm Hyacinth Co has the ability to sell the
product
– Reviewonce complete
the costs, and probable
projected revenuefuture economic
and cash benefitsfor
flow budgets will
thearise.
each of the three
10 projects to confirm Hyacinth Co has adequate resources to complete the development
stage and that probable future economic benefits exist. Agree the budgets to
supporting documentation.

18 (a) Substantive procedures for research and development

1 – Obtain and cast a schedule of intangible assets, detailing opening balances, amounts
capitalised
– Agree theinclosing
the current year,toamortisation
balances the general and closing
ledger, trial balances.
balance and draft financial
2 statements.
3 – Discuss with the finance director the rationale for the three-year useful life and
consider its reasonableness.
– Recalculate the amortisation charge for a sample of intangible assets which have
4 commenced production and confirm it is in line with the amortisation policy of straight
line over three years and that amortisation only commenced from the point of
production.
5 – For the nine new projects, discuss with management the details of each project along
with the stage of development and whether it has been capitalised or expensed.
6 – For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.
7 – Review the disclosures for intangible assets in the draft financial statements to verify
that
– Forthey arecapitalised
those in accordance with IAS 38 Intangible
as development, Assets.
agree costs incurred to invoices and confirm
8 technically feasible by discussion with development managers or review of feasibility
reports.
9 – Review market research reports to confirm Gooseberry Co has the ability to sell the
product once complete and probable future economic benefits will arise.
PROVISION
(b) Substantive procedures for Canopus Co’s restructuring provision
1 – Cast the breakdown of the restructuring provision to ensure it is correctly
calculated and agree the total to the trial balance.
2 – Review the board minutes where the decision to restructure the production
process was taken and confirm the decision was made in March 20X5.
3 – Review the announcement to shareholders and employees in late March, to
confirm that this was announced before the year end.
4 – Obtain a breakdown of the restructuring provision and confirm that only direct
expenditure relating to the restructuring is included
5 – Review the adequacy of the disclosures of the restructuring provision in the
financial statements and assess whether these are in accordance with IAS® 37
–Provisions,
Review theContingent Liabilities
expenditure and that
to confirm Contingent
there areAssets
no retraining costs of existing
staff included.
6 – For the costs included within the provision, including acquisitions of plant and
7 machinery, agree to supporting documentation, such as purchase invoices, to
confirm
– Reviewvalidity andend
post year value of items included.
payments/invoices relating to the expenditure and
8 compare the actual costs incurred to the amounts provided to assess whether
–the amount
Obtain of the representation
a written provision is reasonable.
confirming management discussions in relation
9 to the announcement of the restructuring and to confirm the completeness of
the provision.

(d) Substantive procedures for the redundancy costs

1 Review the board minutes for evidence of the decision to discontinue the brand
of chemicals prior to the year-end.
2 Review supporting documentation to confirm that the decision to discontinue the
brand was notified to the four members of staff prior to the year end.
3 Obtain details of the redundancy calculated by employee, cast the schedule and
agree to thethe
Recalculate trialredundancy
balance/financial statements.
provision to confirm completeness and agree
4 components of the cost to supporting documentation such as employee
contracts.
5 Agree the redundancy payments made in July 20X5 to the cash book/payroll
records
Obtain aand compare
written these to the
representation provision
from in the financial
management statements.
confirming the completeness
6 of the costs.
Review the disclosures included in the financial statements to verify they are in
7 compliance with requirements of IAS 37 Provisions, Contingent Assets and
Contingent Liabilities.

(c) Substantive procedure for Potential breach of transport regulations

1 Review correspondence with the transport authority to establish details of the
complaint and the number of times the breach has allegedly occurred.
2 Enquire of the directors why they are unwilling to provide or make disclosure,
whether they accept that any breaches took place but believe that the effect is
immaterial or whether
Review Encore they dispute
Co’s policies their occurrence.
and procedures to record driving hours and rest
3 periods and compare to the regulations to determine the likelihood that
breaches have occurred and how frequently.
4 Review correspondence with the transport authority to establish if there have
been
Obtaindiscussions about other instances
a written representation of potential
to the effect that thenon-compliance.
directors are not aware of
5 any other breaches of laws or regulations that would require a provision or
disclosure in the financial statements.
6 Review correspondence with Encore Co’s legal advisers or, with the client’s
permission, contact the lawyers to establish their assessment of the likelihood of
the breach being proven and any fines that would be payable.
7 Review the board minutes to ascertain management’s view as to the likelihood
of payment to the transport authority.
 Obtain a written representation to the effect that the directors are not aware of
8 any other breaches of laws or regulations that would require a provision or
disclosure in the financial statements.
9 Inspect the post year-end cash book and bank statements to identify whether
any fines have been paid.

(c) Substantive procedures to confirm the redundancy provision

1 Discuss with the directors of Dashing Co as to whether they have formally
announced their intention to close the production site and make their employees
redundant, to confirm that a present obligation exists at the year end.
2 If announced before the year end, review supporting documentation to verify
that the decision has been formally announced.
3 Review the board minutes to ascertain whether it is probable that the
redundancy payments will be paid.
4 Obtain a breakdown of the redundancy calculations by employee and cast it to
ensure completeness
Recalculate and agree
the redundancy to trialtobalance.
provision confirm completeness and agree
5 components of the calculation to supporting documentation such as employee
contracts.
Review the post year-end cash book to identify whether any redundancy
6 payments have been made, compare actual payments to the amounts provided
to assess whether the provision is reasonable.
7 Obtain a written representation from management to confirm the completeness
of the provision.
8 Review the disclosure of the redundancy provision to ensure compliance with IAS
37 Provisions, Contingent Liabilities and Contingent Assets.

C) Substantive procedure - Contamination – legal claims

1 – Review customer correspondence to establish the details of the claims and the
amounts
– Review being claimed. with Purrfect Co’s lawyers or, with the client’s
correspondence
2 permission, contact the lawyers to establish the likely outcome of the customer
claims made to date.
3 – Discuss with the lawyers the likelihood and amount of potential future claims.
4 – Inspect board minutes to establish details of the circumstances of the
contamination and to ascertain management’s view as to the likelihood that the
existing claims will be successful and the extent of possible future claims.
– Review the draft financial statements to establish that the legal claims have
5 been appropriately provided for or disclosed in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
6 – Compare levels of returns and claims to date against sales volumes of the
product to assess the potential level of future claims.
7 – Review post-year end payments for damage settlements and compare with any
amounts provided at the year end to assess the reasonableness of the provision.
8 – Obtain written representations from management that there have been no
other contamination incidents and no other product liability claims of which
management are aware and for which provision may be required.
PPE
(b) Substantive
– Discuss withprocedures
management forthe
depreciation
rationale for the changes to property, plant and equipment (PPE)
1 depreciation rates, useful lives, residual values and depreciation methods and ascertain how these
changes were arrived at.
2 – Confirm the reasonableness of these changes, by comparing the revised depreciation rates, useful
lives and methods
– Review applied asset
the non-current to PPEregister
to industry averages
to assess if theand knowledge
revised of the rates
depreciation business.
have been
3 applied.
4 – Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to assess
the reasonableness of the revised depreciation rates.
5 – Obtain a breakdown of depreciation by asset categories, compare to prior year; where significant
changes have occurred, discuss with management and assess whether this change is reasonable.
6 – Review the disclosure of the depreciation charges and policies in the draft financial statements
and ensure it is in line with IAS 16 Property, Plant and Equipment.
7 – Review the capital expenditure budgets for the next few years to assess whether the revised asset
lives correspond with the planned period until replacement of the relevant asset categories.
8 – Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current
assets register
– For asset is correct
categories and ensure
where that been
there have new depreciation rates have
a minimal number been appropriately
of additions applied.
and disposals, perform
9 a proof in total calculation for the depreciation charged on PPE, discuss with management if
significant fluctuations arise.

(e) Substantive procedures for disposals of plant and machinery

1 – Obtain a breakdown of disposals, cast the list and review the non-current assets register to confirm
–that all assets
Select have
a sample of been removed.
disposals and agree sale proceeds to supporting documentation such as sundry
2 sales invoices.
3 –– Recalculate
Recalculate the
the profit/loss
depreciationon charge
disposal and
for agree to
a sample of the trial balance
disposals and the
to confirm statement of profit
calculations areor loss.
4 correctly applied as per the company policy of a pro rata basis or a full year in the year of acquisition
and none in the year of disposal.
5 – Review the disclosure of the disposals in the draft financial statements and ensure it is in line with
IAS 16 Property, Plant and Equipment.

(a) Substantive procedure for Vehicles additions and disposals

1 Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note for
property, plant and equipment. Agree the cost of the vehicles given in part-exchange to the
disclosure note to confirm that they have been removed from cost carried forward.
2 For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice,
ensuring that the recorded cost includes the cash amount paid plus the trade-in allowance for the
old vehicle. Confirm that the invoice is made out to Encore Co.
3 Physically inspect a sample of additions, confirming that the registration number of the vehicle
agrees to that on the non-current assets register.
4 Review the non-current assets register to confirm that the 20 old vehicles were removed and that
the 20 new vehicles
Recalculate were
the loss on included.
disposal of $1.1m ($1.8 - ($4.6m - $3.9m) and agree to the trial balance and
5 statement of profit or loss.
6 Agree the cash payment of $3.9m to the cash book and bank statement.
7 Recalculate the depreciation expense, confirming that the depreciation expense was based on the
old vehicles until 1 February and on the cost of the new vehicles after that date.
8 Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been
removed from accumulated depreciation carried forward.
9 In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the
carrying amount of other vehicles may be overstated.
10 Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles are
being used for the entire period of their estimated useful life.
11 Discuss with management why trade-in allowances were so much lower than the carrying amounts
of the vehicles to provide further evidence as to whether depreciation policies are reasonable.
12 Review the notes to the financial statements to ensure that disclosure of the additions and disposals
is in accordance with IAS 16 Property, Plant and Equipment.
AP
(a) Describe substantive procedures the auditor should perform to obtain
sufficient and appropriate audit evidence in relation to the COMPLETENESS of
Airsoft Co’s trade payables and accruals.
1 – Compare the total trade payables and list of accruals against prior year and
investigate any significant differences
2 – Select a sample of post year-end payments from the cash book; if they relate to
the current year, follow through to the purchase ledger or accruals listing to ensure
they are recorded in the correct period.
3 – Obtain supplier statements and reconcile these to the purchase ledger balances,
and investigate any reconciling items.
4 – Select a sample of payable balances and perform a trade payables’ circularisation,
follow up any non-replies and any reconciling items between the balance confirmed
5 and the trade
– Review afterpayables’ balance.
date invoices and credit notes to ensure no further items need to be
6 accrued
– Enquire of management their process for identifying goods received but not
invoiced or logged in the purchase ledger and ensure that it is reasonable to ensure
completeness of payables.
Substantive procedures for purchases and other expenses
1 – Calculate the operating profit and gross profit margins and compare them to last
year and budget and investigate any significant differences.
2 – Review monthly purchases and other expenses to identify any significant
fluctuations and discuss with management.
3 – Recalculate the accuracy of a sample of purchase invoice totals and related taxes
and ensure expense has been included in the correct nominal code.
4 – Recalculate the prepayments and accruals charged at the year end to ensure the
–accuracy
Select aof the expense
sample charge
of goods included
received notesin(GRNs)
the statement of profit the
from throughout or loss.
year; agree
5 them to purchase invoices and the purchase day book to ensure the completeness
of purchases.
6 – Select a sample of GRNs just before and after the year end; agree to the purchase
–day book to
Discuss ensure
with the expense
management is recorded
whether in the
there have correct
been any accounting
changes in period.
the key
7 suppliers used and compare this to the purchase ledger to assess completeness
and accuracy of purchases.
8 – Select a sample of post year-end expense invoices and ensure that any expenses
relating to the current year have been included.
9 – Select a sample of payments from the cash book and trace to expense account to
ensure the expense has been included and classified correctly.

Substantive procedures for additions PPE

1 Obtain a breakdown of additions, cast the list and agree to the non-current asset
register to confirm completeness of plat and equipment
2 Select a sample of additions and agree cost to supplier invoice to confirm valuation
3 Verify rights and obligations by agreeing the addition of plant and equipment to a
supplier invoice in the name of Baggio
4 Review the list of additions and confirm that they relate to captial expenditure
items rather than repairs and maintenance
5 Review board minutes to ensure that significant capital expenditure purchases have
been
For a authorised by the board
sample of additions recored in PE, phisically verify them on the factory floor to
6 confirm existense

Substantive procedures for revaluation of land and buildings

1 Obtain a schedule of land and buildings revalued this year and cast to confirm
completeness and accuracy of the revaluation adjustment
 On a sample basis agree the revalued amounts to the valuation statement provided
2 Agree
by the the
valuer
revalued amounts for these assets are included correctly in the non-
3 Recalculate
current assets
theregister
total revaluation adjustment and agree correctly recorded in the
4 ravaluation surplus
5 Agree the initial cost for the warehoused addition to supporting documentation
such as invoices to confirm cost
6 Confirm through a review of the title deeds that the warehouse is owned by Vieri
7 Recalculate the depreciation charge for the year to ensure that for assets revalued
during the year, the depreciation was based on the correct valuation and for the
warehouse addition that the charge was for 6 months only
8 Review the FS disclosures of the revaluation to ensure they comply with IAS 16
AP

Compare

Select

Obtain

Select
Review

Enquire

Purchase and other exp

BANK LOAN
(c) Substantive procedures
- Obtain a schedule for Canopus
of opening Co’s
and closing bank
loans loans any changes during the
detailing
1 year. Cast the schedule to confirm its accuracy and agree the closing balances to
the trial balance and draft financial statements.
2 - For the new loan taken out in the year, review the loan agreement to confirm the
amount borrowed, the repayment terms and the interest rate applicable.
3 - For loans repaid, agree the final settlement amount per bank correspondence to
payments out during the year in the cash book and bank statements.
4 - Recalculate the split of the loan repayment made on 31 March 20X5 between
interest and principal, recalculate interest and agree to inclusion in statement of
profit or loss,
- Obtain directand outstanding
confirmation at loan balance reduced
the year-end from theby principal
loan amount
provider of the repaid.
5 outstanding balances and any security provided. Agree confirmed amounts to the
loans schedule.
- Obtain direct confirmation at the year-end from the loan provider of the
6 outstanding balances and any security provided. Agree confirmed amounts to the
loans schedule.
- review the disclosure of non-current liabilities in the draft financial statements,
7 including any security provided and assess whether these are in accordance with
accounting standards and local legislation. Additionally, confirm that the split of
current and non-current loans in the financial statements is correct
8 - For the new loan taken out in the year, agree the loan proceeds of $4.8 million per
the loan agreement to the cash book and bank statements.
9 - Agree the quarterly repayment of the new loan of $150,000 paid on 31 March 20X5
to the cash book and bank statement.
10 - Review the bank correspondence and loan agreements for confirmation of any
early settlement charges incurred on the loans repaid. Agree that these were
charged to the statement of profit or loss as a finance charge.
11 - review all loan agreements For details of covenants and Recalculate all covenants
to identify any potential or actual breaches.
TAX
(c) Substantive for Accrual for employment tax payable
1 – Compare the accrual for employment tax payable to the prior year,
investigate
– Agree the any significant
year-end differences.
employment tax payable accrual to the payroll records to
2 –confirm accuracy.
Re-perform the calculation of the accrual for a sample of employees to
3 confirm the accuracy.
4 – Undertake a proof in total test for the employment tax accrual by multiplying
the payroll cost for June 20X9 with the appropriate tax rate. Compare this
expectation to the actual accrual and investigate any significant differences.
5 – Agree the subsequent payment to the post year-end cash book and bank
statements
– Review anytocorrespondence
confirm completeness.
with tax authorities to assess whether there are
6 any additional outstanding payments due. If so, confirm they are included in
the year-end accrual.
7 – Review any disclosures made of the employment tax accrual and assess
whether these are in compliance with accounting standards and legislation.

sufficient and appropriate audit evidence in relation to Hyacinth Co’s

year-end
Agree sales tax liability.
the year-end sales tax liability in the trial balance to the tax
1 return/reconciliation submitted to the tax authority and cast the
return/reconciliation.
2 Agree the quarterly sales tax charged equates to 15% of the last quarter’s
sales as per the sales day book.
3 Recalculate the sales tax incurred as per the reconciliation is equal to 15% of
the final quarter’s purchases and expenses as per the purchase day book.
4 Recalculate the amount payable to the tax authority as being sales tax
charged less sales tax incurred.
5 Compare the year-end sales tax liability to the prior year balance or budget
and investigate
Review any significant
any disclosures made ofdifferences.
the sales tax liability to ensure that it is shown
6 as a current liability and assess whether disclosures are in compliance with
accounting
Agree standards and
the subsequent legislation.
payment to the post year-end cash book and bank
7 statements to confirm completeness and that it has been paid in line with the
terms of the tax authority.
8 Review any current and post year-end correspondence with the tax authority
to assess whether there are any additional outstanding payments due. If so,
confirm they are included in the year-end liability.
 The fact Control deficiency Control recommendation Test of control
Review the file of completed bank
reconciliations to identify who prepared them.
The key roles of posting bank receipts,
Lily Shah, a finance clerk, is responsible for
updating the sales ledger and performing bank Review the log of IDs of individuals who have
several elements of the cash receipts system
reconciliations should be split between posted bank receipts and updated the sales
as she posts the bank transfer receipts from
There is a lack of segregation of duties and different individuals. ledger to assess whether these are different
the bank statements to the cash book,
errors will not be identified on a timely basis. individuals.
updates the sales ledger and performs the
There is also an increased risk of fraud. If this is not practical, then as a minimum, the
bank reconciliations.
bank reconciliations should be undertaken by Discuss with the financial controller which
another member of the finance team. members of staff undertake the roles of
processing of bank receipts and updating of
the cash book and sales ledger

Observe which member of staff undertakes

the processing of purchase invoices and
The purchase ordering clerk, Oliver Dancer, confirm this is not the purchase ordering clerk,
There is a lack of segregation of duties and The roles of purchase ordering and processing
has responsibility for ordering goods below Oliver Dancer.
this increases the risk of fraud and non- of the related supplier invoices should be
$1,000 and for processing all purchase
business related purchases being made. allocated to separate members of staff.
invoices for payment. Inspect a copy of the company’s organisation
chart to identify if these tasks have now been
allocated to different roles.

This could result in delays in suppliers being

A copy of the GRNs should be sent to the Enquire of the accounts clerk as to the
paid as the purchase invoices could not be
accounts department on a more regular basis, frequency of when GRNs are received to
agreed to a GRN and also recorded liabilities
Goods received notes (GRNs) are sent to the such as daily. assess if they are being sent promptly.
being understated.
accounts department every two weeks.
The accounts department should undertake a Undertake a sequence check of GRNs held by
Additionally, any prompt payment discounts
sequence check of the GRNs to ensure none the accounts department, discuss any missing
offered by suppliers may be missed due to
are missing for processing. items with the accounts clerk.
delayed payments.

Review the file of copy GRNs held by the

The GRN should be created in three parts and
purchase ordering clerk, Oliver Dancer, and
a copy of the GRN should be sent to the
Failing to send a copy to the ordering review for evidence that these are matched to
purchase order clerk, Oliver Dancer, who
GRNs are only sent to the accounts department could result in a significant level of orders and flagged as complete.
should agree this to the order and change the
department. unfulfilled orders leading to a loss of sales and
order status to complete. On a regular basis
stock-outs. Review the file of unfulfilled purchase orders
he should then review for all unfulfilled orders
for any overdue items and discuss their status
and chase these with the relevant supplier.
with Oliver Dancer.

For a sample of new customers accepted in

the year, review the authorisation of the credit
Sales ledger clerks are not sufficiently senior Credit limits should be set by a senior member
limit, and ensure that this was performed by a
Customer credit limits are set by sales ledger and so may set limits too high, leading to of the sales department and not by sales
responsible official.
clerks. irrecoverable debts, or too low, leading to a ledger clerks. These limits should be regularly
loss of sales reviewed by a responsible official.
Enquire of sales ledger clerks as to who can
set credit limits
These numbers are not sequential. Without
Re-perform the control by undertaking a
sequential numbers, it is difficult for Freesia Sales orders should be sequentially
Customer orders are given a number based sequence check of sales orders.
Co to identify missing orders and to monitor if numbered. On a egular basis, a sequence
on the sales person’s own identification
all orders are being dispatched in a timely check of orders should be undertaken to
number. Discuss any gaps in the sequence with sales
manner. If they are not, this could lead to a identify any missing orders.
ordering staff.
loss of customer goodwill.
 The fact Control deficiency Control recommendation Test of control

The GRN should be created in three parts with

Failing to send a copy to the purchase
one copy of the GRN being sent to the
ordering department means that it is not
ordering department. The second copy should
possible to monitor the level of unfulfilled Review the file of copy GRNs held by the
be held at the warehouse and the third sent to
orders. This could result in a significant level of purchase ordering department and review for
the finance department.
unfulfilled orders leading to stock-outs and a evidence that these are matched to orders and
consequent loss of sales. flagged as complete.
GRNs are only sent to the finance department. A purchase ordering clerk should agree their
copy of the GRN to the purchase order and
In addition, if the GRN is lost, then it will not be Review the file of unfulfilled purchase orders
change the order status to
possible for the finance department to match for any overdue items and discuss their status
complete. On a regular basis, a review should
the invoice to proof of goods being received. with an ordering clerk.
be undertaken for all unfulfilled orders and
This could result in a delay to the invoice
these should be followed up with the relevant
being paid and a loss of supplier goodwill.
supplier.

The audit team should utilise test data

Document count controls can confirm the The purchase ledger clerk should instead
procedures to assess whether data can be
completeness of input. However, they do not input the invoices in batches and apply
Camilla Brown, the purchase ledger clerk, only entered without the use of batch control totals
verify the accuracy or validity of input. application controls, such as control totals,
utilises document count controls when and also whether sequence checks are built
rather than just completeness checks to
inputting invoices into into the system.
If the invoices are not input correctly, suppliers ensure both completeness and accuracy over
the purchase ledger.
may not be paid on time, or paid incorrect the input of purchase invoices. In addition,
Observe the inputting of purchase invoices
amounts leading to an overpayment or loss of sequence checks should be built into the
and identify what application controls are
supplier goodwill who may withdraw credit system to ensure completeness of input.
utilised by the clerk.
facilities.
 The fact Control deficiency Control recommendation Test of control

If the standard costs were reviewed 18 months

ago, there is the risk that the costs are A review of all standard costs currently in use
misstated as changes in raw materials and should be undertaken by a senior manager in
wages inflation may not have been adjusted the production department. Actual costs for
for. This could result in inventory being under materials, labour and overheads should be
or overvalued and profits being misstated. ascertained and compared to the proposed
The company values its inventory using Obtain a copy of the standard costs used for
standard costs to ensure they are a close
standard costs, which are not being kept up- inventory valuation, assess when the review
In addition for year-end reporting, IAS 2 approximation.
to-date. was last undertaken and inspect for evidence
Inventories only allows standard costs to be
of review by the production director.
used for valuation purposes The revised standard costs should be
if they are a close approximation to actual reviewed by the production director who
costs, which is unlikely if the standard costs should evidence this review. At least annually,
remain unchanged for a long period of time. a review of the standard costs should be
Therefore the valuation may not be in line with undertaken to ensure they are up-to-date.
IAS 2.

Overtime worked is not authorised prior to

These reports are reviewed sometime after the
being paid. The information per employee is All overtime should be authorised by a All overtime should be authorised by a
payments have been made which could result
collated and submitted to payroll by a responsible official prior to the payment being responsible official prior to the payment being
in unauthorised overtime or amounts being
production clerk, but not authorised. The processed by the payroll department. This processed by the payroll department. This
paid incorrectly and Freesia Co’s payroll cost
production director is only informed about authorisation should be evidenced in writing. authorisation should be evidenced in writing.
increasing.
overtime levels via quarterly reports.

The finance director, when authorising the The finance director, when authorising the
payments, should on a sample basis perform payments, should on a sample basis perform
checks from the human resource department’s checks from the human resource department’s
The finance director compares the total of the There could be employees omitted or fictitious staff records to payment list and vice versa to staff records to payment list and vice versa to
list of bank transfers with the total to be paid employees added to the payment listing so confirm that payments are complete and only confirm that payments are complete and only
per the payroll records. that, although the total payments list agrees to made to bona fide employees. made to bona fide employees.
payroll totals, there could be fraudulent or
erroneous payments being made. The finance director should sign the payments The finance director should sign the payments
list as evidence that these checks have been list as evidence that these checks have been
undertaken. undertaken

During the interim audit, arrange to visit a

Customers are less likely to contact individual An inter-branch transfer system should be
number of the stores, discuss with the store
It is not possible for a store to order goods stores themselves and this could result in the established between stores, with inter-branch
manager the process for ordering of inventory
from other local stores for customers who company losing valuable sales inventory forms being completed for store
items, in particular whether it is possible to
request them. Instead, customers are told to transfers.
order from other branches.
contact the other stores or use the company In addition, some goods which are slow
website. moving in one store may be out of stock at This should help stores whose inventory levels
At each store, inspect a sample of completed
another; if goods could be transferred between are low but are awaiting their deliveries from
inter-branch inventory forms for confirmation
stores, then overall sales may be maximised. the suppliers.
the control is operating.

All purchase orders should be authorised by a

This could result in non-business related
Purchase orders below $1,000 are not responsible official. Select a sample of purchase orders and
purchases and there is an increased fraud risk
authorised and are processed solely by the review for evidence of authorisation, agree this
as the clerk could place orders for personal
purchase order clerk who is also responsible Authorised signatories should be established to the appropriate signature on the approved
goods up to the value of $1,000, which is
for processing invoices. with varying levels of purchase order signatories list.
significant.
authorisation.
 The fact Control deficiency Control recommendation Test of control
The finance director should review the whole
payments list prior to authorising.
Review the payments list for evidence of
The finance director authorises the bank Without looking at the detail of the payments As part of this, she should agree the amounts
review by the finance director.
transfer payment list for suppliers; however, list, as well as supporting documentation, to be paid to supporting documentation, as
she only views the total amount of payments there is a risk that suppliers could be being well as reviewing the supplier names to
Enquire of accounts staff what supporting
to be made. paid an incorrect amount, or that sums are identify any duplicates or any unfamiliar
documentation the finance director requests
being paid to fictitious suppliers. names.
when undertaking this review.
She should evidence her review by signing the
bank transfer list.

Review the file of reconciliations to ensure that

they are being performed on a regular basis
Supplier statement reconciliations should be and that they have been reviewed by a
This may result in errors in the recording of
Supplier statement reconciliations are no performed on a monthly basis for all suppliers responsible official.
purchases and payables not being identified in
longer performed. and these should be reviewed by a
a timely manner.
responsible official. Re-perform a sample of the reconciliations to
ensure that they have been carried out
appropriately.
The fact Control deficiency Control recommendation Test of control
The fact Control deficiency Control recommendation Test of control
BANK
(c) Substantive procedures for bank balances
1 Obtain a bank confirmation letter from Airsoft Co’s bankers for all of its bank accounts.
2 Agree all accounts listed on the bank confirmation letter to Airsoft Co’s bank reconciliations and the
trial balance to ensure completeness of bank balances.
3 For all bank accounts, obtain Airsoft Co’s bank account reconciliation and cast to ensure arithmetical
accuracy.
4 Agree the balance per the bank reconciliation to an original year-end bank statement and to the
bank confirmation letter.
5 Agree the reconciliations balance per the cash book to the year-end cash book.
6 Review the financial statements to ensure that the disclosure of bank balances is complete and
accurate.
Review the cash book and bank statements for any unusual items or large
7 transfers around the year end, as this could be evidence of window dressing.
Examine the bank confirmation letter for details of any security provided by
8 Airsoft Co or any legal right of set-off as this may require disclosure.
For the savings bank accounts, review any reconciling items on the year-end
9 bank reconciliations and agree to supporting documentation.
Trace all the outstanding lodgements to the pre year-end cash book, post year-
10 end
Trace bank statement and
all unpresented also tothrough
cheques the paying-in-book pre year
to a pre year-end end.
cash book and post
year-end statement. For any unusual amounts or significant delays, obtain
11 explanations from management.
Examine any old unpresented cheques to assess if they need to be written back
12 into the purchase ledger as they are no longer valid to be presented.

(b) Substantive
Obtain a bankprocedures
confirmationfor bank
letter balances
from Jasmine Co’s bankers for all of its
accounts.
1 Agree all accounts listed on the bank confirmation letter to the company’s bank
2 reconciliations or the trial balance/general ledger to ensure completeness of bank
balances.
3 For the current account, obtain Jasmine Co’s bank reconciliation and cast to
check the additions to ensure arithmetical accuracy.
4 Agree the balance per the bank reconciliation to an original year-end bank
statement and to the bank confirmation letter.
5 Agree the reconciliation’s balance per the cash book to the year-end cash book.
6 Trace all the outstanding lodgements to the pre year-end cash book, post year-
end bank
Trace statement and
all unpresented also to through
cheques the paying-in book
to a pre pre year
year-end end.
cash book and post
7 year-end bank statement. For any unusual amounts or significant delays, obtain
explanations
Examine anyfrom management.
old unpresented cheques to assess whether they need to be
8 written back.
9 Review the cash book and bank statements for any unusual items or large
transfers
Examine around
the bank the year end, asletter
confirmation this could be evidence
for details of window
of any security dressing.
provided by
10 Jasmine Co, with regards to the bank overdraft or any legal right of set-off as this
may require
Review disclosure.
the financial statements to ensure that the disclosure of bank balances is
11 complete and accurate and classified appropriately between current assets and
current liabilities.
Bank
Obtain

Bank
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
If statements are not sent regularly, this
increases the likelihood of errors and any
Customer statements are no longer being Amberjack Co should produce monthly customer statements
disputed invoices not being quickly identified AR
generated and sent to customers. for all customers and send them out promptly.
and resolved by Amberjack Co. This could
lead to cash flow issues
The receivables ledger control account should be reconciled
If the receivables ledger is only reconciled
The receivables ledger control account is only on a monthly basis to identify any errors which should be
annually, there is a risk that errors will not be
reconciled at the end of April in order to verify investigated and corrected. The reconciliations should be AR
spotted promptly and receivables may be
the year-end balance. reviewed by a responsible official and they should evidence
misstated.
their review by way of signature.
For a cash-based business, the bank
reconciliation is a key control which reduces
The bank reconciliations should be performed on a monthly
The bank reconciliations are only carried out the risk of fraud.
basis rather than every two months. The financial controller
every two months. Bank
should continue to review each reconciliation and evidence her
If it is not reconciled regularly enough, then
review by way of signature on the bank reconciliation.
this reduces its effectiveness as fraud and
errors may not be identified on a timely basis.

The bank reconciliations could contain

significant errors, but a low overall amount of
The bank reconciliations are only reviewed by reconciling items, as there could be
the financial controller if the sum of reconciling compensating errors which cancel each other
items is significant; therefore some out. The bank reconciliations should be reviewed by the financial
reconciliations are not being reviewed. The controller on a monthly basis, even if the reconciling items are
Bank
financial controller relies solely on the Bank reconciliations are a key control which not significant, and he should evidence his review by way of
accounts clerk’s notification that the bank reduces the risk of fraud. If they are not signature on the bank reconciliation.
reconciliations require review. reviewed, then this reduces its effectiveness
and also results in a lack of assurance that
bank reconciliations are being carried out at all
or on a timely basis.

Review the file of completed bank

reconciliations to identify who prepared them.
Lily Shah, a finance clerk, is responsible for The key roles of posting bank receipts, updating the sales
Review the log of IDs of individuals who have
several elements of the cash receipts system ledger and performing bank reconciliations should be split
posted bank receipts and updated the sales
as she posts the bank transfer receipts from between different individuals.
There is a lack of segregation of duties and ledger to assess whether these are different
the bank statements to the cash book, Bank
errors will not be identified on a timely basis. individuals.
updates the sales ledger and performs the If this is not practical, then as a minimum, the bank
There is also an increased risk of fraud.
bank reconciliations. reconciliations should be undertaken by another member of
Discuss with the financial controller which
the finance team.
members of staff undertake the roles of
processing of bank receipts and updating of
the cash book and sales ledger
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
The finance director, when authorising the payments, should
on a sample basis perform checks from the human resource
The finance director compares the total of the There could be employees omitted or fictitious department’s staff records to payment list and vice versa to
Obtain a sample of payments lists and review
list of bank transfers with the total to be paid employees added to the payment listing so confirm that payments are complete and only made to bona
for signature by the finance director as Bank
per the payroll records. that, although the total payments list agrees to fide employees.
evidence that the control is operating correctly.
payroll totals, there could be fraudulent or
erroneous payments being made. The finance director should sign the payments list as evidence
that these checks have been undertaken.

The finance director should review the whole payments list

prior to authorising.
Review the payments list for evidence of
The finance director authorises the bank Without looking at the detail of the payments
review by the finance director.
transfer payment list for suppliers; however, list, as well as supporting documentation, As part of this, she should agree the amounts to be paid to
she only views the total amount of payments there is a risk that suppliers could be being supporting documentation, as well as reviewing the supplier Bank
Enquire of accounts staff what supporting
to be made. paid an incorrect amount, or that sums are names to identify any duplicates or any unfamiliar names.
documentation the finance director requests
being paid to fictitious suppliers.
when undertaking this review.
She should evidence her review by signing the bank transfer
list.

This lack of segregation of duties increases

Once the bank transfer has been prepared by the financial
The financial controller prepares the bank the risk of fraud/error as the financial controller
controller, it should be passed to the finance director to be
transfers for the payroll and also authorises could pay themselves or certain employees Bank
reviewed and authorised for payment. The review and
these to be paid. more than they are due without this being
authorisation should be evidenced by the finance director.
detected.

Discrepancies may arise due to the payroll

records or the bank transfer listing being
incorrect. Assuming the discrepancies are
always in the payroll records may result in
incorrect amendments being made to payroll The senior payroll manager should not be able to process
The senior payroll manager reviews the bank or incorrect amounts paid to employees. changes to the payroll system as well as authorise payments.
transfer listing prior to authorising the Discrepancies should be thoroughly investigated, and
payments and if any discrepancies are noted, In addition, there is a lack of segregation of adjustments made in the relevant record as required.
Bank
always makes the adjustment in the payroll duties as it is the payroll team which
records for any changes required. processes the amounts and the senior payroll The authorisation of the bank transfer listing should be
manager who authorises payments. undertaken by an individual outside the payroll department,
such as the finance director.
The senior manager could fraudulently
increase or incorrectly amend the amounts to
be paid to certain employees, process this
payment as well as amend the records.

The finance director should review the whole payments list

prior to authorising.
Without looking at the detail of the payments
The finance director only views the total list, as well as supporting documentation,
As part of this, he should agree the amounts to be paid to
amount of payments to be made rather than there is a risk that suppliers could be being Bank
supporting documentation, as well as reviewing the supplier
the amounts to be paid to each supplier. paid an incorrect amount, or that sums are
names to identify any duplicates or any unfamiliar names.
being paid to fictitious suppliers.
He should evidence his review by signing the bank transfer list.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
There is a fraud risk as the manager could
The cashing up process should be undertaken by two
remove some of the cash and then simply
individuals together, ideally an assistant manager and the
record that there was an exception on the
restaurant manager. One should count the cash and the other
daily sales list.
The cashing up of tills along with the recording record it.
of any cash discrepancies is undertaken by Cash
In addition, as there is no segregation of
just one individual, the restaurant manager. Any exceptions to the till reading should be double checked to
duties, the restaurant manager could,
confirm that they are not simply arithmetical errors. If still
fraudulently or by error, record the total sales
present, the relevant employees who had access to the till can
as per each till incorrectly leading to incorrect
be identified and further investigations can be undertaken.
identification of discrepancies.
Cash is stored in a safe at each venue and the There is a risk of significant cash losses due to The current key lock safe should be replaced with a safe with a
restaurant manager stores the safe key in a theft if access to the safe key is not carefully digital code. Only authorised personnel should have the code Cash
drawer of their desk when not in use. controlled. which should be updated on a regular basis.
The cashier should reconcile the credit card vouchers per
restaurant to the monthly statement received from the card
There is a risk that receipts of cash by credit
company. The daily amounts per the statement should be
The cashier is not checking that payments card may have been omitted and this would
agreed to the bank statement to ensure that all funds have
made by credit card have resulted in cash not be identified on a timely basis as the bank
been received. Cash
being received by Camomile Co. is only reconciled every two months and may
result in difficulties in resolving any
This reconciliation should be reviewed by a responsible official,
discrepancies with the credit card company.
such as the financial controller, who should evidence by
signature that the review has been undertaken

Senior management should consider recruiting additional

employees to join the IA department.
Equestrian Co has experienced significant Maintaining an IA department is an important
staff shortages within their internal audit (IA) control as it enables senior management to
In the interim, employees from other departments, such as Internal
department. In addition, several members of test whether controls are operating effectively
finance, could be seconded to IA to assist them with the control
the current IA team are new to the company. within the company. If the team has staff
internal audits, provided these reviews do not cover controls
shortages or lack of experience, this reduces
operating in the department where the employees normally
the effectiveness of this monitoring control.
work.

If the standard costs were reviewed 18 months

ago, there is the risk that the costs are
misstated as changes in raw materials and A review of all standard costs currently in use should be
wages inflation may not have been adjusted undertaken by a senior manager in the production department.
for. This could result in inventory being under Actual costs for materials, labour and overheads should be
The company values its inventory using or overvalued and profits being misstated. ascertained and compared to the proposed standard costs to Obtain a copy of the standard costs used for
standard costs, which are not being kept up- ensure they are a close approximation. inventory valuation, assess when the review
Inventory
to-date. In addition for year-end reporting, IAS 2 was last undertaken and inspect for evidence
Inventories only allows standard costs to be The revised standard costs should be reviewed by the of review by the production director.
used for valuation purposes if they are a close production director who should evidence this review. At least
approximation to actual costs, which is unlikely annually, a review of the standard costs should be undertaken
if the standard costs remain unchanged for a to ensure they are up-to-date.
long period of time. Therefore the valuation
may not be in line with IAS 2.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

The company has 45 centres as well as a

IA should review its programme of visits to assess if additional
head office and warehouse, hence if each
resources could be devoted to ensuring that all sites are visited
year the four largest sites are visited this can
over a shorter period, for example, five years. This would
result in the other sites only being visited
ensure that physical verification of all assets could be
every eight years.
The IA department undertakes physical completed more regularly. For sites visited any assets which
verification of assets each year for the four cannot be located should be investigated fully. If it cannot be
If the non-current assets register is not Inventory
largest centres as well as five of the other located, then it should be written off.
physically verified on a regular basis, there is
centres, randomly selected.
an increased risk of assets being
Each centre should submit a list of assets with serial numbers
misappropriated as there is no check that the
to IA, who should compare these to the PPE register. Those
assets still exist in their correct location. In
sites with significant variations should be prioritised for a site
addition, obsolete assets will not be identified
visit by IA.
on a timely basis.

High value inventory is stored in a secure

As the code is the same across all sites, this The access codes for all of the sites should be changed. Each
location across all nine warehouses and
significantly increases the risk of fraud. A site should have a unique code, known to a small number of
access is via a four digit code, which is Inventory
considerable number of people will be aware senior warehouse employees. These codes should be
common to all sites.
of the codes and could access inventory at changed on a regular basis.
any of the nine sites

In order to rely on inventory records for

The programme of perpetual inventory counts should be
Monthly perpetual inventory counts are decision making and the year-end financial
reviewed for omissions. Any lines which have been missed out
supposed to be undertaken at each of the nine statements, all lines of inventory must be
should be included in the remaining counts.
warehouses, but some of these are counted at least once a year, with high value
Inventory
outstanding. or high turnover items counted more regularly.
At the year end, if any lines are identified as having not been
If the counts are outstanding, some goods
counted, the company should organise an additional count to
may not be counted, and the inventory records
ensure that all items are confirmed to inventory records.
may be incorrect.

Additional resources should be devoted to completing the

Physical verification of assets within the non- If non-current assets are not physically verified physical verification of all assets within the register. If any
current asset register has not been on a regular basis, there is an increased risk assets cannot be located, they should be written off. Non-
undertaken for some time. A current of assets being misappropriated or misplaced current
programme has started but is only 15% as there is no check that the assets still exist Following this full review, on a monthly basis a sample of asset
complete, due to staff shortages. in their correct location. assets at the sites should be agreed back to the register to
confirm existence.
Overtime worked is not authorised prior to
These reports are reviewed sometime after the
being paid. The information per employee is Review the overtime report for evidence of
payments have been made which could result All overtime should be authorised by a responsible official prior
collated and submitted to payroll by a authorisation and note the date this occurred
in unauthorised overtime or amounts being to the payment being processed by the payroll department. Payroll
production clerk, but not authorised. The to ensure that this was undertaken prior to the
paid incorrectly and Freesia Co’s payroll cost This authorisation should be evidenced in writing.
production director is only informed about payment of the overtime.
increasing.
overtime levels via quarterly reports.

This could result in employees taking

unauthorised leave which could lead to Employees should receive written confirmation when their
operational difficulties if there are shortages of holiday has been approved and should be informed that they
Department managers are required to approve
staff at critical periods. will not be able to take holiday without this notification.
all employees’ holiday forms, however, this Payroll
does not always occur.
In addition, payments for untaken holiday may Any payments for unused holiday should be authorised by
be made in error as holiday records may be department managers prior to payment.
incorrect.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

As the edit report is not checked, errors made

by the payroll clerk when updating the system
will not be identified promptly. This may result
in new employees not being paid at all, errors
The payroll supervisor or a member of the finance team should
being made in payments to new employees or
review all edit reports and agree changes made to the details
leavers being paid after they have left the
The payroll clerk amends the payroll and an on the joiner/leavers forms. Any discrepancies should be
company.
edit report of changes is produced but this investigated promptly and the payroll system updated for any
Payroll
report is not reviewed. errors or omissions.
This would lead to loss of employee goodwill
and errors in accounting records for wages
The payroll supervisor should evidence their review on the edit
and salaries.
report with their signature.
It could also result in an increased risk of fraud
as fictitious employees could be added by the
payroll clerk

All staff appointments, including temporary staff, should only

The operations manager may not carry out all
be processed by the HR department to ensure that correct
the required procedures for processing
procedures are followed.
temporary new drivers as the manager may
The HR department is responsible for not be using appropriate documentation.
If it is not possible for the HR department to carry out all of the
processing joiners and leavers, but due to staff
detailed processing due to staff shortages, a member of the Payroll
illness, the operations manager has processed This could result in temporary employees not
HR team should review the leaver/joiner form and authorise it
temporary new drivers and notified payroll. being set up in the payroll records correctly,
before it is sent to the payroll department.
resulting in the late payment of wages,
incorrect statutory deductions being calculated
The payroll department should be notified not to accept any
and incomplete payroll records.
new joiner information unless approved by a member of HR.

This means that employees could claim to All overtime, including that below five hours, should be
Only overtime in excess of five hours per week
have worked up to five hours overtime without authorised by a responsible official before being processed in
needs authorisation by the operations Payroll
authorisation resulting in payments being the payroll. This authorisation should be evidenced by way of
manager.
made to employees for hours not worked and signature.
additional payroll costs.
Where cash wages are paid, the driver is only Payment of wages without proof of identity or All drivers collecting cash pay packets should provide a form of
required to provide their name to collect their signature increases the risk that wages could identification to the finance staff member before the pay packet
Payroll
pay packet. be paid to incorrect employees either in error is handed to them. The driver should also be required to sign
or due to fraud resulting in a loss of cash. for their pay packet.
Approved bonus parameters should be established by the
The operations manager decides on the bonus Without approved parameters, the operations
board. All bonuses should be determined by a senior official,
to be paid to delivery drivers each quarter and manager may award excessive bonuses or
such as the sales director, in line with these parameters, who Payroll
there are no approved parameters for the pay additional sums to friends and family
should communicate the bonus in writing to the payroll
bonus levels. members resulting in additional payroll costs.
department.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

Drivers could take longer breaks than those The company should monitor the activity of the delivery drivers
authorised resulting in payments being made through electronic means, for example, by using tracking
to employees for time not worked. Conversely, devices attached to their vehicles to ensure that the prescribed
Delivery drivers must take breaks throughout
if drivers do not take the required breaks, they breaks are taken by the employees. Payroll
the day which are not monitored.
may be in breach of law and regulations which
require drivers to take regular breaks, hence Data should be downloaded and reviewed by a responsible
the company is at risk of fines. official on a regular basis.

The password to amend standing data should be changed and

only communicated to senior members of the payroll
department.

If all members of payroll need the ability to amend standing

As all members of payroll can amend standing
All members of the payroll department can data, the system should be changed to require authorisation of
data this may result in errors or unauthorised
amend employees' standing data in the payroll all changes by a senior member of payroll. Payroll
changes being made, leading to incorrect
system as they have access to the password.
payment of wages and increased risk of fraud.
Edit reports should be generated for all standing data changes
with clear reference to who made the change and who
authorised it. These edit reports should be regularly reviewed
by a responsible official and they should evidence this review
with a signature.

The bonus should be determined by a responsible official,

such as the production director and should be formulated
Production supervisors should not determine
Production supervisors determine the amount based on a written policy. If significant in value, the bonus
this as they could pay extra bonuses to friends
of the discretionary bonus to be paid to should be formally agreed by the board of directors. Payroll
or family members, resulting in additional
employees.
payroll costs.
The bonus should be communicated in writing to the payroll
department.
A senior member of the payroll team should recalculate the
Therefore, if system errors occur during the
gross to net pay workings for a sample of employees and
The wages calculations are generated by the payroll processing, this would not be identified.
compare their results to the output from the payroll system.
payroll system and there are no checks This could result in wages being over or under Payroll
performed. calculated, leading to an additional payroll cost
These calculations should be signed as approved before
or loss of employee goodwill.
payments are made.

As the payments continue until the employee

notifies HR, and employees are unlikely to be
closely monitoring payments, there is the risk The payroll department should maintain a schedule, by
that overpayments may be made, which then employee, of payments made to third parties, such as the
need to be reclaimed, leading to employee central government as well as the cumulative balance owing.
Student loan deduction forms are completed
dissatisfaction. On a regular basis, at least annually, this statement should be
by relevant employees and payments are
reconciled to the loan statement received from the government
made directly to the third party until the Payroll
In the case of underpayments, Raspberry Co and sent to the employee for agreement.
employee notifies HR that the loan has been
has an obligation to remit funds on time and to
repaid in full.
reconcile to annual loan statements. If the In accordance with the schedule, payments which are due to
company does not make payments in full and cease shortly should be confirmed in writing with the third
on time, this could result in non-compliance by party, prior to stopping.
both the company and employee, which could
result in
fines or penalties.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
This could result in employees taking
Employees should be informed that they will not be able to
Holiday request forms are required to be unauthorised leave, resulting in production
take holiday without completion of a holiday request form, with
completed and authorised by relevant line difficulties if an insufficient number of
authorisation from the line manager.
managers, however, this does not always employees are present to operate the power Payroll
occur. plant. In addition, employees taking
Payroll clerks should not process holiday payments without
unauthorised leave could result in an
agreement to the authorised holiday form.
overpayment of wages.

There is a lack of segregation of duties as it is

the payroll team which processes the amounts
The senior payroll manager should not be able to process
and the senior payroll manager who
The senior payroll manager reviews the bank changes to the payroll system as well as authorise payments.
authorises payments.
transfer listing prior to authorising the
Payroll
payments and also amends the payroll The authorisation of the bank transfer listing should be
The senior manager could fraudulently
records for any changes required. undertaken by an individual outside the payroll department,
increase the amounts to be paid to certain
such as the finance director.
employees, process this payment as well as
amend the records.

All pay packets should be distributed by the payroll

department, directly to employees, upon sight of the
employee’s clock card and photographic identification as this
confirms proof of identity.
The supervisor is not sufficiently independent
to pay wages out. They could adjust pay
Payroll should undertake a reconciliation of pay packets issued
packets to increase those of close friends
to production supervisors, wages distributed with employee
whilst reducing others.
The pay packets are delivered to the signatures to confirm receipt and pay packets returned to
production supervisors, who distribute them to payroll due to staff absences. Any differences should be Payroll
In addition, although the production
employees at the end of their shift. investigated immediately.
supervisors know their team members,
payment of wages without proof of identity
As employees work eight-hour shifts over 24 hours,
increases the risk that wages could be paid to
consideration should be given to operating a shift system for
incorrect employees.
the payroll department on wages pay out day. This will ensure
that there are sufficient payroll employees to perform the
wages pay out for each shift of employees, with the same level
of controls in place

This is because there are no overtime costs.

However, wages and salaries are a significant

expense and management needs to The monthly management accounts should be amended to
Monthly management accounts do not analyse understand why variances may have arisen. include an analysis of wages and salaries compared to the
the variances between actual and budgeted These could occur due to extra employees budgeted costs. These should be broken down to each Payroll
wages and salaries; being recruited which were not budgeted for, relevant department and could also include an analysis of
or an increase in wage pay out rates. The headcount numbers compared to budget.
board would need to monitor the wages and
salaries costs as if they are too high, then this
would impact the profitability of the company.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
The HR director should as a matter of urgency review the
workloads of the department to assess whether other tasks
During the year, the human resources (HR)
This is a lack of segregation of duties, as can be reprioritised as payroll should cease to set up new
department has been busy; therefore the
employees are able to set up new joiners in joiners. This role must immediately revert back to HR to
payroll department has set up new joiners to
the payroll system and process their pay, this undertake. Payroll
the company.
leads to an increased risk of fictitious/duplicate
employees being set up. Additionally, a review should be undertaken of all new joiners
set up by payroll with agreement to employee files to confirm
that all new employees are bona fide.

As payroll can be a significant expense for a

business, any decision to increase this should
be made by the board as a whole and not just All increases of pay should be proposed by the HR department
by the HR director. and then formally agreed by the board of directors.

The wage rate has been increased by the HR In addition, the notification of the payroll Upon agreement of the pay rise, a written notification of the
director and notified to the payroll supervisor increase was via email and the payroll board decision should be sent to the payroll supervisor who Payroll
by email. supervisor was able to make changes to the enters the revised pay rate into the system. This change
payroll standing data without further should trigger an exception report for the payroll director, and
authorisation. the new rate should not go live until the director has signed off
the changes.
This increases the risk of fraud or errors
arising within payroll.

Observe which member of staff undertakes

the processing of purchase invoices and
The purchase ordering clerk, Oliver Dancer, confirm this is not the purchase ordering clerk,
There is a lack of segregation of duties and The roles of purchase ordering and processing of the related
has responsibility for ordering goods below Oliver Dancer.
this increases the risk of fraud and non- supplier invoices should be allocated to separate members of Purchase
$1,000 and for processing all purchase
business related purchases being made. staff.
invoices for payment. Inspect a copy of the company’s organisation
chart to identify if these tasks have now been
allocated to different roles.

This could result in delays in suppliers being

Enquire of the accounts clerk as to the
paid as the purchase invoices could not be
A copy of the GRNs should be sent to the accounts frequency of when GRNs are received to
agreed to a GRN and also recorded liabilities
Goods received notes (GRNs) are sent to the department on a more regular basis, such as daily. assess if they are being sent promptly.
being understated.
accounts department every two weeks. Purchase
The accounts department should undertake a sequence check Undertake a sequence check of GRNs held by
Additionally, any prompt payment discounts
of the GRNs to ensure none are missing for processing. the accounts department, discuss any missing
offered by suppliers may be missed due to
items with the accounts clerk.
delayed payments.

Failing to send a copy to the purchase

ordering department means that it is not The GRN should be created in three parts with one copy of the
possible to monitor the level of unfulfilled GRN being sent to the ordering department. The second copy Review the file of copy GRNs held by the
orders. This could result in a significant level of should be held at the warehouse and the third sent to the purchase ordering department and review for
unfulfilled orders leading to stock-outs and a finance department. evidence that these are matched to orders and
consequent loss of sales. flagged as complete.
GRNs are only sent to the finance department. Purchase
A purchase ordering clerk should agree their copy of the GRN
In addition, if the GRN is lost, then it will not be to the purchase order and change the order status to Review the file of unfulfilled purchase orders
possible for the finance department to match complete. On a regular basis, a review should be undertaken for any overdue items and discuss their status
the invoice to proof of goods being received. for all unfulfilled orders and these should be followed up with with an ordering clerk.
This could result in a delay to the invoice the relevant supplier.
being paid and a loss of supplier goodwill.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note

The audit team should utilise test data

Document count controls can confirm the
procedures to assess whether data can be
completeness of input. However, they do not The purchase ledger clerk should instead input the invoices in
entered without the use of batch control totals
Camilla Brown, the purchase ledger clerk, only verify the accuracy or validity of input. batches and apply application controls, such as control totals,
and also whether sequence checks are built
utilises document count controls when rather than just completeness checks to ensure both
into the system. Purchase
inputting invoices into the purchase ledger. If the invoices are not input correctly, suppliers completeness and accuracy over the input of purchase
may not be paid on time, or paid incorrect invoices. In addition, sequence checks should be built into the
Observe the inputting of purchase invoices
amounts leading to an overpayment or loss of system to ensure completeness of input.
and identify what application controls are
supplier goodwill who may withdraw credit
utilised by the clerk.
facilities.

During the interim audit, arrange to visit a

Customers are less likely to contact individual
number of the stores, discuss with the store
It is not possible for a store to order goods stores themselves and this could result in the An inter-branch transfer system should be established
manager the process for ordering of inventory
from other local stores for customers who company losing valuable sales between stores, with inter-branch inventory forms being
items, in particular whether it is possible to
request them. Instead, customers are told to completed for store transfers.
order from other branches. Purchase
contact the other stores or use the company In addition, some goods which are slow
website. moving in one store may be out of stock at This should help stores whose inventory levels are low but are
At each store, inspect a sample of completed
another; if goods could be transferred between awaiting their deliveries from the suppliers.
inter-branch inventory forms for confirmation
stores, then overall sales may be maximised.
the control is operating.

This could result in non-business related All purchase orders should be authorised by a responsible
Purchase orders below $1,000 are not Select a sample of purchase orders and
purchases and there is an increased fraud risk official.
authorised and are processed solely by the review for evidence of authorisation, agree this
as the clerk could place orders for personal Purchase
purchase order clerk who is also responsible to the appropriate signature on the approved
goods up to the value of $1,000, which is Authorised signatories should be established with varying
for processing invoices. signatories list.
significant. levels of purchase order authorisation.
Review the file of reconciliations to ensure that
they are being performed on a regular basis
and that they have been reviewed by a
This may result in errors in the recording of Supplier statement reconciliations should be performed on a
Supplier statement reconciliations are no responsible official.
purchases and payables not being identified in monthly basis for all suppliers and these should be reviewed Purchase
longer performed.
a timely manner. by a responsible official.
Re-perform a sample of the reconciliations to
ensure that they have been carried out
appropriately.

It appears that purchase orders for capital

The company’s monthly management accounts should include
expenditure are being placed without being
an analysis of capital expenditure against budget and prior
agreed back to annual capital budgets,
year per department. Each department head should include
Some departments have already significantly resulting in overspends.
narrative which explains the significant variances to date.
exceeded their annual capital expenditure
Purchase
budgets. The increased expenditure may be due to
Capital purchase orders should be compared to the annual
increased levels of services being provided, or
department budgets as part of the authorisation process. Any
it could be due to a lack of control over the
spend in excess of the budget should be referred for
capital expenditure process, resulting in
authorisation to the finance director.
increased costs and reduced profits.

There is the risk that Equestrian Co is missing

out on early settlement discounts.
The policy of making payment after 75 days should be
Invoices are authorised by the finance
Also, failing to pay in accordance with the reviewed. Consideration should be given to earlier payment if
director, but payment is only made 75 days Purchase
supplier’s payment terms can lead to a loss of the settlement discounts are sufficient. If not, invoices should
after receipt of the invoice.
supplier goodwill as well as the risk that be paid in accordance with the supplier’s payment terms.
suppliers may refuse to supply goods to the
company
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
For a sample of new customers accepted in
the year, review the authorisation of the credit
Sales ledger clerks are not sufficiently senior
Credit limits should be set by a senior member of the sales limit, and ensure that this was performed by a
Customer credit limits are set by sales ledger and so may set limits too high, leading to
department and not by sales ledger clerks. These limits should responsible official. Sales
clerks. irrecoverable debts, or too low, leading to a
be regularly reviewed by a responsible official.
loss of sales
Enquire of sales ledger clerks as to who can
set credit limits
These numbers are not sequential. Without
Re-perform the control by undertaking a
sequential numbers, it is difficult for Freesia
Customer orders are given a number based Sales orders should be sequentially numbered. On a egular sequence check of sales orders.
Co to identify missing orders and to monitor if
on the sales person’s own identification basis, a sequence check of orders should be undertaken to Sales
all orders are being dispatched in a timely
number. identify any missing orders. Discuss any gaps in the sequence with sales
manner. If they are not, this could lead to a
ordering staff.
loss of customer goodwill.
If credit limits are not reviewed regularly, they
After passing a credit check a credit limit is set
could be out of date, resulting in limits being Credit limits should continue to be set by the sales director;
for all new customers by the sales director, but
too high and sales being made to poor credit however, these limits should be reviewed and amended as Sales
these credit limits are not reviewed after this
risks or too low and Snowdon Co losing appropriate on a regular basis by a responsible official.
unless a review is requested by the customer.
potential revenue.
Client services managers are given
responsibility to chase customers directly for Further, client services managers are more
payment once an invoice is outstanding for 90 likely to focus on customer relationships and
A credit controller should be appointed, and it should be their
days. This is considerably in excess of the generating further revenues rather than
role, rather than the client services managers, to chase any Sales
company’s credit terms of 30 days which will chasing payments. This could result in an
outstanding sales invoices which are more than 30 days old
lead to poor cash flow. increase in irrecoverable balances and
reduced profit and cash flows.

A petty cash log should be maintained so the purchase of

sundry items is recorded in the log along with the sum
borrowed, date and employee.
Each restaurant maintains a petty cash float of
$400, and at any point in time the receipts and This could be as a result of sundry items being
On purchase of the items, the relevant employee should return
funds present should equal the float. It has purchased without the relevant receipt or
the relevant receipt or voucher and any funds not spent. The
been noted by the internal audit (IA) voucher being returned.
log should be updated to confirm return of funds and receipts. Sales
department that on occasions there are
differences due to the fact that no log is There is also a possibility that the cash is
On a weekly basis, the restaurant manager should reconcile
maintained of petty cash requests. being misappropriated by staff members, or
the petty cash and if any receipts are missing, these should be
being spent on non-business related items.
followed up with the relevant employee. If it is cash which is
missing, then this should be investigated further with the
employees who made petty cash purchases during that period.

This means that when exceptions arise, it will

The reconciliations of the tills to the daily sales be difficult to identify which till caused the The reconciliations should be undertaken on an individual till
readings are performed in total for all five tills difference and therefore which employees by till basis rather than in aggregate and any discrepancies Sales
at each venue rather than for each till. may require further till training or may have noted should be investigated immediately.
undertaken fraudulent transactions.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
Each employee should be provided with a unique log on code
and this is required to be entered when using the tills.

To speed up the cash payment by customers, In the event of cash discrepancies arising in In order to facilitate the investigation of till differences,
for each venue the tills have the same log on the tills, it would be difficult to ascertain which employees should be allocated to a specific till point for their
code and these codes are changed fortnightly. employees may be responsible as there is no shift. Sales
way of tracking who used which till. This could
lead to cash being easily misappropriated. Any discrepancies which arise should initially be double
checked to ensure they are not arithmetical errors. If still
present, the relevant employees who had access to the till can
be identified and further investigations can be undertaken.

Daily sales sheets for each venue should be sequentially

numbered and remitted to head office on a daily basis. At head
office, a sequence check should be undertaken on a regular
There is a possibility that some sales sheets
basis to identify any missing sheets and any gaps should be
could be misplaced by the restaurant manager
Daily sales sheets are scanned and emailed to investigated further.
resulting in incomplete sales and cash receipts Sales
head office on a weekly basis.
data being recorded into the accounting
Once received, the cashier should post the sales and cash
system.
data for all six venues on a daily basis. Once processed, they
should then be signed as posted by the cashier and filed away
securely.

New customers undergo a credit check, after

Over a period of time it may be that the Credit limits should continue to be approved by the sales
which a credit limit is proposed by the sales
customers’ credit limits have been set too director; however, on a regular basis the sales director should Sales
staff and approved by the sales director, these
high, leading to irrecoverable debts, or too review these limits based on order history and payment record.
credit limits are not reviewed after this.
low, leading to a loss of sales.
Receivables ledger clerks are not sufficiently Credit limits should be set by a senior member of the
Customer credit limits are set by receivables senior and so may set limits too high, leading receivables ledger department and not by receivables ledger
Sales
ledger clerks. to irrecoverable debts, or too low, leading to a clerks. These limits should be regularly reviewed by a
loss of sales responsible official.
Receivables ledger clerks should not be able to access the
There is a risk that customers could be set up master data file to add new customers or make amendments.
Receivables ledger clerks record new
incorrectly resulting in a loss of customer
customer details and credit limits in the
goodwill and sales revenue In addition, the Any such additions/amendments to master file data should be
customer master data file and these changes
receivables ledger clerks are not senior restricted so that only supervisors and above can make Sales
are not reviewed.
enough to be given access to making changes changes.
to master file data as this could increase the
risk of fraud An exception report of changes made should be generated
and reviewed by a responsible official.

Amberjack Co’s credit controller is currently on

secondment for six months to the internal
During the period of the secondment, an alternative member of
audit department and has not been replaced. This could result in an increased risk of
the finance department should be trained in the credit control
During this period, it does not appear that irrecoverable debts and lead to customers not Sales
role and assigned responsibility for reviewing the aged
anyone else has been responsible for paying their outstanding balances on time, or
receivables listing and following up on any overdue customers.
monitoring ageing receivables. at all, leading to reduced cash flows.
 this is because there are no overtime costs. Control deficiency Control recommendation Test of control Note
Once orders are processed, copies of GDNs The GDN should be amended to be at least four-part. One
are sent to the finance department, customer If the sales order department does not receive copy should be sent to the sales order department.
and remain in the warehouse. a copy of the completed GDNs, they are not
able to monitor if orders are being fulfilled on a Once the copy of the GDN has been received by the order Sales
However, the sales order department of timely basis. This could result in a loss of department, it should be matched to the order. A regular
Amberjack Co does not receive a copy of the revenue and customer goodwill. review of unmatched orders should be undertaken by the sales
GDN. order department to identify any unfulfilled orders.

The sales invoices are only raised on receipt

of a GDN, and without separate sequential
numbers, it is difficult for Amberjack Co to
identify if any GDNs are missing as they are GDNs should all be sequentially numbered using a sequence
Goods dispatch notes (GDN) are given the
not likely to be raised in the same sequence which is different to the order number. On a regular basis, a
same number as the order number to which Sales
as the sales orders. sequence check of GDNs should be undertaken to identify any
they relate.
missing dispatch notes.
If GDNs are missing and the company fails to
raise invoices in a timely manner, this could
lead to a loss of revenue.

Only the sales clerks should be able to raise sales invoices. As

As the extra staff will not be as experienced as Amberjack Co is expanding, consideration should be given to
the sales clerks, there is an increased risk of recruiting and training more permanent sales clerks who can
Additional staff has been drafted in to help the mistakes being made in the sales invoices. produce sales invoices.
Sales
sales clerks produce the sales invoices. This could result in customers being under or
overcharged leading to misstated revenue or If this is not currently possible, temporary staff should be
dissatisfied customers. adequately trained and additional input checks on invoices
should be introduced.

This could result in unauthorised sales

During the period of any special offers, such as the 10% off
discounts being given as there does not seem
weekend, the authorised sales prices file should be updated by
to be any authorisation required. In addition, a
a responsible official. These changes should be reviewed for
clerk could forget to manually enter the
Discounts given to customers who purchased any input errors, this review should be evidenced. The
discount or enter an incorrect level of discount
goods during the 10% off weekend are invoicing system should confirm that orders were placed during
for a customer, leading to the sales invoice
manually entered onto the sales invoices by the discount weekend. Hence the sales invoices for these Sales
being overstated and a loss of customer
sales clerks. periods should automatically contain the reduced prices.
goodwill.
The invoicing system should be amended to prevent sales
Unauthorised discounts in excess of 10%
clerks from being able to manually enter sales discounts onto
would result in a loss of revenue, either due to
invoices.
error or fraud.

This has resulted in a reduction in their Senior management should consider recruiting additional
programme of work for the year. employees to join the IA department or outsourcing the IA
function.
Snowdon Co has experienced significant staff
Maintaining an IA department is an important
shortages within its internal audit (IA)
control as it enables senior management to In the interim, employees from other departments, such as Staff
department, and the department is currently
test whether controls are operating effectively finance, could be seconded to IA to assist them with audits. It
under resourced.
within the company. If the team has staff must be ensured that these reviews do not cover controls
shortages, this reduces the effectiveness of operating in the department in which the employees normally
this monitoring control. work.Print_Area

The cashier is responsible for several

elements of the cash receipts system. She
receives the daily sales sheets from These key roles should be split between different members of
There is a lack of segregation of duties and
restaurants, agrees that cash has cleared into the finance team, with ideally the bank reconciliations being Staff
errors will not be identified on a timely basis.
the bank statements, updates the cash book undertaken by another member of the team.
and undertakes the bank reconciliations.
Key controls and tests of control
The fact Key control Test of control Noted
The finance director authorises the bank transfer
This reduces the risk that suppliers could be being paid Review the payments list for evidence of review by the finance director.
payment list for suppliers after agreeing the amounts to Bank
an incorrect amount, or that sums are being paid to Enquire of accounts staff what supporting documentation the finance
be paid to supporting documentation and reviewing for transfer
fictitious suppliers. director requests when undertaking this review.
any duplicate payments.
Review the file of bank reconciliations to confirm that there is one for each
The cashier reconciles the bank statements to the cash
month. Inspect a sample of monthly bank reconciliations for evidence of
book monthly and this reconciliation is reviewed and The bank reconciliation is a key control which reduces
investigation and review by the financial controller.
investigated by the financial controller, who evidences the risk of fraud. Monthly review and investigation Bank
his review by way of signature on the bank reconciliation. ensure that fraud and errors are identified on a timely transfer
For a sample of months reperform the bank reconciliation and where
basis.
differences have occurred discuss and investigate these with the financial
controller.
Review the job descriptions of payroll and HR to confirm the split of
Swift Co has a separate human resources (HR) responsibilities with regards to setting up new joiners.
Having a segregation of roles between HR and payroll
department, which is responsible for setting up all new Payroll
departments reduces the risk of fictitious employees
employees. Discuss with members of the payroll department the process for setting up
being set up and also being paid.
new joiners and agree new joiners to documentation initiated by HR.
All new employees are assigned a unique employee
As payroll staff are unable to set up new joiners without
number by HR. The payroll system is unable to process Attempt to add a new joiner to the payroll system without a unique employee
the employee number from the joiner form it reduces the Payroll
new joiners without the inclusion of the unique employee number, the system should reject this addition.
risk of fictitious employees being set up by payroll.
number.
This ensures that any unauthorised amendments to
On a monthly basis an exception report of changes to
standing data are identified and investigated on a timely Select a sample of monthly exception reports and review for evidence of
payroll standing data is produced and reviewed by the Payroll
basis so that the data used when the payroll is run is review and follow up of any unexpected changes by the payroll manager.
payroll manager.
valid and accurate.
Review the monthly payslips sampled by the payroll supervisor for their
The payroll supervisor selects a sample of payslips and This reduces the risk that the automated system signature for evidence the review of calculations has been undertaken.
recalculates the gross to net pay calculations, compares generates errors during the payroll processing. Any
Payroll
the results to the output from the payroll system and errors would be identified on a timely basis to prevent For a sample of monthly payrolls reperform the gross to net pay calculation
investigates any discrepancies. wages being over or under paid. and compare to the payroll system, discuss any discrepancies with the
payroll supervisor.
All staff members are issued with a sequentially
This ensures that payroll records are complete, that
numbered key card. Sequence checks and checks on For a sample of key cards and data recorded in the clocking-in system, carry
employees are paid for hours worked and that all hours Payroll
the data recorded are carried out by the human out a sequence check to identify if there are any gaps in the sequence.
are recorded
resources (HR) supervisor.
Review details of checks carried out by the HR supervisor to identify any
gaps in the sequence and check they have evidenced their review by way of
signature.
The clocking-in process is monitored by a camera on
This will prevent staff members fraudulently clocking-in For a sample of weeks, review the log of the recordings to identify who
entry to the distribution centre and video footage is Payroll
for other employees and hence employees will only be reviewed that week’s footage to ensure it has been reviewed by a member
reviewed by HR every week
paid for actual hours worked. of the HR department.

Review the log for any gaps in the review process and discuss these
findings with HR.
 The fact Key control Test of control Noted
For a sample of months, review the calculations of gross to net pay for
This check is also reviewed by the payroll supervisor evidence that the calculations have been performed. Confirm the signature
who evidences their review. of the payroll supervisor as evidence that they have reviewed the report. For
The payroll clerk confirms the transfer of hours and any anomalies, enquire of the reasons and what action was taken to resolve
calculations has been done accurately by recalculating, This reduces the risk that errors occur in the automated the issue Payroll
for a sample of employees, their gross to net pay. transfer and calculations during the payroll processing.
Any errors would be dentified on a timely basis to For a sample of months, reperform the gross to net pay calculations and
prevent salaries being over or under paid compare to the payroll system and the calculations prepared by the payroll
clerk. Discuss any discrepancies with the payroll supervisor.
This reduces the risk of fraud by preventing
The payroll system is password-protected and the payroll
unauthorised changes being made to the standing data Attempt to login to the payroll system using a password which should be out
manager changes the password on a monthly basis Payroll
and unauthorised access to sensitive payroll of date. Confirm that the system has rejected access.
using a random password generator.
information.
For a sample of months, review the control account reconciliations and
make enquiries of the finance director of any errors on the control account,
how they arose and what action was taken to ensure they do not arise in the
Each month, the finance director carries out a payroll This will ensure the payroll expense and employment future.
control account reconciliation and investigates any tax liability is accurate and is not misstated in the year- Payroll
differences. end financial statements Reperform a sample of control account reconciliations and compare results
with those prepared by the finance director.

Discuss any discrepancies with the finance director.

Review the job descriptions of payroll and HR to confirm the split of

Snowdon Co has a separate human resources (HR) Having a segregation of roles between HR and payroll responsibilities with regards to setting up new joiners.
department, which is responsible for setting up all new departments reduces the risk of fictitious employees Payroll
employees. being set up and also being paid. Discuss with members of the payroll department the process for setting up
new joiners and agree new joiners to documentation initiated by HR.

Select a sample of new employees added to the payroll during the year,
review the joiner forms for evidence of completion and the allocation of a
Pre-printed forms are completed by HR for new unique employee number which was received by payroll prior to being
employees, and includes assignment of a unique added to the system.
As payroll is unable to set up new joiners without the
employee number, and once verified a copy is sent to the
forms and employee number it reduces the risk of Payroll
payroll department. The payroll system is unable to Select a sample of edit reports for changes to payroll during the year; agree
fictitious employees being set up by payroll.
process new joiners without the inclusion of the a sample of new employees added to payroll to the joiner’s forms.
employee’s unique number.
Attempt to add a new joiner to the payroll system without a unique employee
number, the system should reject this addition.

Review the job descriptions of payroll and HR to confirm the split of

Raspberry Co has a separate human resources (HR) Having a segregation of roles between human responsibilities with regards to setting up new joiners.
department which is responsible for setting up all new resources and payroll departments reduces the risk of Payroll
employees. fictitious employees being set up and also being paid. Discuss with members of the payroll department the process for setting up
new joiners and for confirmation that the process is initiated by HR.

The use of pre-printed forms ensures that all relevant Select a sample of new employees added to the payroll during the year,
Pre-printed forms are completed by HR for all new information, such as tax IDs, is obtained about review the joiner forms for evidence of completion of all parts and that the
employees, and includes assignment of a unique employees prior to set up. This minimises the risk of information was verified as accurate and was received by payroll prior to
employee number, and once verified, a copy is sent to incorrect wage and tax payments. In addition, as payroll being added to the system. Payroll
the payroll department. Payroll is unable to set up new is unable to set
joiners without information from these forms. up new joiners without the forms and employee number, Select a sample of edit reports for changes to payroll during the year; agree
it reduces the risk of fictitious employees being set up a sample of new employees added to payroll to the joiners forms.
by payroll.
 The fact Key control Test of control Noted
If attending Raspberry Co at the time of bonus processing, observe the clerk
The quarterly production bonus is input by a clerk into inputting and senior clerk checking the bonus payments into the payroll
the payroll system, each entry is checked by a senior This reduces the risk of input errors resulting in over/ system.
Payroll
clerk for input errors prior to processing, and they underpayment of the bonus to employees.
evidence their review via signature. In addition, obtain listings of quarterly bonus payments and review for
evidence of signature by the senior clerk who checks for input errors.
This ensures that genuine employees are only paid for Observe the use of clock cards by employees when entering the power
Production employees are issued with clock cards and
the work actually done, and reduces the risk of station.
are required to swipe their cards at the beginning and
employees being paid but not completing their eight- Payroll
end of their shift, this process is supervised by security
hour shift. In addition, due to the supervision it is Confirm the security team is supervising the process and following up on
staff 24 hours a day.
unlikely that one employee could swipe in others. discrepancies through discussions with the security staff.
As the hours worked are automatically transferred into
The clock card information identifies the employee
the payroll system, this reduces the risk of input errors in Utilise test data procedures to input dummy clock card information, verify
number and links into the hours worked report produced Payroll
entering hours to be paid in calculating payroll, ensuring this has been updated into the payroll system
by the payroll system.
that employees are paid the correct amount.
On a quarterly basis, exception reports of changes to This ensures that any unauthorised amendments to
Select a sample of quarterly exception reports and review for evidence of
payroll standing data are produced and reviewed by the standing data are identified and resolved on a timely Payroll
review and follow up of any unexpected changes by the payroll director.
payroll director. basis.
Enquire of payroll clerks how cash is delivered to Raspberry Co for weekly
It is likely the sum of money required to pay over 175
pay packets.
For production employees paid in cash, cash is received employees would be considerable. It is important that
Payroll
weekly from the bank by a security company. cash is adequately safeguarded to reduce the risk of
Review a sample of invoices from the security company to Raspberry Co for
misappropriation.
delivery of cash.
Observe the preparation of the pay packets ensuring that two members of
The pay packets are prepared by two members of staff staff are involved and that pay packets are checked for accuracy.
with one preparing and one checking the pay packets This ensures there is segregation of duties which
Payroll
and this is evidenced by each staff member signing the prevents fraud and errors not being identified. For a sample of weeks throughout the year, inspect the weekly payroll listing
weekly listing. for evidence of signature by the two members of staff involved in the
preparation of the pay packets.
Purchase orders up to $5,000 are authorised by the This ensures that goods are only purchased which are Select a sample of purchase orders and review for evidence of authorisation
Purchas
purchasing manager and above $5,000 by the required by Swift Co and relate to genuine business in accordance with authorisation limits. Agree this to the appropriate
e
purchasing director. expenses. signature on the approved signatories list.
The warehouse department agrees the receipt of goods During the interim audit observe the warehouse department when receiving
from suppliers to a copy of the purchase order and This ensures that Swift Co is not recording liabilities and goods to understand the level of checks being undertaken.
Purchas
confirms the quantity and quality of the goods received subsequently paying for the receipt of inferior quality
e
and signs the goods received notes (GRNs) to evidence goods or for goods it did not order. Review a sample of GRNs held in the warehouse department for signature,
the checks. as evidence of checks being undertaken on receipt of goods.
Utilising control totals ensures both completeness and
Purchase invoices are logged into the purchase day accuracy over the input of purchase invoices. If the Select a sample of control total sheets and review for evidence of control Purchas
book in batches, utilising control totals. invoices are not all input completely and accurately totals being utilised and the clerk’s signature. e
payables may be misstated.
Review the file of reconciliations to ensure that they are being performed on
This ensures that any errors in the recording of
Supplier statement reconciliations are undertaken on a a regular basis and that they have been reviewed by a responsible official.
purchases and payables are identified and corrected in Purchas
monthly basis and these are reviewed by the financial
a timely manner and therefore that payables are e
controller. Re-perform a sample of the reconciliations to ensure that they have been
complete and accurate.
carried out appropriately and discrepancies investigated.
 The fact Key control Test of control Noted
Select a sample of capital expenditure purchase orders and review evidence
of the classification being noted.
Capital expenditure purchase orders are classified by the
The use of finance department guidelines and sample
finance department between capital and revenue using For a sample of orders compare the classification noted with the finance
checks by the finance director should reduce the risk of Purchas
guidelines established by the finance director, this is director’s guidelines to assess whether the classification was correctly
an incorrect assessment and of understated/overstated e
noted on the purchase order. The finance director also undertaken.
profits, assets and incorrect depreciation charges.
sample checks the classification is correctly applied.
Review purchase orders for evidence of the finance director’s sample
checks for example, by signature.

This ensures that the amount paid to the tax authority is

The amount due to the tax authority is calculated by the correct. It also creates segregation of duties between Review a sample of calculations of the monthly employment tax liability for
payroll supervisor who then passes it to the financial the payroll supervisor calculating the liability and the evidence of review by the financial controller confirming the calculation is Tax
controller for review. financial controller reviewing the calculation which correct and that payment can be made.
reduces the risk of error.
 The fact Control deficiency Control recommendation
This could result in employees taking unauthorised leave Employees should receive written confirmation when their holiday
which could lead to operational difficulties if there are has been approved and should be informed that they will not be
Department managers are required to
shortages of staff at critical periods. able to take holiday without this notification.
approve all employees’ holiday forms,
however, this does not always occur.
In addition, payments for untaken holiday may be made Any payments for unused holiday should be authorised by
in error as holiday records may be incorrect. department managers prior to payment.
This lack of segregation of duties increases the risk of Once the bank transfer has been prepared by the financial
The financial controller prepares the bank
fraud/error as the financial controller could pay controller, it should be passed to the finance director to be
transfers for the payroll and also authorises
themselves or certain employees more than they are reviewed and authorised for payment. The review and
these to be paid.
due without this being detected. authorisation should be evidenced by the finance director.

As the edit report is not checked, errors made by the

payroll clerk when updating the system will not be
identified promptly. This may result in new employees The payroll supervisor or a member of the finance team should
not being paid at all, errors being made in payments to review all edit reports and agree changes made to the details on
The payroll clerk amends the payroll and an new employees or leavers being paid after they have left the joiner/leavers forms. Any discrepancies should be investigated
edit report of changes is produced but this the company. promptly and the payroll system updated for any errors or
report is not reviewed. omissions.
This would lead to loss of employee goodwill and errors
in accounting records for wages and salaries. The payroll supervisor should evidence their review on the edit
report with their signature.
It could also result in an increased risk of fraud as
fictitious employees could be added by the payroll clerk

All staff appointments, including temporary staff, should only be

The operations manager may not carry out all the processed by the HR department to ensure that correct
required procedures for processing temporary new procedures are followed.
The HR department is responsible for drivers as the manager may not be using appropriate
processing joiners and leavers, but due to documentation. If it is not possible for the HR department to carry out all of the
staff illness, the operations manager has detailed processing due to staff shortages, a member of the HR
processed temporary new drivers and This could result in temporary employees not being set team should review the leaver/joiner form and authorise it before it
notified payroll. up in the payroll records correctly, resulting in the late is sent to the payroll department.
payment of wages, incorrect statutory deductions being
calculated and incomplete payroll records. The payroll department should be notified not to accept any new
joiner information unless approved by a member of HR.

Only overtime in excess of five hours per This means that employees could claim to have worked All overtime, including that below five hours, should be authorised
week needs authorisation by the operations up to five hours overtime without authorisation resulting by a responsible official before being processed in the payroll. This
manager. in payments being made to employees for hours not authorisation should be evidenced by way of signature.
worked and additional payroll costs.
 The fact Control deficiency Control recommendation
Where cash wages are paid, the driver is Payment of wages without proof of identity or signature All drivers collecting cash pay packets should provide a form of
only required to provide their name to collect increases the risk that wages could be paid to incorrect identification to the finance staff member before the pay packet is
their pay packet. employees either in error or due to fraud resulting in a handed to them. The driver should also be required to sign for
loss of cash. their pay packet.
The operations manager decides on the bonus to be paid to
delivery drivers each quarter and there are no approved
The operations manager decides on the Without approved parameters, the operations manager
parameters for the bonus levels.
bonus to be paid to delivery drivers each may award excessive bonuses or pay additional sums to
quarter and there are no approved friends and family members resulting in additional payroll
Without approved parameters, the operations manager may award
parameters for the bonus levels. costs.
excessive bonuses or pay additional sums to friends and family
members resulting in additional payroll costs.
The company should monitor the activity of the delivery drivers
Drivers could take longer breaks than those authorised
through electronic means, for example, by using tracking devices
resulting in payments being made to employees for time
attached to their vehicles to ensure that the prescribed breaks are
Delivery drivers must take breaks throughout not worked. Conversely, if drivers do not take the
taken by the employees.
the day which are not monitored. required breaks, they may be in breach of law and
regulations which require drivers to take regular breaks,
Data should be downloaded and reviewed by a responsible official
hence the company is at risk of fines.
on a regular basis.

This has resulted in a reduction in their programme of Senior management should consider recruiting additional
work for the year. employees to join the IA department or outsourcing the IA
Snowdon Co has experienced significant function.
staff shortages within its internal audit (IA) Maintaining an IA department is an important control as
department, and the department is currently it enables senior management to test whether controls In the interim, employees from other departments, such as
under resourced. are operating effectively within the company. If the team finance, could be seconded to IA to assist them with audits. It must
has staff shortages, this reduces the effectiveness of this be ensured that these reviews do not cover controls operating in
monitoring control. the department in which the employees normally work.Print_Area

The company’s monthly management accounts should include an

It appears that purchase orders for capital expenditure
analysis of capital expenditure against budget and prior year per
are being placed without being agreed back to annual
department. Each department head should include narrative which
Some departments have already significantly capital budgets, resulting in overspends.
explains the significant variances to date.
exceeded their annual capital expenditure
budgets. The increased expenditure may be due to increased
Capital purchase orders should be compared to the annual
levels of services being provided, or it could be due to a
department budgets as part of the authorisation process. Any
lack of control over the capital expenditure process,
spend in excess of the budget should be referred for authorisation
resulting in increased costs and reduced profits.
to the finance director.
 The fact Control deficiency Control recommendation

IA should review its programme of visits to assess if additional

resources could be devoted to ensuring that all sites are visited
The company has 45 centres as well as a head office
over a shorter period, for example, five years. This would ensure
and warehouse, hence if each year the four largest sites
that physical verification of all assets could be completed more
are visited this can result in the other sites only being
regularly. For
The IA department undertakes physical visited every eight years.
sites visited any assets which cannot be located should be
verification of assets each year for the four
investigated fully. If it cannot be located, then it should be written
largest centres as well as five of the other If the non-current assets register is not physically verified
off.
centres, randomly selected. on a regular basis, there is an increased risk of assets
being misappropriated as there is no check that the
Each centre should submit a list of assets with serial numbers to
assets still exist in their correct location. In addition,
IA, who should compare these to the PPE
obsolete assets will not be identified on a timely basis.
register. Those sites with significant variations should be prioritised
for a site visit by IA.

The password to amend standing data should be changed and

only communicated to senior members of the payroll department.

If all members of payroll need the ability to amend standing data,

All members of the payroll department can As all members of payroll can amend standing data this the system should be changed to require authorisation of all
amend employees' standing data in the may result in errors or unauthorised changes being changes by a senior member of payroll.
payroll system as they have access to the made, leading to incorrect payment of wages
password. and increased risk of fraud. Edit reports should be generated for all standing data changes
with clear reference to who made the change and who authorised
it. These edit reports should be regularly reviewed by a
responsible official and they should evidence this review with a
signature.

Discrepancies may arise due to the payroll records or

the bank transfer listing being incorrect. Assuming the
discrepancies are always in the payroll records may
result in incorrect amendments being made to payroll or The senior payroll manager should not be able to process
The senior payroll manager reviews the bank incorrect amounts paid to employees. changes to the payroll system as well as authorise payments.
transfer listing prior to authorising the Discrepancies should be thoroughly investigated, and adjustments
payments and if any discrepancies are In addition, there is a lack of segregation of duties as it is made in the relevant record as required.
noted, always makes the adjustment in the the payroll team which processes the amounts and the
payroll records for any changes required. senior payroll manager who authorises payments. The authorisation of the bank transfer listing should be undertaken
by an individual outside the payroll department, such as the
The senior manager could fraudulently increase or finance director.
incorrectly amend the amounts to be paid to certain
employees, process this payment as well as amend the
records.
 The fact Control deficiency Control recommendation
After passing a credit check a credit limit is
If credit limits are not reviewed regularly, they could be
set for all new customers by the sales Credit limits should continue to be set by the sales director;
out of date, resulting in limits being too high and sales
director, but these credit limits are not however, these limits should be reviewed and amended as
being made to poor credit risks or too low and Snowdon
reviewed after this unless a review is appropriate on a regular basis by a responsible official.
Co losing potential revenue.
requested by the customer.
Client services managers are given
responsibility to chase customers directly for
Further, client services managers are more likely to
payment once an invoice is outstanding for
focus on customer relationships and generating further A credit controller should be appointed, and it should be their role,
90 days. This is considerably in excess of the
revenues rather than chasing payments. This could rather than the client services managers, to chase any outstanding
company’s credit terms of 30 days which will
result in an increase in irrecoverable balances and sales invoices which are more than 30 days old
lead to poor cash flow.
reduced profit and cash flows.

The bonus should be determined by a responsible official, such as

the production director and should be formulated based on a
Production supervisors determine the Production supervisors should not determine this as they written policy. If significant in value, the bonus should be formally
amount of the discretionary bonus to be paid could pay extra bonuses to friends or family members, agreed by the board of directors.
to employees. resulting in additional payroll costs.
The bonus should be communicated in writing to the payroll
department.
A senior member of the payroll team should recalculate the gross
Therefore, if system errors occur during the payroll to net pay workings for a sample of employees and compare their
The wages calculations are generated by the
processing, this would not be identified. This could result results to the output from the payroll system.
payroll system and there are no checks
in wages being over or under calculated, leading to an
performed.
additional payroll cost or loss of employee goodwill. These calculations should be signed as approved before
payments are made.

As the payments continue until the employee notifies

HR, and employees are unlikely to be closely monitoring The payroll department should maintain a schedule, by employee,
payments, there is the risk that overpayments may be of payments made to third parties, such as the central government
made, which then need to be reclaimed, leading to as well as the cumulative balance owing. On a regular basis, at
Student loan deduction forms are completed
employee dissatisfaction. least annually, this statement should be reconciled to the loan
by relevant employees and payments are
statement received from the government and sent to the employee
made directly to the third party until the
In the case of underpayments, Raspberry Co has an for agreement.
employee notifies HR that the loan has been
obligation to remit funds on time and to reconcile to
repaid in full.
annual loan statements. If the company does not make In accordance with the schedule, payments which are due to
payments in full and on time, this could result in non- cease shortly should be confirmed in writing with the third party,
compliance by both the company and employee, which prior to stopping.
could result in
fines or penalties.
 The fact Control deficiency Control recommendation
Employees should be informed that they will not be able to take
Holiday request forms are required to be This could result in employees taking unauthorised
holiday without completion of a holiday request form, with
completed and authorised by relevant line leave, resulting in production difficulties if an insufficient
authorisation from the line manager.
managers, however, this does not always number of employees are present to operate the power
occur. plant. In addition, employees taking unauthorised leave
Payroll clerks should not process holiday payments without
could result in an overpayment of wages.
agreement to the authorised holiday form.
There is a lack of segregation of duties as it is the payroll
The senior payroll manager should not be able to process
team which processes the amounts and the senior
The senior payroll manager reviews the bank changes to the payroll system as well as authorise payments.
payroll manager who authorises payments. The senior
transfer listing prior to authorising the
manager could fraudulently increase the amounts to be
payments and also amends the payroll The authorisation of the bank transfer listing should be undertaken
paid to certain employees, process this payment as well
records for any changes required. by an individual outside the payroll department, such as the
as amend
finance director.
the records.

All pay packets should be distributed by the payroll department,

directly to employees, upon sight of the employee’s clock card and
photographic identification as this confirms proof of identity.

The pay packets are delivered to the Payroll should undertake a reconciliation of pay packets issued to
production supervisors, who distribute them production supervisors, wages distributed with employee
In addition, although the production supervisors know
to employees at the end of their shift. The signatures to confirm receipt and pay packets returned to payroll
their team members, payment of wages without proof of
supervisor is not sufficiently independent to due to staff absences. Any differences should be investigated
identity increases the risk that wages could be paid to
pay wages out. They could adjust pay immediately.
incorrect employees.
packets to increase those of close friends
whilst reducing others. As employees work eight-hour shifts over 24 hours, consideration
should be given to operating a shift system for the payroll
department on wages pay out day. This will ensure that there are
sufficient payroll employees to perform the wages pay out for each
shift of employees, with the same level of controls in place

However, wages and salaries are a significant expense

and management needs to understand why variances
The monthly management accounts should be amended to include
Monthly management accounts do not may have arisen. These could occur due to extra
an analysis of wages and salaries compared to the budgeted
analyse the variances between actual and employees being recruited which were not budgeted for,
costs. These should be broken down to each relevant department
budgeted wages and salaries; this is or an increase in wage pay out rates. The board would
and could also include an analysis of headcount numbers
because there are no overtime costs. need to monitor the
compared to budget.
wages and salaries costs as if they are too high, then
this would impact the profitability of the company.
 The fact Control deficiency Control recommendation

A petty cash log should be maintained so the purchase of sundry

items is recorded in the log along with the sum borrowed, date and
employee.
Each restaurant maintains a petty cash float
of $400, and at any point in time the receipts This could be as a result of sundry items being
On purchase of the items, the relevant employee should return the
and funds present should equal the float. It purchased without the relevant receipt or voucher being
relevant receipt or voucher and any funds not spent. The log
has been noted by the internal audit (IA) returned.
should be updated to confirm return of funds and receipts.
department that on occasions there are
differences due to the fact that no log is There is also a possibility that the cash is being
On a weekly basis, the restaurant manager should reconcile the
maintained of petty cash requests. misappropriated by staff members, or being spent on
petty cash and if any receipts are missing, these should be
non-business related items.
followed up with the relevant employee. If it is cash which is
missing, then this should be investigated further with the
employees who made petty cash purchases during that period.

Each employee should be provided with a unique log on code and

this is required to be entered when using the tills.
To speed up the cash payment by
In the event of cash discrepancies arising in the tills, it
customers, for each venue the tills have the In order to facilitate the investigation of till differences, employees
would be difficult to ascertain which employees may be
same log on code and these codes are should be allocated to a specific till point for their shift.
responsible as there is no way of tracking who used
changed fortnightly.
which till. This could lead to cash being easily
Any discrepancies which arise should initially be double checked
misappropriated.
to ensure they are not arithmetical errors. If still present, the
relevant employees who had access to the till can be identified
and further investigations can be undertaken.
The reconciliations of the tills to the daily This means that when exceptions arise, it will be difficult
The reconciliations should be undertaken on an individual till by till
sales readings are performed in total for all to identify which till caused the difference and therefore
basis rather than in aggregate and any discrepancies noted should
five tills at each venue rather than for each which employees may require further till training or may
be investigated immediately.
till. have undertaken fraudulent transactions.
There is a fraud risk as the manager could remove some The cashing up process should be undertaken by two individuals
of the cash and then simply record that there was an together, ideally an assistant manager and the restaurant
The cashing up of tills along with the exception on the daily sales list. manager. One should count the cash and the other record it.
recording of any cash discrepancies is
undertaken by just one individual, the In addition, as there is no segregation of duties, the Any exceptions to the till reading should be double checked to
restaurant manager. restaurant manager could, fraudulently or by error, confirm that they are not simply arithmetical errors. If still present,
record the total sales as per each till incorrectly leading the relevant employees who had access to the till can be identified
to incorrect identification of discrepancies. and further investigations can be undertaken.
 The fact Control deficiency Control recommendation
Daily sales sheets for each venue should be sequentially
numbered and remitted to head office on a daily basis. At head
office, a sequence check should be undertaken on a regular basis
There is a possibility that some sales sheets could be
to identify any missing sheets and any gaps should be
Daily sales sheets are scanned and emailed misplaced by the restaurant manager resulting in
investigated further.
to head office on a weekly basis. incomplete sales and cash receipts data being recorded
into the accounting system.
Once received, the cashier should post the sales and cash data
for all six venues on a daily basis. Once processed, they should
then be signed as posted by the cashier and filed away securely.
Cash is stored in a safe at each venue and The current key lock safe should be replaced with a safe with a
There is a risk of significant cash losses due to theft if
the restaurant manager stores the safe key digital code. Only authorised personnel should have the code
access to the safe key is not carefully controlled.
in a drawer of their desk when not in use. which should be updated on a regular basis.
The cashier is responsible for several
elements of the cash receipts system. She
receives the daily sales sheets from
These key roles should be split between different members of the
restaurants, agrees that cash has cleared There is a lack of segregation of duties and errors will
finance team, with ideally the bank reconciliations being
into the bank statements, updates the cash not be identified on a timely basis.
undertaken by another member of the team.
book and undertakes the bank
reconciliations.

The cashier should reconcile the credit card vouchers per

restaurant to the monthly statement received from the card
There is a risk that receipts of cash by credit card may
The cashier is not checking that payments company. The daily amounts per the statement should be agreed
have been omitted and this would not be identified on a
made by credit card have resulted in cash to the bank statement to ensure that all funds have been received.
timely basis as the bank is only reconciled every two
being received by Camomile Co.
months and may result in difficulties in resolving any
This reconciliation should be reviewed by a responsible official,
discrepancies with the credit card company.
such as the financial controller, who should evidence by signature
that the review has been undertaken

For a cash-based business, the bank reconciliation is a

key control which reduces the risk of fraud. The bank reconciliations should be performed on a monthly basis
The bank reconciliations are only carried out
rather than every two months. The financial controller should
every two months.
If it is not reconciled regularly enough, then this reduces continue to review each reconciliation and evidence her review by
its effectiveness as fraud and errors may not be way of signature on the bank reconciliation.
identified on a timely basis.
 The fact Control deficiency Control recommendation
The finance director should review the whole payments list prior to
authorising.
Without looking at the detail of the payments list, as well
The finance director only views the total
as supporting documentation, there is a risk that As part of this, he should agree the amounts to be paid to
amount of payments to be made rather than
suppliers could be being paid an incorrect amount, or supporting documentation, as well as reviewing the supplier
the amounts to be paid to each supplier.
that sums are being paid to fictitious suppliers. names to identify any duplicates or any unfamiliar names.

He should evidence his review by signing the bank transfer list.

Additional resources should be devoted to completing the physical

Physical verification of assets within the non- verification of all assets within the register. If any assets cannot be
If non-current assets are not physically verified on a
current asset register has not been located, they should be written off.
regular basis, there is an increased risk of assets being
undertaken for some time. A current
misappropriated or misplaced as there is no check that
programme has started but is only 15% Following this full review, on a monthly basis a sample of assets at
the assets still exist in their correct location.
complete, due to staff shortages. the sites should be agreed back to the register to confirm
existence.
Senior management should consider recruiting additional
Equestrian Co has experienced significant employees to join the IA department.
Maintaining an IA department is an important control as
staff shortages within their internal audit (IA)
it enables senior management to test whether controls
department. In addition, several members of In the interim, employees from other departments, such as
are operating effectively within the company. If the team
the current IA team are new to the company. finance, could be seconded to IA to assist them with the internal
has staff shortages or lack of experience, this reduces
audits, provided these reviews do not cover controls operating in
the effectiveness of this monitoring control.
the department where the employees normally work.

The HR director should as a matter of urgency review the

During the year, the human resources (HR) workloads of the department to assess whether other tasks can be
department has been busy; therefore the This is a lack of segregation of duties, as employees are reprioritised as payroll should cease to set up new joiners. This
payroll department has set up new joiners to able to set up new joiners in the payroll system and role must immediately revert back to HR to undertake.
the company. process their pay, this leads to an increased risk of
fictitious/duplicate employees being set up. Additionally, a review should be undertaken of all new joiners set
up by payroll with agreement to employee files to confirm that all
new employees are bona fide.
 The fact Control deficiency Control recommendation
As payroll can be a significant expense for a business,
any decision to increase this should be made by the
All increases of pay should be proposed by the HR department
board as a whole and not just by the HR director.
and then formally agreed by the board of directors.
The wage rate has been increased by the In addition, the notification of the payroll increase was
Upon agreement of the pay rise, a written notification of the board
HR director and notified to the payroll via email and the payroll supervisor was able to make
decision should be sent to the payroll supervisor who enters the
supervisor by email. changes to the payroll standing data without further
revised pay rate into the system. This change should trigger an
authorisation.
exception report for the payroll director, and the new rate should
not go live until the director has signed off the changes.
This increases the risk of fraud or errors arising within
payroll.

New customers undergo a credit check, after

Credit limits should continue to be approved by the sales director;
which a credit limit is proposed by the sales Over a period of time it may be that the customers’ credit
however, on a regular basis the sales director should review these
staff and approved by the sales director, limits have been set too high, leading to irrecoverable
limits based on order history and payment record.
these credit limits are not reviewed after this. debts, or too low, leading to a loss of sales.

High value inventory is stored in a secure

The access codes for all of the sites should be changed. Each site
location across all nine warehouses and As the code is the same across all sites, this significantly
should have a unique code, known to a small number of senior
access is via a four digit code, which is increases the risk of fraud. A considerable number of
warehouse employees. These codes should be changed on a
common to all sites. people will be aware of the codes and could access
regular basis.
inventory at any of the nine sites
In order to rely on inventory records for decision making The programme of perpetual inventory counts should be reviewed
Monthly perpetual inventory counts are
and the year-end financial statements, all lines of for omissions. Any lines which have been missed out should be
supposed to be undertaken at each of the
inventory must be counted at least once a year, with included in the remaining counts.
nine warehouses, but some of these are
high value or high turnover items counted more
outstanding.
regularly. If the counts are outstanding, some goods may At the year end, if any lines are identified as having not been
not be counted, and the inventory records may be counted, the company should organise an additional count to
incorrect. ensure that all items are confirmed to inventory records.

The bank reconciliations could contain significant errors,

The bank reconciliations are only reviewed but a low overall amount of reconciling items, as there
by the financial controller if the sum of could be compensating errors which cancel each other
reconciling items is significant; therefore out. The bank reconciliations should be reviewed by the financial
some reconciliations are not being reviewed. controller on a monthly basis, even if the reconciling items are not
The financial controller relies solely on the Bank reconciliations are a key control which reduces the significant, and he should evidence his review by way of signature
accounts clerk’s notification that the bank risk of fraud. If they are not reviewed, then this reduces on the bank reconciliation.
reconciliations require review. its effectiveness and also results in a lack of assurance
that bank reconciliations are being carried out at all or on
a timely basis.
 The fact Control deficiency Control recommendation
There is the risk that Equestrian Co is missing out on
early settlement discounts.
The policy of making payment after 75 days should be reviewed.
Invoices are authorised by the finance
Consideration should be given to earlier payment if the settlement
director, but payment is only made 75 days Also, failing to pay in accordance with the supplier’s
discounts are sufficient. If not, invoices should be paid in
after receipt of the invoice. payment terms can lead to a loss of supplier goodwill as
accordance with the supplier’s payment terms.
well as the risk that suppliers may refuse to supply
goods to the company
Receivables ledger clerks are not sufficiently senior and Credit limits should be set by a senior member of the receivables
Customer credit limits are set by receivables
so may set limits too high, leading to irrecoverable debts, ledger department and not by receivables ledger clerks. These
ledger clerks.
or too low, leading to a loss of sales limits should be regularly reviewed by a responsible official.
Receivables ledger clerks should not be able to access the master
Receivables ledger clerks record new data file to add new customers or make amendments.
There is a risk that customers could be set up incorrectly
customer details and credit limits in the
resulting in a loss of customer goodwill and sales
customer master data file and these changes Any such additions/amendments to master file data should be
revenue In addition, the receivables ledger clerks are not
are not reviewed. restricted so that only supervisors and above can make changes.
senior enough to be given access to making changes to
master file data as this could increase the risk of fraud
An exception report of changes made should be generated and
reviewed by a responsible official.

Amberjack Co’s credit controller is currently

on secondment for six months to the internal
During the period of the secondment, an alternative member of the
audit department and has not been replaced. This could result in an increased risk of irrecoverable
finance department should be trained in the credit control role and
During this period, it does not appear that debts and lead to customers not paying their outstanding
assigned responsibility for reviewing the aged receivables listing
anyone else has been responsible for balances on time, or at all, leading to reduced cash
and following up on any overdue customers.
monitoring ageing receivables. flows.

The sales invoices are only raised on receipt of a GDN,

and without separate sequential numbers, it is difficult for
Amberjack Co to identify if any GDNs are missing as
GDNs should all be sequentially numbered using a sequence
Goods dispatch notes (GDN) are given the they are not likely to be raised in the same sequence as
which is different to the order number. On a regular basis, a
same number as the order number to which the sales orders.
sequence check of GDNs should be undertaken to identify any
they relate.
missing dispatch notes.
If GDNs are missing and the company fails to raise
invoices in a timely manner, this could lead to a loss of
revenue.
 The fact Control deficiency Control recommendation
Once orders are processed, copies of GDNs The GDN should be amended to be at least four-part. One copy
are sent to the finance department, customer should be sent to the sales order department.
If the sales order department does not receive a copy of
and remain in the warehouse.
the completed GDNs, they are not able to monitor if
Once the copy of the GDN has been received by the order
orders are being fulfilled on a timely basis. This could
However, the sales order department of department, it should be matched to the order. A regular review of
result in a loss of revenue and customer goodwill.
Amberjack Co does not receive a copy of the unmatched orders should be undertaken by the sales order
GDN. department to identify any unfulfilled orders.

Only the sales clerks should be able to raise sales invoices. As

Amberjack Co is expanding, consideration should be given to
As the extra staff will not be as experienced as the sales
recruiting and training more permanent sales clerks who can
clerks, there is an increased risk of mistakes being made
Additional staff has been drafted in to help produce sales invoices.
in the sales invoices. This could result in customers
the sales clerks produce the sales invoices.
being under or overcharged leading to misstated
If this is not currently possible, temporary staff should be
revenue or dissatisfied customers.
adequately trained and additional input checks on invoices should
be introduced.

During the period of any special offers, such as the 10% off
This could result in unauthorised sales discounts being
weekend, the authorised sales prices file should be updated by a
given as there does not seem to be any authorisation
responsible official. These changes should be reviewed for any
Discounts given to customers who required. In addition, a clerk could forget to manually
input errors, this review should be evidenced. The invoicing
purchased goods during the 10% off enter the discount or enter an incorrect level of discount
system should confirm that orders were placed during the discount
weekend are manually entered onto the for a customer, leading to the sales invoice being
weekend. Hence the sales invoices for these periods should
sales invoices by sales clerks. overstated and a loss of customer goodwill.
automatically contain the reduced prices.
Unauthorised discounts in excess of 10% would result in
The invoicing system should be amended to prevent sales clerks
a loss of revenue, either due to error or fraud.
from being able to manually enter sales discounts onto invoices.
If statements are not sent regularly, this increases the
Customer statements are no longer being likelihood of errors and any disputed invoices not being Amberjack Co should produce monthly customer statements for all
generated and sent to customers. quickly identified and resolved by Amberjack Co. This customers and send them out promptly.
could lead to cash flow issues
The receivables ledger control account should be reconciled on a
The receivables ledger control account is If the receivables ledger is only reconciled annually, monthly basis to identify any errors which should be investigated
only reconciled at the end of April in order to there is a risk that errors will not be spotted promptly and and corrected. The reconciliations should be reviewed by a
verify the year-end balance. receivables may be misstated. responsible official and they should evidence their review by way
of signature.
INTERNAL CONTROL SYSTEM

2020 - Mar, Jun

(a) Significant deficiencies
Examples of matters the external auditor may consider in determining whether a deficiency in
internal controls is significant include:
1. The likelihood of the deficiencies leading to material misstatements in the financial statements in
the future.
2. The susceptibility to loss or fraud of the related asset or liability.
3. The subjectivity and complexity of determining estimated amounts.
4. The financial statement amounts exposed to the deficiencies.
5. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
6. The importance of the controls to the financial reporting process.
7. The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
8. The interaction of the deficiency with other deficiencies in internal control

2019 - Sep, Dec

(a) Control objectives for sales and dispatch system
1. To ensure that orders are only accepted if goods are available to be processed for customers.
2. To ensure that all orders are recorded completely and accurately.
3. To ensure that goods are not supplied to poor credit risks.
4. To ensure that goods are dispatched for all orders on a timely basis.
5. To ensure that the correct quantity of goods are dispatched and they are of an adequate quality.
6. To ensure that all goods dispatched are correctly invoiced at authorised prices.
7. To ensure completeness of income for goods dispatched.
8. To ensure that sales discounts are only provided during the valid period.

2017 MJ
(a) Control activities - Mô tả các thủ tục control
Segregation of duties – assignment of roles or responsibilities to ensure the tasks of authorising and
recording transactions and maintaining custody of assets are carried out by different people,
thereby reducing the risk of fraud and error occurring. For example, the purchase ledger clerk
recording invoices onto the purchase ledger, and the finance director authorising the payment of
those purchase invoices.
2020 - Dec, Sep

Documenting
Description Advantage Disadvantage
systems
They are simple to record; after discussion with staff They may prove to be time-consuming and cumbersome
Narrative notes consist of a written description of the
members, these discussions are easily written up as notes. if the internal control system is complex.
Narrative system. They detail what occurs in the system at each
They can facilitate understanding by all members of the audit
notes stage and include details of any controls which operate at
team, especially more junior members who might find It may make it more difficult to identify if any internal
each stage.
alternative methods too complex. controls are missing in narrative notes
Changes can be difficult as often the whole flowchart
Flowcharts are a diagrammatic illustration of the internal With flowcharts it is easy to view the system in its entirety as it
needs re-drawing
control system. Lines usually demonstrate the sequence of is all presented together in one diagram. Due to the use of
Flowcharts
events and standard symbols are used to signify controls or standard symbols for controls, it can be effective in identifying
Narrative notes will still be needed to explain the
documents. missing controls.
flowchart and hence it can be time consuming
Internal control questionnaires (ICQs) or internal control Questionnaires are quick to prepare, which means they are a Internal controls may be overstated if the client is aware
evaluation questionnaires (ICEQs) contain a list of timely method for recording the system. If drafted thoroughly that the auditor is looking for a particular answer.
Questionnaire
questions for each major transaction cycle; ICQs are used they ensure that all controls present within the system are
s
to assess whether controls exist whereas ICEQs assess considered and recorded, hence missing controls or Unusual controls may not be included on a standard
the effectiveness of the controls in place. deficiencies are clearly highlighted by the audit team questionnaire and hence may not be identified
 Back
The fact Audit risk Response Noted
The company’s suppliers have There is a risk that understated payables and Request that the bank reconciliation is amended to remove the AP
been paid on 1 June 20X5 and the bank balances. supplier payments at the year-end as these should be accounted
payment has been included as an for in the 31 May 20X6 financial statements.
unpresented item in the year end (Trả 1/6 nhưng ghi nhận trên sổ là 31/5 -> phải
bank reconciliation. trả giảm, tiền giảm so với thực tế) Review the journal entry correcting the payables and bank
balances at the year end.

Preliminary analytical review of The forecast profit is higher than last year, The audit team should increase their testing on trade payables at AP
the August management accounts indicating an increase in trade, also the the year end, with a particular focus on completeness of payables.
shows payable days of 56 for company’s cash position has continued to A payables circularisation or review of supplier statement
August 20X7, compared to 87 deteriorate and therefore, it is unusual for reconciliations should be undertaken.
days for September 20X6. It is payable days to have decreased.
anticipated that the year-end
payable days will be even lower. There is an increased risk of errors within trade
payables and the year-end payables may be
The company purchases their 1) There is a risk that the cut-off of purchases 1) Discuss with management the point at which inventory is AP,
goods from its main supplier in may not be accurate as they may not correctly recorded and review the contract with the supplier to verify the Inventory
Asia and has responsibility for recognise the goods from the point of dispatch requirements in place.
goods at the point of dispatch, the at the year end.
goods are in transit for up to one 2) Review the controls the company has in place to ensure that
month. 2) There is also a risk that inventory and trade inventory is recorded from the point of dispatch.
payables are understated at the year end.
3) The audit team should undertake detailed cut-off testing of
purchases of goods at the year end and the sample of shipping
documentation immediately before and after the year end
relating to goods from its main supplier in Asia should be
Since the dismissal of the There is a risk that the purchases and trade increased
Review thetounprocessed
ensure that invoices
cut-off is file
complete and accurate.
at the year end to identify AP
payables ledger supervisor, payables balance at the year end will be any invoices which relate to the supply of pre year-end goods and
purchase invoices have yet to be understated if these invoices are not logged ensure they have been properly accrued for in the year-end
logged onto the payables ledger. onto the payables ledger before it is closed financial statements and recognised as a liability.
down for the year or accrued for.
Discuss with the finance director the approach to be adopted to
resolve the issue of unprocessed purchase invoices.
 The fact Audit risk Response Noted
The report to management issued If these deficiencies have not been rectified, Discuss with management whether the purchases cycle AP
after the prior year audit the controls over purchases and payables may recommendations suggested by Brooklyn & Co were implemented
highlighted significant deficiencies continue to be weak leading to increased successfully this year. If so, undertake tests of these controls to
relating to the purchases cycle. control risk and risk of misstatements arising. assess if they are operating efficiently.
Cost of sales, expenses and trade payables
may not be complete or accurate. If the controls are not in place or operating efficiently, adopt a
fully substantive approach for confirming the completeness and
accuracy of cost of sales and other expenses and trade payables.
No supplier statement or This a key control which is being overridden The audit team should increase their testing on trade payables at AP
purchase ledger control account and as such there is an increased risk of errors the year end, including performing supplier statement
reconciliations have been within trade payables and the year-end reconciliations, with a particular focus on completeness of trade
erformed in the period from payables balance may be under or overstated. payables.
December 20X7 to the year end.
Request management prepare a year-end purchase ledger control
account reconciliation. The audit team should undertake a
detailed review of this reconciliation with a focus on any unusual
Customers who wish to purchase There is a risk that overstated revenue and Discuss with management the treatment of deposits received in AR
a property are required to place understated liabilities if management may have advance, to ensure it is appropriate.
an order and a 5% non-refundable incorrectly treated the deferred income as
deposit prior to the completion of revenue. During the final audit, undertake increased testing over the cut-
the building. off of revenue and completeness of deferred income.
These deposits should not be recognised as
revenue in the statement of profit or loss until
the performance obligations as per the
contracts have been satisfied, which is likely to
be when the building is finished and the sale
process is complete. Instead, they should be
A customer of Hurling Co has recognised as deferred
If the customer income within
is experiencing current
difficulties, Review the revised credit terms and identify if any after date cash AR
been encountering difficulties there is an increased risk that the receivable is receipts for this customer have been made.
paying their outstanding balance not recoverable and hence is overvalued.
of $1·2m and Hurling Co has Discuss with the finance director whether he intends to make an
agreed to a revised credit period. allowance for this receivable. If not, review whether any existing
allowance for uncollectable accounts is sufficient to cover the
amount of this receivable.
 The fact Audit risk Response Noted
An allowance for receivables has There is a risk that receivables will be Review and test the controls surrounding how the finance director AR
historically been maintained, but overvalued; some balances may not be identifies old or potentially irrecoverable receivables balances and
it is anticipated that this will be recoverable and so will be overstated if not credit control to ensure that they are operating effectively.
reduced. provided for.
Discuss with the director the rationale for reducing the allowance
In addition, reducing the allowance for for receivables.
receivables will increase asset values and
would improve the covenant compliance, which Extended post year-end cash receipts testing and a review of the
increases the manipulation risk further. aged receivables ledger to be performed to assess valuation and
the need for an allowance for receivables.
Over the last six months, the There is the risk that receivables will be Review and test the controls surrounding the way in which the AR
receivables collection period has overstated and the allowance for receivables finance director assesses the recoverability of receivables
increased from 42 days to 55 days understated if some receivables may not be balances and other credit control processes to ensure that they
and the allowance for receivables recoverable and if an additional allowance for are operating effectively.
will be at the same level as the receivables is not included in the financial
prior year. statements. Perform extended post year-end cash receipts testing and a
review of the aged receivables ledger in order to assess valuation
and the need for an increased allowance for irrecoverable
receivables.

Discuss with the finance director whether an additional allowance

Preliminary analytical procedures There is a risk that some receivables may not for receivables
Extend will be cash
post year-end required against
receipts balances
testing older than
and perform the
a review AR
indicate that the receivables be recoverable and an allowance for of the aged receivables listing to assess the valuation of
collection period has increased receivables is required, hence receivables may receivables.
from 38 days to 52 days due to be overstated and the allowance for
customers taking longer to pay. receivables understated. Discuss with management the adequacy of any allowance for
receivables.
A significant customer has been There is a risk that receivables will be Discuss with the director the rationale for maintaining the AR
granted a six-month payment overvalued; some balances may not be allowance for receivables at the same level as the prior year,
break and the receivables recoverable and so will be overstated if not despite the increase in receivables collection period and the
collection period has increased adequately provided for payment break granted to a large customer.
from 38 to 51 days. An allowance
for receivables has historically Extended post year-end cash receipts testing and a review of the
been maintained, and it is aged receivables ledger to be performed to assess valuation and
anticipated that it will remain at the need for an increased level of allowance for receivables.
the prior year level.
 The fact Audit risk Response Noted
The receivables collection period The increase in receivable days could be solely Review and test the controls surrounding how Darjeeling Co AR
has increased from 38 to 51 days due to these increased credit terms. identifies receivables balances which may not be recoverable and
and management has extended procedures around credit control to ensure that they are
the credit terms given to However, it could also be due to an increased operating effectively.
customers on the condition that risk over recoverability of receivables as they
sales order quantities were may be overvalued and expenses understated. Extended post year-end cash receipts testing and a review of the
increased. aged receivables ledger to be performed to assess valuation. Also
consider the adequacy of any allowance for receivables.
Customers pay a 25% deposit on The deposits should not be recognised as 1) Obtain a copy of the contracts with customers and review them AR, Sales
signing the contract to purchase revenue immediately and instead should be to understand the performance obligations.
the playgrounds. recognised as deferred income (contract
liabilities) within current liabilities until the 2) Discuss with management the criteria for determining whether
performance obligations, as per the contracts, performance obligations have been satisfied and the treatment of
have been satisfied deposits received to ensure it is appropriate and consistent with
relevant standards.
-> There is a risk that revenue is overstated
and current liabilities understated if the
deposits have been recorded within revenue.
Revenue has increased by 16·8% This is a significant increase in revenue and, During the audit a detailed breakdown of sales will be obtained, Sales
in the year; and the gross margin along with the increase in gross margin, may be discussed with management and tested in order to understand
has increased slightly from 36·4% related to the increased credit period and price the sales increase. Also increased cut-off testing should be
to 37·3%. promise promotion or could be due to an undertaken to verify that revenue is recorded in the right period
overstatement of revenue. and is not overstated.
The sales ledger processing There is a risk that sales and receivables being Discuss with management the transfer process undertaken and Sales
transferred to the service under/overstated if any errors occurred during any controls put in place to ensure the completeness and
organisation from 1 February the transfer process. accuracy of the data.
20X8.
Where possible, undertake tests of controls to confirm the
effectiveness of the transfer controls. In addition, perform
substantive testing on the transfer of information from the old to
This year the company made a There is a risk that overstated revenue, Discuss with management the basis of the refund liability of Sales
‘price promise’ to match the price under/overstated profits and liabilities if $0·25m and obtain supporting documentation to confirm the
of its competitors for similar company did not recored appropriate refund reasonableness of the assumptions and calculations.
products. Customers are able to liablity
claim the difference from the
company for one month after the
date of purchase of goods.
The company provides a six- There is the risk that liabilities and expenses Review the calculation of the warranty provision and assess its Sales
month warranty on its products may be understated if the company has reasonableness in light of the value of claims received in the return/
which require defects to be reduced the warranty provision excessively at period. warranty
repaired at Corley Appliances Co’s the year end.
own cost. The directors have Review the assumptions underpinning the warranty provision for
reduced this provision during the Because the company does not manufacture reasonableness
year on the grounds they feel the the goods (they only sell them) and therefore
products they sell are built to a this is not a reasonable reason for reduction Review the level of claims made under warranty post year end to
 The fact Audit risk Response Noted
The company has a returns policy There is a risk that revenue will be overstated Enquire with the finance director how the returns policy has been Sales
allowing a customer to return and the refund liability understated if the applied at the year end and whether the provisions in IFRS 15 return/
goods within 28 days of purchase company has not correctly accounted for the have been reflected. warranty
if they are dissatisfied with the refund liability.
product. Review the assumptions underpinning the refund liability for
IFRS® 15 Revenue from Contracts with reasonableness and whether they meet the historic 5% value of
Customers requires that revenue should only returns.
be recognised to the extent that goods will not
be returned. The company should recognise a Compare the level of post year-end returns to the refund liability
refund liability for goods which are expected to and discuss any significant differences with management
A customer has returned be returned.
There is a risk that revenue and receivables are Inspect a copy of the credit note and confirm an adjustment to Sales
$120,000 of faulty goods to the overstated if the credit note is not correctly revenue and receivables has been recorded pre- year end. return/
company prior to the year-end but recorded prior to the year end. warranty
a credit note is yet to be issued.

The finance director is planning There is a risk that revenue and cost of sales Discuss the basis of the revised assumption of a 5% return rate Sales
on reducing the estimated return may be overstated and liabilities understated if with the finance director. Review a period of 60 days to quantify return/
rate for goods sold on a sale or reducing the rate of return goods the levels of return in the specified period and compare this to the warranty
return basis to wholesale assumed rate of 5%. Discuss any significant variations with the
customers from 10% to 5%. finance director.
IFRS® 15 Revenue from Contracts with
Customers provides that revenue and cost of
sales should only be accounted for to the
extent that the company foresees that the
goods will not be returned. For the goods which
may be returned, the company should
recognise a refund liability. If, after 60 days, the
goods are not returned, then this liability is
reversed and revenue is recognised.
Hart Co offers its customers a There is a risk that the warranty provision could 1) Discuss with management the basis of the provision calculation Sales
warranty at no extra cost, which be understated, leading to understated and compare this to industry averages and the level of post year- return/
guarantees the playgrounds will expenses and liabilities if the company does not end claims warranty
function as expected for three record enough warranty provision under IAS 37
years. The provision is calculated 2) Discuss the rationale behind reducing the level of provision this
as 2% of revenue in the current year.
year against 6% in the prior year,
despite there being no changes in 3) Compare the prior year provision with the actual level of claims
the construction techniques or the in the year, to assess the reasonableness of the judgements made
 The fact Audit risk Response Noted
A sales-related bonus scheme has Sales staff seeking to maximise their current Increased sales cut-off testing will be performed along with a Sales/
been introduced in the year for year bonus may result in new accounts being review of any post year-end returns as they may indicate cut-off Bonus
sales staff, with a significant opened from poor credit risks leading to errors. In addition, increased after date cash receipts testing to be
number of new customer irrecoverable receivables. undertaken for new customer account receivables.
accounts on favourable credit
terms being opened pre year end. In addition, there is a risk of sales cut-off errors
This has resulted in a 5% increaseas new customers could place orders within the
in revenue. two-month introductory period and
subsequently return these goods post year end.
The external audit team may If reliance is placed on irrelevant or poorly The external audit team should meet with IA staff, read their Audit
place reliance on the controls performed testing, then the external audit team reports and review their files relating to store visits to ascertain team
testing work undertaken by the IA may form an incorrect conclusion on the the nature of the work undertaken.
department. strength of the internal controls at Peony Co.
This could result in them performing insufficient Before using the work of IA, the audit team will need to evaluate
levels of substantive testing, thereby increasing and perform audit procedures on the entirety of the work which
detection risk they plan to use, in order to determine its adequacy for the
purposes of the audit. In addition, the team will need to re-
The directors are paid a bonus There is a risk that the directors will try to 1) Maintain professional scepticism and be alert to the increased Bonus
based on a percentage of profit overstate the profit, and therefore their risk of manipulation.
before tax for the year. bonuses by increasing the revenue and income
recorded and decreasing expenses 2) Increased testing should be performed relating to adjusting
journal entries
Directors’ remuneration The directors’ remuneration disclosure will not Discuss this matter with management and review the Bonus
disclosures have been made in be complete if the additional information is not requirements of local legislation to determine if the disclosure in
line with IFRS® Standards but not disclosed as local legislation the financial statements is included appropriately.
local legislation.
The directors have each been The directors’ remuneration disclosure will be Discuss this matter with management and review the disclosure Bonus
paid a significant bonus at the incomplete and inaccurate if the bonus paid is in the financial statements to ensure it complies with local
year end and separate disclosure included in the payroll charge for the year and legislation.
of this is required in the financial not separately disclosed in accordance with the
statements by local legislation. local legislation.
 The fact Audit risk Response Noted
In May 20X5, the financial If it is probable that Harlem Co will make The audit team should discuss with management and request Dismissal
controller was dismissed and is payment to the financial controller, a provision confirmation from the company’s lawyers of the existence and
threatening to sue the company for unfair dismissal is required to comply with likelihood of success of any claim from the former financial
for unfair dismissal. IAS 37 Provisions, Contingent Liabilities and controller.
Contingent Assets. If the payment is possible
rather than probable, a contingent liability
disclosure would be necessary. If Harlem Co
has not done this, there is a risk over the
completeness of any provisions or contingent
In December 20X7, the financial If it is probable that Blackberry Co will make a The audit team should request confirmation from the company’s Dismissal
accountant of Blackberry Co was payment to the financial accountant, a lawyers of the existence and likelihood of success of any claim
dismissed and is threatening to provision for unfair dismissal is required. from the former financial accountant.
sue the company for unfair
dismissal. If the payment is possible rather than probable,
a contingent liability disclosure would be
necessary.

If Blackberry Co has not done this, there is a

risk over the completeness of any provisions or
Petanque Co, a customer of contingent
If liabilities.
it is probable that the company will make Caving & Co should write to the company’s lawyers to enquire of Dismissal
Hurling Co, has announced that payment to the customer, a legal provision is the existence and likelihood of success of any claim from
they intend to commence legal required. If the payment is possible rather than Petanque Co. The results of this should be used to assess the
action for a loss of information probable, a contingent liability disclosure would level of provision or disclosure included in the financial
and profits as a result of the Luge be necessary. If Hurling Co has not done this, statements.
product sold to them. there is a risk over the completeness of any
provisions or the necessary disclosure of
The payables ledger supervisor 1) There is a risk that expenses being The audit team should undertake additional substantive Fraud
was dismissed in June 20X5 due understated and payables being overstated If procedures over the payables balance, particularly the fictitious
to a fraud. The value of this fraud additional frauds committed by the payables supplier set up on the payables ledger to ensure this has been
has been recognised as an ledger supervisor are not discovered. removed.
expense in the draft statement of
profit or loss. 2) Control risk is also increased if the fraud has Discuss with the finance director the details of the fraud
gone undetected for a period of time. perpetrated by the payables ledger supervisor and what
procedures have been adopted to date to identify any further
adjustments which are needed in the financial statements. In
addition, discuss with the finance director what additional controls
have been put in place to prevent any similar frauds.

In addition, the team should maintain professional scepticism and

be alert to the risk of further fraud.
 The fact Audit risk Response Noted
Harlem Co’s financial controller There is a risk that she may have undertaken a Discuss with the finance director the details of the fraud Fraud
has allegedly carried out a significant level of fraudulent transactions perpetrated by the financial controller and what procedures have
number of fraudulent transactions leading to an increased control risk which has been adopted to date to identify any adjustments which are
at the company. The investigation not yet been identified. These would need to be needed in the financial statements.
into the extent of the fraud has written off to the statement of profit or loss. If
only recently commenced. these have not been uncovered by the year Additional substantive testing should be conducted over the
end, the financial statements could include affected areas of the accounting records.
errors resulting in the misstatement of profits.
In addition, the team should maintain their professional
scepticism and be alert to the risk of further fraud and errors.
In November 20X7, it was There is a risk that the full impact of the fraud Discuss with the finance director what procedures they have Fraud
discovered that a significant has not been quantified and any additional adopted to fully identify and quantify the impact of the teeming
teeming and lading fraud had fraudulent transactions would need to be and lading fraud. In addition, discuss with the finance director,
been carried out by four members written off in the statement of profit or loss. If what controls have been put in place to identify any similar
of the sales ledger department. these have not been uncovered, the financial frauds.
statements could be misstated.
Review the receivables listing to identify any unusual postings to
In addition, individual receivable balances may individual receivable balances as this could be further evidence of
be under/overstated as customer receipts have fraudulent transactions.
been misallocated to other receivable balances.
In addition, the team should maintain their professional
The payables payment period has These are all indicators that the company could scepticism and concern
Detailed going be alert testing
to the risk of performed
to be further fraud and errors.
during the audit, Going
increased from 40 to 58 days. The be experiencing a reduction in its cash flow including the review of cash flow forecasts and the underlying concern
current ratio has decreased from which could result in going concern difficulties assumptions. These should be discussed with management to
3·08 to 1·65. or uncertainties. ensure that the going concern basis is reasonable.

The quick ratio has also These uncertainties may not be adequately
decreased from 1·97 to 0·99. In disclosed in the financial statements.
addition, the bank balance has
moved from $0·56m to an
overdraft of $0·81m.
The company breached the terms If the bank refuses to continue to support the Discuss with the finance director the availability of alternative Going
of its overdraft facility in June company, there may be doubts as to the financing if the bank is unwilling to continue to support the concern
20X5 and the bank will only company’s ability to continue as a going company and review the adequacy of any going concern
confirm the decision whether, or concern. The uncertainties may not be disclosures in the financial statements.
not, to continue to support the adequately disclosed in the financial
business in November 20X5, statements. The audit team should undertake detailed going concern testing,
which is after the auditor’s report in particular, reviewing the impact of a non-renewal of the
will be signed. The company is overdraft facility.
dependent on the overdraft
 The fact Audit risk Response Noted
A current asset of $360,000 has To comply with IAS 37 Provisions, Contingent Discuss with management whether any notification of payment IAS 37 -
been included within the Liabilities and Contingent Assets, this should has been received from the liquidators and review the related Provision
statement of profit or loss and not be recognised until the receipt is virtually correspondence. If virtually certain, the treatment adopted is
assets. It represents an certain. With no firm response to date, the correct. If payment has been received, agree to post-year end
anticipated pay out from inclusion of this sum overstates profit and cash book.
liquidators handling the current assets.
bankruptcy of a customer who If receipt is not virtually certain, management should be
owed Blackberry Co $0·9m. The requested to remove it from profit and receivables. If the receipt
sum of $0·9m was written off in is probable, the auditor should request management include a
the prior year accounts. However, contingent asset disclosure note.
the company has not received a
formal notification from the
liquidators confirming the
payment and this would therefore
Prancer Construction Co offers its A warranty provision will be required under IAS Discuss with management the basis of the provision calculation, IAS 37 -
customers a building warranty of 37 Provisions, Contingent Liabilities and and compare this to the level of post year-end claims, if any, Provision
five years, which covers any Contingent Assets. made by customers. In particular, discuss the rationale behind
construction defects. reducing the level of provision this year.
Calculating warranty provisions requires
judgement as it is an uncertain amount. Compare the prior year provision with the actual level of claims in
the year, to assess the reasonableness of the judgements made
The finance director anticipates this provision by management.
will be lower than last year as the company has
improved its building practices and the quality
of its finished properties. However, there is a
risk that this provision could be understated,
especially in light of the overdraft covenant
relating to a minimum level of net assets and is
being used as a mechanism to manipulate
profit and asset levels.
A patent has been purchased for In accordance with IAS 38 Intangible Assets, The audit team will need to agree the purchase price to Intangible
$1·1m and this grants Blackberry this should have been included as an intangible supporting documentation and confirm the useful life is three assets
Co the exclusive right for three asset and amortised over its three-year life. As years as per the contract.
years to customise their portable the sum has been fully expensed and not
music players to gain a treated in accordance with IAS 38, intangible Discuss with management the reason for fully expensing the
competitive advantage in their assets and profits are understated. $1·1m paid, and request they correct the treatment.
industry. Management has
expensed the full amount paid to The correcting journal should be reviewed and the amortisation
the current year statement of charge should be recalculated in order to ensure the accuracy of
profit or loss. the charge and that the intangible is correctly valued at the year
end.
 The fact Audit risk Response Noted
The company’s central warehouse It is unlikely that the auditor will be able to The audit team should assess which of the inventory counts they Inventory
and all 20 branches will be attend all sites which increases detection risk. It will attend. This should include the count for the central
carrying out an inventory count at may not be possible to gain sufficient warehouse and a sample of branches which contain the most
the year-end date of 31 August. appropriate audit evidence over the inventory material balances of inventory and those which have historically
counting controls and completeness and had exceptions reported during the inventory count.
existence of inventory for those sites which are
not visited. For those not visited, the auditor will need to review the level of
exceptions noted during the count and discuss any issues which
arose during the count with management.
At the year end there will be It is unlikely that the auditor will be able to The auditor should assess for which of the building sites they will Inventory
inventory counts undertaken at all attend all of these inventory counts, increasing attend the counts. This will be those with the most material
11 of the building sites in detection risk, and therefore they need to inventory or which according to management have the most
progress. ensure that they obtain sufficient evidence over significant risk of misstatement.
the inventory counting controls, and
completeness and existence of inventory for For those not visited, the auditor will need to review the level of
any sites not visited. exceptions noted during the count and discuss with management
any issues, which arose during the count.
The audit team will only attend WIP is a material balance and the valuation of 1) Assess which inventory counts the team will attend _ the most Inventory
the WIP counts at five of the 16 WIP is a judgemental area. material WIP balances or which are assessed as having the
sites. -> As the audit team is not attending all sites, greatest risk of misstatement.
detection risk is increased as the team will be
unable to directly obtain evidence relating to 2) For those inventory counts not attended -> +) obtain and
WIP. review documentation relating to the controls surrounding the
counts
+) discuss with management any issues which arise during the
The delivery time of three weeks There is a risk that inventory is not recorded on Discuss with management the point at which inventory is Inventory
from the company’s international dispatch and therefore inventory and liabilities recorded and review the contract with the supplier to verify the
supplier is likely to result in goods are understated at the year end. requirements in place.
in transit at the year end. The
company has advised that the Review the controls the company has in place to ensure that
contract with the supplier means inventory is recorded from the point of dispatch.
that Scarlet Co will be responsible
for goods from dispatch and Extend cut-off testing by reviewing pre and post year-end GRNs
therefore inventory should be and supplier dispatch notes to verify that inventory is recorded at
recorded when the products are the correct point.
sent by Co
Harlem thehas
supplier.
had production Inventory may be overvalued as its net Discuss with the finance director whether any write downs will be Inventory
problems which have affected the realisable value (NRV) may be below its cost. If made to the affected tyres, and what, if any, modifications may
quality of a significant batch of the tyres can be rectified, the rectification costs be required with regards to the quality.
tyres. In addition, the inventory may mean that cost exceeds net realisable
holding period has increased from value. If the tyres cannot be rectified, the Testing should be undertaken to confirm cost and NRV of the
34 to 41 days. inventory may need to be written off affected products in inventory and that all inventory on a
completely. line-by-line basis is valued correctly.
 The fact Audit risk Response Noted
The company is holding a number There is a risk that this inventory may be Discuss with the finance director whether any write downs will be Inventory
of damaged paint products in overvalued as its net realisable value may be made to this product, and what, if any, modifications will be
inventory and overall the below cost. required to rectify the quality of the product.
inventory holding period has
increased from 45 days to 54 Due to the issue with the paint consistency, the Testing should be undertaken to confirm cost and NRV of the
days. quality of these products is questionable and affected paint products held in inventory and that on a line by line
management is investigating whether these basis the goods are valued correctly.
products can be rectified.
Prancer Construction Co is likely The level of work in progress will need to be The auditor should discuss with management the process they Inventory
to have a material level of work in assessed at the year end. Assessing the will undertake to assess the percentage completion for work in
progress at the year end, being percentage completion for partially constructed progress at the year end. This process should be reviewed by the
construction work in progress as buildings is likely to be quite subjective, and auditor while attending the year-end inventory counts.
well as ongoing maintenance the team should consider if they have the
services, as Prancer Construction required expertise to undertake this. If the In addition, consideration should be given as to whether an
Co has annual contracts for many percentage completion is not correctly independent expert is required to value the work in progress or if
of the buildings constructed. calculated, the inventory valuation may be a management expert has been used. If the work of an expert is
under or overstated. to be used, then the audit team will need to assess the
competence, capabilities and objectivity of the expert.
Darjeeling Co has stopped further This product recall will result in Darjeeling Co Review the list of sales of the paint product made between June Inventory
sales of one of its paint products paying refunds to customers. The sales will and the date of the recall, agree that the sales have been
and a product recall has been need to be removed from the 20X8 financial removed from revenue and the inventory included. If the refunds
initiated for any goods sold since statements and a refund liability recognised. have not been paid before the year end, review the draft financial
June. Also inventory will need to be reinstated, albeit statements to confirm that it is included within current liabilities.
at a possibly written down value. Failing to
account for this correctly could result in
overstated revenue, understated liabilities and
The company utilises a perpetual Inventory could be under or overstated if the The timetable of the perpetual inventory counts should be Inventory
inventory system at its warehouse perpetual inventory counts are not all reviewed and the controls over the counts and adjustments to
rather than a full year-end count. completed, such that some inventory lines are records should be tested.
Under such a system, all not counted in the year.
inventory must be counted at In addition, the level of adjustments made to inventory should be
least once a year with During the interim audit, it was noted that there considered to assess their significance. This should be discussed
adjustments made to the were significant exceptions with the inventory with management as soon as possible as it may not be possible to
inventory records on a timely records being higher than the inventory in the place reliance on the inventory records at the year end, which
basis. warehouse. As the year-end quantities will be could result in the requirement for a full year-end inventory count.
based on the records, this is likely to result in
Blackberry Co values its inventory overstated
The generalinventory
overheads do not meet Discuss with management the nature of the overheads included in Inventory
at the lower of cost and net requirement to record in inventory cost. If these inventory valuation. If general overheads are included, request
realisable value. Cost includes are included in inventory cost, then this will management remove them from the valuation to be included in
both production and general result in over-valued inventory. the draft financial statements.
overheads.
Review supporting documentation to verify those overheads
deemed to be of a production nature are valid.
 The fact Audit risk Response Noted
The company is planning to There is a risk that the year-end inventory The auditor should attend the inventory count held after the year Inventory
undertake the full year-end could be under or overstated if the adjustments end and note details of goods received and despatched post year
inventory counts after the year are not completed accurately end, in order to agree to the reconciliation.
end and then adjust for
movements from the year end. During the final audit, the year-end inventory adjustments
schedule should be reviewed in detail and agreed to supporting
documentation obtained during the inventory count for all
adjusting items.

The audit team should increase the extent of inventory cut-off

testing at the year end and at the date of the count.
Peony Co’s inventory valuation There is a risk that inventory could be under or Testing should be undertaken to confirm cost and NRV of Inventory
policy is selling price less averageovervalued because inventory should be valued inventory and that on a line-by-line basis the goods are valued
profit margin, as this is industry at the lower of cost and net realisable value correctly.
practice. (NRV).
In addition, valuation testing should focus on comparing the cost
of inventory to the selling price less margin for a sample of items
to confirm whether this method is actually a close approximation
The August 20X7 management The increase in inventory may be due to an Detailed cost and net realisable value (NRV) testing to be Inventory
accounts contain $2·1 million of increased level of pre year-end orders. performed at the year end and the aged inventory report to be
completed properties; this Alternatively, it may be that Prancer reviewed to assess whether inventory requires to be written
balance was $1·4 million in Construction Co is struggling to sell completed down.
September 20X6. properties, which may indicate that they are
overvalued. IAS 2
Inventories requires that inventory should be
stated at the lower of cost and NRV.
Hurling Co has halted further If there are issues with the quality of the Luge Discuss with the finance director whether any write downs will be Inventory
sales of its new product Luge and product, inventory may be overvalued as its made to this product, and what, if any, modifications may be
a product recall has been initiated NRV may be below its cost. required with regards the quality.
for any goods sold in the last four
months. Testing should be undertaken to confirm cost and NRV of the Luge
products in inventory and that on a line-by-line basis the goods
Additionally, products of Luge sold The sale will need to be removed; a refund Review the list of sales made of product Luge prior to the recall, Inventory
within the last four months are liability should be recognised along with the agree that the sale has been removed from revenue and the
being recalled, this will result in reinstatement of inventory, although the NRV of inventory included. If the refund has not been paid pre year end,
Hurling Co paying customer this inventory could be of a minimal value. agree it is included within current liabilities.
refunds. Failing to account for this correctly could result
in overstated revenue and understated
liabilities and inventory.
 The fact Audit risk Response Noted
Harlem Co has issued shares If the company has not accounted for a bonus Review the treatment of the bonus issue and agree the increase Issue
during the year via a bonus issue. issue before, there is a risk that it could have in shares to the share register and share certificates, and agree shares
Share capital within equity should been incorrectly treated with equity being that the corresponding reduction in reserves is correct.
increase by the value of the under or overstated. In addition, legal issues
shares and a reserve should may arise if the shares have not been issued in Review board minutes for authorisation and terms of the bonus
decrease accordingly. accordance with the company’s statutory issue and review if the transaction has been conducted in line
constitution. with this approval. Review the statutory constitution documents
to confirm the legality of the share issue.
Additionally, bonus issues require disclosure in
the financial statements and there is a risk that Review the adequacy of the bonus issue disclosures in the
Hart Co made a rights issue in the these may
1) There is be incomplete
a risk or inaccurate.
that the split between share financial
1) Obtainstatements.
legal documentation in support of the rights issue to Issue
year. capital and share premium has not been agree the number of shares issued and the rights price. shares
accounted for correctly and that these balances
are misstated 2) Recalculate the split of share capital and share premium and
agree this to the journal entry to record the rights issue.
Significant finance has been There is a risk that understated equity and Review share issue documentation to confirm that the preference Issue
obtained in the year, as the overstated non-current liabilities if shares are irredeemable. Confirm that they have been correctly shares
company has issued $5m of irredeemable preference shares are classified classified as equity within the accounting records and that total
irredeemable preference shares. incorrectly into non-current liabilities, not financing proceeds of $5m were received.
equity.
In addition, the disclosures for this share issue should be reviewed
in detail to ensure compliance with relevant accounting
During the year Blackberry Co has This needs to be accounted for correctly, with The audit team should confirm that proceeds of $1·2m were Issue
raised new finance through adequate disclosure made and the equity received and that the split of share capital and share premium is shares
issuing $1·2m of shares at a finance needs to be allocated correctly between correct and appropriately recorded.
premium. share capital and share premium.
In addition, the disclosures for this finance should be reviewed in
If this is not done, then the accounts may be detail to ensure compliance with relevant accounting standards
misstated due to a lack of disclosure or share and local legislation.
capital and share premium may be misstated.

The company has borrowed $4m This loan needs to be correctly split between During the audit, the team would need to confirm that the $4 Loan
from the bank via an eight-year current and non-current liabilities in order to million loan finance was received.
loan. ensure correct disclosure.
In addition, the split between current and non-current liabilities
and the disclosures for this loan should be reviewed in detail to
ensure compliance with relevant accounting standards and local
legislation.

Details of security should be agreed to the bank confirmation

As the level of debt has increased, There is a risk that this has been omitted from The finance costs should be recalculated and any increase agreed Loan
there should be additional finance the statement of profit or loss leading to to the loan documentation for confirmation of the 5% interest
costs as the loan has an interest understated finance costs and overstated profit. rate.
rate of 5%.
Interest payments should be agreed to the cash book and bank
statements to confirm the amount was paid and is not therefore a
 The fact Audit risk Response Noted
Prancer Construction Co has a If the company does not have sufficient cash to Review the covenant calculations prepared by the company at the Manipulat
material overdraft which has meet this repayment, then there could be going year end and identify whether any defaults have occurred; if so, e
minimum profit and net assets concern implications. determine the effect on the company.
covenants attached to it. If these
covenants were to be breached, In addition, there is a risk of manipulation of The team should maintain their professional scepticism and be
the overdraft balance would profit and net assets to ensure that covenants alert to the risk that profit and/or net assets have been overstated
become instantly repayable. are met. to ensure compliance with the covenants.

The year-end financial statements This increases the risk that the directors may The audit engagement team should maintain professional Manipulat
have to be prepared by the end of manipulate the financial statements, by scepticism throughout the course of the audit. e
September 20X5 in order to overstating profits and assets and understating
secure bank finance and liabilities. Detailed cut-off testing on areas such as revenue, inventory and
management wish to report payables should be performed to ensure that cut-off has been
strong results. correctly applied and substantive procedures performed on
estimates and judgements to ensure accuracy.
Harlem Co intends to restructure In order to maximise the chances of securing Brooklyn & Co should ensure that there is a suitably experienced Manipulat
its debt finance after the year the debt finance restructure, Harlem Co will audit team. Also, adequate time should be allocated for team e
end. However, the interest cover need to present financial statements which members to obtain an understanding of the company and the
has declined from 4·4 to 2·6 and show the best possible position and significant risks of overstatement of profits and assets and
the level of gearing has increased performance. The worsening interest cover and understatement of debt, including attendance at an audit team
from 53·7% to 56·5%. gearing ratio increases the risk that the briefing.
directors may manipulate the financial
statements, by overstating profits and assets The team needs to maintain professional scepticism and be alert
and understating debt liabilities to the increased risk of manipulation.

Significant estimates and judgements should be carefully

Darjeeling Co intends to There is a risk that the directors have an reviewed
Earl & Co in light ensure
should of the misstatement
that there is arisk.
suitably experienced audit Manipulat
undertake a stock exchange incentive to manipulate the financial team. Also, adequate time should be allocated for team members e
listing in the next 12 months. statements, by overstating revenue, profits and to obtain an understanding of the company and the significant
assets because in order to maximise the risks of overstatement of revenue, profits and assets, including
success of the potential listing, Darjeeling Co attendance at an audit team briefing.
will need to present financial statements which
show the best possible position and The team needs to maintain professional scepticism and be alert
performance. to the increased risk of manipulation.

Significant estimates and judgements should be carefully

reviewed in light of the misstatement risk.
1) not familiar with the accounting 1) An increased detection risk on the audit 1) Assign suitably experienced team to the audit New
policies, transactions and client
balances 2) Less assurance over opening balances as the 2) Ensure adequate time is allowed for team members to obtain
audit team did not perform the audit last yea an understanding of the company and the risks of material
2) a new audit client of the firm. misstatement

3) Increased audit procedures should be performed over opening

 The fact Audit risk Response Noted
The payroll function was If any errors occurred during the transfer Discuss with management the extent of records maintained at Outsource
transferred to the service process, these could result in wages and Peony Co for the period since January 20X9 and any monitoring of
organisation from 1 January 20X9, salaries being under/overstated controls which has been undertaken by management over payroll.
which is five months prior to the
year end. Consideration should be given to contacting the service
organisation’s auditor to confirm the level of controls in place, a
type 1 or type 2 report could be requested.
Hart Co’s payroll function is 1) A detection risk arises as to whether 1) Discuss with management any changes to the extent of records Outsource
outsourced to an external service sufficient and appropriate evidence is available maintained at Hart Co since the prior year audit and any
organisation. at Hart Co to confirm the completeness and monitoring of controls which has been undertaken by
accuracy of controls over the payroll cycle and management over payrol.
liabilities at the year end.

2) Consideration should be given to the level of 2) Consideration should be given to contacting the auditor of the
controls in place at the service organisation and service organisation to confirm the level of controls in place.
whether the data is reliable. If any errors Consider the extent to which sufficient appropriate audit evidence
occurred these could result in the wages and can be obtained from records held at Hart Co in respect of the
salaries expense and any accruals being wages and salaries expense and liabilities.
During the year, Peony Co misstated.
A detection risk arises as to whether sufficient Discuss with management the extent of records maintained at Outsource
outsourced its payroll function to and appropriate evidence is available at Peony Peony Co for the period since January 20X9 and any monitoring of
an external service organisation. Co to confirm the completeness and accuracy controls which has been undertaken by management over payroll.
of controls over the payroll cycle and liabilities
at the year end. Consideration should be given to contacting the service
organisation’s auditor to confirm the level of controls in place, a
type 1 or type 2 report could be requested.
During the year Blackberry Co A detection risk arises as to whether sufficient Discuss with management the extent of records maintained at Outsource
outsourced its sales ledger and appropriate evidence is available at Blackberry Co for the period since February 20X8 and any
processing to an external service Blackberry Co to confirm the completeness and monitoring of controls undertaken by management over sales and
organisation. accuracy of controls over the sales and receivables.
receivables cycle and balances at the year end.
Consideration should be given to contacting the service
organisation’s auditor to confirm the level of controls in place.
Surplus plant and machinery was Significant profits or losses on disposal are an Recalculate the loss on disposal calculations and agree all items PPE
sold during the year, resulting in a indication that the depreciation policy of plant to supporting documentation.
loss on disposal of $160,000. and machinery may not be appropriate.
Therefore depreciation may be understated and Discuss the depreciation policy for plant and machinery with the
profit and assets overstated finance director to assess its reasonableness.

Review for other significant gains or losses on disposal of

property, plant and equipment to assess the reasonableness
of the company’s depreciation policies.
 The fact Audit risk Response Noted
The finance director has extended Under IAS 16 Property, Plant and Equipment, Discuss with the directors the rationale for any extensions of PPE
the useful lives of fixtures and useful lives are to be reviewed annually, and if asset lives and reduction of depreciation rates. Also, the four-year
fittings from three to four years, asset lives have genuinely increased, then this life should be compared to how often these assets are replaced,
resulting in the depreciation change is reasonable. to assess the useful life of assets.
charge reducing.
However, there is a risk that this reduction has
occurred in order to boost profits. If this is the
case, then fixtures and fittings are overvalued
Hart Co placed an order for $2.4m There is a risk that prepayments are 1) Review the non-current asset register to determine if the $1m PPE
of machinery, paying $1m in understated and PPE will be overstated if the paid in advance has been capitalised.
advance. The machinery was due deposit of $1m paid in advance has been
to be received in July 20X5 but capitalised within PPE because only assets 2) Discuss the correct accounting treatment with management to
will now be delivered which physically exist at the year end should be confirm that the amount paid in advance is recognised as a
post year end. capitalised as PPE prepayment and if incorrectly recognised review the correcting
journal entry.
A number of assets which had not This is an indication that the company’s Discuss the depreciation policy for non-current assets with the PPE
been fully depreciated were depreciation policy of non-current assets may finance director and assess its reasonableness. Enquire
identified as being obsolete. not be appropriate, as depreciation in the past of the finance director if the obsolete assets have been written
appears to have been understated. off. If so, review the adjustment for completeness

If an asset is obsolete, it should be written off to

the statement of profit or loss. Therefore
depreciation may be understated and profit and
Hurling Co has entered into a Only assets which physically exist at the year Discuss with management as to whether the warehouse purchase PPE
transaction to purchase a new end should be included in property, plant and was completed by the year end. If so, inspect legal documents of
warehouse for $3·2m and it is equipment. If the transaction has not been ownership, such as title deeds ensuring these are dated prior to 1
anticipated that the legal process completed by the year end, there is a risk that April 20X7 and are in the company name.
will be completed by the year assets are overstated if the company
end. incorrectly includes the warehouse at the year
The company purchased and There is a risk that PPE and profits are Discuss the accounting treatment with the finance director and PPE
installed a new dispatch system. overstated because the training costs should be request that the training costs are written off to profit or loss to
The costs which have been charged to profit or loss. ensure treatment is in accordance with IAS 16.
capitalised include staff training
costs ($0·1m). IAS 16 does not allow staff training costs to be If adjusted, review the journal entry for accuracy.
capitalised as part of the cost of a non-current
A specialised machine was There is a risk that profits and property, plant Discuss the accounting treatment with the directors and request PPE
acquired and staff members had and equipment will be overstated, and that an adjustment is made to ensure appropriate treatment of
to be trained in the achine’s use expenses understated if the training costs are the training costs. Obtain a breakdown of the remaining
at a cost of $15,000 which has not written off to the statement of profit or loss. capitalised costs and agree to supporting documentation to
been capitalised as part of the ensure that they meet the recognition criteria in IAS 16.
cost of the machine. IAS® 16 prohibits training costs from being
capitalised and
 The fact Audit risk Response Noted
Darjeeling Co purchased and If the service for 20X8 has been carried out, Review the purchase documentation for the new manufacturing PPE
installed a new manufacturing then $0·1m ($0·5m/5) should be charged to line to confirm the exact cost of the servicing and that it does
line. The costs include purchase profit or loss. Therefore property, plant and relate to a five-year period.
price ($2·2m), installation costs equipment (PPE) and profits are overstated and
($0·4m) and a five-year servicing prepayments are understated. Discuss the accounting treatment with the finance director and
and maintenance plan ($0·5m). the level of any necessary adjustment to ensure treatment is in
accordance with IAS 16.
The company purchased a patent There is a risk that intangible assets and profits Agree the useful life of the patent is four years to supporting PPE
for $800,000 at the end of the are overstated if that management has documentation.
prior year which has a useful life correctly accounted for the amortisation.
of four years. The amortisation charge should be calculated and the appropriate
IAS® 38 Intangible Assets, this intangible asset journal adjustment discussed with management, in order to
The carrying amount in the should be amortised over its four-year life. ensure the accuracy of the charge and that the intangible is
forecast financial statements is correctly valued at the year end.
$800,000 which is the same as
the prior year.
The company purchased a patent There is a risk that intangible assets and profits Agree the useful life of the patent is four years to supporting PPE
for $800,000 at the end of the are overstated if that management has documentation.
prior year which has a useful life correctly accounted for the amortisation.
of four years. The amortisation charge should be calculated and the appropriate
IAS® 38 Intangible Assets, this intangible asset journal adjustment discussed with management, in order to
The carrying amount in the should be amortised over its four-year life. ensure the accuracy of the charge and that the intangible is
forecast financial statements is correctly valued at the year end.
$800,000 which is the same as
the prior year.
Peony Co is planning to include a The costs were incurred and adverts shown in Discuss with management the rationale for including the PPE
current asset of $0·7m, which the year ending 20X9 and there is no basis for advertising as a current asset. Request evidence to support the
relates to advertising costs including them as a current asset at the year assessment of probable future cash flows, and review for
incurred and adverts shown on TV end. The costs should be recognised in reasonableness.
before the year end. operating expenses in the current year financial
statements. Review supporting documentation for the advertisements to
confirm that all were shown before the 20X9 year end.
If these costs are not expensed, current assets
and profits will be overstated. Request that management remove the current asset and record
the amount as an expense in the statement of profit or loss.
Hurling Co upgraded their website The costs incurred should be correctly allocated Review a breakdown of the costs and agree to invoices to assess PPE
during the year at a cost of between revenue and capital expenditure. As the nature of the expenditure and if capital, agree to inclusion
$1·1m. the website has been upgraded, there is a within the asset register or agree to the statement of profit or
possibility that the new processes and systems loss.
may not record data reliably and accurately.
The audit team should document the revised system and
This may lead to a risk over completeness and undertake tests over the completeness and accuracy of data
accuracy of data in the underlying accounting recorded from the website to the accounting records.
 The fact Audit risk Response Noted
Hart Co has recognised $0.6m of There is a risk that intangible assets could be 2) Obtain a breakdown of the research expenditure recognised in R&D
research expenditure in profit or overstated and research expenses understated profit or loss and of the development costs capitalised and review
loss with the remaining $1.2m If research costs have been incorrectly supporting documentation to determine whether they have been
having been capitalised as classified as development expenditure because correctly classified. Any development expenditure agreed must
development expenditure. IAS 38 Intangible Assets has strict criteria to meet the relevant criteria for capitalisation under IAS 38.
capitalise with development expenditure.
2) Discuss the accounting treatment with the finance director and
ensure it is in accordance with IAS 38.
During the year, Darjeeling Co has If research costs have been incorrectly Obtain a breakdown of the expenditure and verify that it relates R&D
spent $0·9m on developing new classified as development expenditure, there is to the development of the new products. Review expenditure
product lines, some of hich are in a risk that intangible assets could be overstated documentation to determine whether the costs relate to the
the early stages of their and expenses understated. research or development stage. Discuss the accounting treatment
development cycle. with the finance director and ensure it is in accordance with IAS
This expenditure is classed as research and 38.
development under IAS® 38 Intangible Assets.
The standard requires research costs to be
expensed to profit or loss and only
Forecast ratios from the finance There is a risk that costs may have been The classification of costs between cost of sales and operating Reclassify
director show that the gross omitted or included in operating expenses expenses should be reviewed in comparison to the prior year and
margin is expected to increase rather than cost of sales because this any inconsistencies investigated.
from 56% to 60% and the movement in gross margin is significant and
operating margin is expected to inconsistent with the fall in operating margin.
decrease from 21% to 18%.
Misclassification of expenses would result in
understatement of cost of sales and
overstatement of operating expenses.
On 29 May 20X5, the directors There is a risk that profit would be overstated Obtain the calculation of the redundancy payments and agree Redundan
announced that a brand was and liabilities and payables would be that a provision has been included as a liability in the year-end cy
being discontinued resulting in understated if a provision is not recognised. financial statements.
four members of staff being made
redundant. The costs of As there is a present obligation for which the Agree the redundancy payments have been paid post year end.
redundancy are being included in costs can be reliably measured, and which will
the July 20X5 payroll run. result in an outflow of funds, IAS 37 Provisions,
Contingent Assets and Contingent Liabilities
would require this provision to be recognised in
the financial statements.
Peony Co is planning to make The timing of this announcement has not been Discuss with management the status of the redundancy Redundan
approximately 60 employees confirmed; if it is announced to the staff before announcement; if before the year end, review supporting cy
redundant after the year end. the year end, then under IAS 37 Provisions, documentation to confirm the timing. In addition, review the basis
Contingent Liabilities and Contingent Assets, a of and recalculate the redundancy provision.
redundancy provision will be required at the
year end as a constructive obligation will have
been created.

Failure to provide or to provide an appropriate

 The fact Audit risk Response Noted
The finance director has A reduction in the audit timetable will increase The timetable should be confirmed with the finance director. If it Request
requested that the audit detection risk and place additional pressure on is to be reduced, then consideration should be given to finish
completes one week earlier than the team in obtaining sufficient and appropriate performing an interim audit in late March or early April; this would soon
normal as he wishes to report evidence. then reduce the pressure on the final audit.
results earlier.
In addition, the finance team of Hurling Co will The team needs to maintain professional scepticism and be alert
have less time to prepare the financial to the increased risk of errors occurring.
information leading to an increased risk of
The company’s financial There is an increased risk of errors in the Discuss with management the technical competency and Staff
accountant was taken ill suddenly financial statements as the temporary financial experience of the temporary financial accountant.
in May 20X5 and a temporary accountant may not be familiar with the
accountant has been drafted in to company’s activities and so errors/omissions In addition, the audit engagement team should ensure that
help prepare the financial may go unnoticed. increased substantive procedures are undertaken on the material
statements. areas of the financial statements to reduce audit risk, particularly
those requiring judgement.
The company is intending to This amount should not be provided for in the Discuss the issue with management and confirm that the dividend Subseque
propose a final dividend once the 20X7 financial statements, as the obligation will not be included within liabilities in the 20X7 financial nt event
financial statements are finalised. only arises once the dividend is announced, statements.
which is post year end.
The financial statements need to be reviewed to ensure that
In line with IAS 10 Events after the Reporting adequate disclosure of the proposed dividend is included.
Date the dividend should only be disclosed. If
the dividend is included, this will result in an
overstatement of liabilities and understatement
2020 - Dec, Sep
The fact Audit risk Response
2017 MJ Audit risk
a) Audit risk and the components of audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated. Audit risk is a
function of two main components, being the risk of material misstatement
and detection risk. Risk of material misstatement is made up of a further two
components, inherent risk and control risk.
Inherent risk is the susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement which could be material,
either individually or when aggregated with other misstatements, before
consideration of any related controls.
Control risk is the risk that a misstatement which could occur in an assertion
about a class of transaction, account balance or disclosure and which could
be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely
basis by the entity’s internal control.
Detection risk is the risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement
which exists and which could be material, either individually or when
aggregated with other misstatements. Detection risk is affected by sampling
and non-sampling risk.
2020 - Dec, Sep
Audit risk Auditor’s response The fact
Hart Co is a new client for Morph & Morph & Co should ensure it has a The audit team is not familiar with
Co. As the audit team is not suitably experienced team the accounting policies,
familiar with the accounting assigned to the audit and that transactions and balances
policies, transactions and balances adequate time is allowed for team
of Hart Co, there will be an members to obtain an
increased detection risk on the understanding of the company and
audit. the risks of material misstatement,
including a detailed team briefing
to cover the key areas of risk.
There is also less assurance over
opening balances as Morph & Co Increased audit procedures should
did
Thenot perform
directors arethe audit
paid last year. be
a bonus Theperformed
audit teamover opening
should be aware of The directors are paid a bonus
based on a percentage of profit the increased risks of manipulation based on a percentage of profit
before tax for the year. and should assign more before tax for the year.
experienced audit members to
There is a risk that the directors significant estimates and
will try to overstate the profit, and judgemental areas.
therefore their bonuses by
increasing the revenue and income Also, adequate time should be
recorded and decreasing allocated for team members to
expenses. This is a particular risk obtain an understanding of the
relating to judgemental areas such company and the significant risks
as provisions and estimates. of overstatement of profit,
including attendance at an audit
team briefing.

The team needs to maintain

professional scepticism and be
alert to the increased risk of
manipulation. Increased testing
should be performed relating to
Customers pay a 25% deposit on The audit team should obtain a Customers pay a 25% deposit on
signing the contract to purchase copy of the contracts with signing the contract to purchase
the playgrounds. customers and review them to the playgrounds.
understand the performance
The deposits should not be obligations. They should discuss
recognised as revenue with management the criteria for
immediately and instead should be determining whether performance
recognised as deferred income obligations have been satisfied
(contract liabilities) within current and the treatment of deposits
liabilities until the performance received to ensure it is appropriate
obligations, as per the contracts, and consistent with relevant
have been satisfied. This is likely standards.
to be at a point in time, when
control of the playground is passed During the final audit, the audit
to the customer. team should undertake increased
testing over the cut-off of revenue
There is a risk that revenue is and the completeness of deferred
overstated and current liabilities income (contract liabilities).
understated if the deposits have
The audit team will only attend the The auditor should assess which The audit team will only attend the
WIP counts at five of the 16 sites. inventory counts the team will WIP counts at five of the 16 sites.
attend, most likely to be those
WIP is a material balance and the with the most material WIP
valuation of WIP is a judgemental balances or which are assessed as
area. As the audit team is not having the greatest risk of
attending all sites, detection risk is misstatement.
increased as the team will be
unable to directly obtain evidence For those inventory counts not
relating to WIP. attended, the audit team will need
to obtain and review
documentation relating to the
controls surrounding the counts
and will need to review report from
any experts used to value the WIP,
and any exceptions noted during
the count and discuss with
management any issues which
arise during the count
Hart Co offers its customers a The audit team should discuss with Hart Co offers its customers a
warranty at no extra cost, which management the basis of the warranty at no extra cost, which
guarantees the playgrounds will provision calculation and compare guarantees the playgrounds will
function as expected for three this to industry averages and the function as expected for three
years. The provision is calculated level of post year-end claims, if years. The provision is calculated
as 2% of revenue in the current any, made by customers. In as 2% of revenue in the current
year against 6% in the prior year, particular, they should discuss the year against 6% in the prior year,
despite there being no changes in rationale behind reducing the level despite there being no changes in
the construction techniques or the of provision this year. the construction techniques or the
level of claims. level of claims.
The audit team should also
Under IAS® 37 Provisions, compare the prior year provision
Contingent Liabilities and with the actual level of claims in
Contingent Assets this should be the year, to assess the
recognised as a warranty reasonableness of the judgements
provision. Calculating warranty made by management.
provisions requires judgement as it
is an uncertain amount.

There is a risk that the warranty

provision could
Hart Co has be understated,
recognised $0.6m of The audit team should obtain a Hart Co has recognised $0.6m of
research expenditure in profit or breakdown of the research research expenditure in profit or
loss with the remaining $1.2m expenditure recognised in profit or loss with the remaining $1.2m
having been capitalised as loss and of the development costs having been capitalised as
development expenditure. capitalised and review supporting development expenditure.
documentation to determine
IAS 38 Intangible Assets has strict whether they have been
criteria as to which costs can be correctly classified. Any
capitalised as development development expenditure should
expenditure. There is a risk that then be agreed as meeting the
the requirements of the standard relevant criteria for capitalisation
have not been applied correctly. as set out in IAS 38.

If research costs have been The team should also discuss the
incorrectly classified as accounting treatment with the
development expenditure, there is finance director and ensure it is in
a risk that intangible assets could accordance with IAS 38.
be overstated and research
Hart Co placed an order for $2.4m Review the non-current asset Hart Co placed an order for $2.4m
of machinery, paying $1m in register to determine if the $1m of machinery, paying $1m in
advance. The machinery was due paid in advance has been advance. The machinery was due
to be received in July 20X5 but will capitalised. Discuss the correct to be received in July 20X5 but will
now be delivered post year end. accounting treatment with now be delivered
management to confirm that the post year end.
Only assets which physically exist amount paid in advance is
at the year end should be recognised as a prepayment and if
capitalised as property, plant and incorrectly recognised review the
equipment (PPE). The $1m deposit correcting journal entry.
paid in advance should be
recognised as a prepayment. If the
deposit of $1m paid in advance
has been capitalised within PPE
then prepayments are understated
and PPE will be overstated.
Hart Co made a rights issue in the The audit team should obtain legal Hart Co made a rights issue in the
year. This is a non-standard documentation in support of the year.
transaction and there is increased rights issue to agree the number of
risk that the issue has not been shares issued and the rights price.
recorded correctly. The rights They should recalculate the split of
issue has been made at a premium share capital and share premium
and therefore requires to be split and agree this to the journal entry
into its share capital and share to record the rights issue.
premium elements.
The audit team should also agree
There is a risk that the split that disclosures are adequate and
between share capital and share consistent with standards and
premium has not been accounted legislation.
for correctly and that these
balances are misstated. There is
also a risk that the rights issue has
not been disclosed in accordance
 Hart Co’s payroll function is Discuss with management any Hart Co’s payroll function is
outsourced to an external service changes to the extent of records outsourced to an external service
organisation. A detection risk maintained at Hart Co since the organisation.
arises as to whether sufficient and prior year audit and any
appropriate evidence is available monitoring of controls which has
at Hart Co to confirm the been undertaken by management
completeness and accuracy of over payrol.
controls over the payroll cycle and
liabilities at the year end. Consideration should be given to
Consideration should be given to contacting the auditor of the
the level of controls in place at the
service organisation, Chaz Co, to
service organisation and whether confirm the level of controls in
the data is reliable. If any errors place. A type 1 or type 2 report
occurred these could result in the could be requested. Consider the
wages and salaries expense and extent to which sufficient
any accruals being misstated. appropriate audit evidence can be
obtained from records held at Hart
Directors’ remuneration Discuss this matter with Directors’ remuneration
disclosures have been made in line management and review the disclosures have been made in line
with IFRS® Standards but not local requirements of local legislation to with IFRS® Standards but not local
legislation. determine if the disclosure in the legislation.
financial statements is included
Where the local legislation is more appropriately.
comprehensive than IFRS
Standards it is likely that the
company must comply with local
legislation. The directors’
remuneration disclosure will not be
complete if the additional
information is not disclosed.
2021 - Mar, Jun
Audit risk Auditor's response
The company has a returns policy Enquire with the finance director The company has a returns policy
allowing a customer to return how the returns policy has been allowing a customer to return
goods within 28 days of purchase applied at the year end and goods within 28 days of purchase
if they are dissatisfied with the whether the provisions in IFRS 15 if they are dissatisfied with the
product. have been reflected. product.

IFRS® 15 Revenue from Contracts Review the assumptions

with Customers requires that underpinning the refund liability
revenue should only be recognised for reasonableness and whether
to the extent that goods will not be they meet the historic 5% value of
returned. The company should returns.
recognise a refund liability for
goods which are expected to be Compare the level of post year-
returned. end returns to the refund liability
and discuss any significant
If the company has not correctly differences with management
accounted for the refund liability,
revenue will be overstated and the
refund liabilityprovides
The company understated
a six-month Review the calculation of the The company provides a six-month
warranty on its products which warranty provision and assess its warranty on its products which
require defects to be repaired at reasonableness in light of the require defects to be repaired at
Corley Appliances Co’s own cost. value of claims received in the Corley Appliances Co’s own cost.
The directors have reduced this period. The directors have reduced this
provision during the year on the provision during the year on the
grounds they feel the products Review the assumptions grounds they feel the products
they sell are built to a high underpinning the warranty they sell are built to a high
standard. provision for reasonableness standard.

The company does not Review the level of claims made

manufacture the goods (they only under warranty post year end to
sell them) and therefore this is not assess the reasonableness of the
a reasonable reason for reduction, reduced provision.
hence if the company has reduced
the warranty provision excessively
at the year end, liabilities and
The company purchases their Discuss with management the The company purchases their
goods from its main supplier in point at which inventory is goods from its main supplier in
Asia and has responsibility for recorded and review the contract Asia and has responsibility for
goods at the point of dispatch, the with the supplier to verify the goods at the point of dispatch, the
goods are in transit for up to one requirements in place. goods are in transit for up to one
month. month.
Review the controls the company
At the year end, there is a risk that has in place to ensure that
the cut-off of purchases may not inventory is recorded from the
be accurate as they may not point of dispatch.
correctly recognise the goods from
the point of dispatch. There is also The audit team should undertake
a risk that inventory and trade detailed cut-off testing of
payables are understated at the purchases of goods at the year
year end. end and the sample of shipping
documentation immediately before
and after the year end relating to
goods from its main supplier in
Asia should be increased to ensure
The company’s central warehouse The that audit
cut-off is complete
team and
should assess The company’s central warehouse
and all 20 branches will be which of the inventory counts they and all 20 branches will be
carrying out an inventory count at will attend. This should include the carrying out an inventory count at
the year-end date of 31 August. count for the central warehouse the year-end date of 31 August.
and a sample of branches which
It is unlikely that the auditor will contain the most material balances
be able to attend all sites which of inventory and those which have
increases detection risk. It may not historically had exceptions
be possible to gain sufficient reported during the inventory
appropriate audit evidence over count.
the inventory counting controls
and completeness and existence For those not visited, the auditor
of inventory for those sites which will need to review the level of
are not visited. exceptions noted during the count
and discuss any issues which arose
during the count with
Over the last six months, the Review and test the controls Over the last six months, the
receivables collection period has surrounding the way in which the receivables collection period has
increased from 42 days to 55 days finance director assesses the increased from 42 days to 55 days
and the allowance for receivables recoverability of receivables and the allowance for receivables
will be at the same level as the balances and other credit control will be at the same level as the
prior year. processes to ensure that they are prior year.
operating effectively.
Some receivables may not be
recoverable and if an additional Perform extended post year-end
allowance for receivables is not cash receipts testing and a review
included in the financial of the aged receivables ledger in
statements, receivables will be order to assess valuation and the
overstated and the allowance for need for an increased allowance
receivables understated. for irrecoverable receivables.

Discuss with the finance director

whether an additional allowance
for receivables will be required
against balances older than the
The payables ledger supervisor company’s
Discuss withcredit terms. director
the finance The payables ledger supervisor
was dismissed in June 20X5 due to the details of the fraud was dismissed in June 20X5 due to
a fraud. The value of this fraud has perpetrated by the payables a fraud. The value of this fraud has
been recognised as an expense in ledger supervisor and what been recognised as an expense in
the draft statement of profit or procedures have been adopted to the draft statement of profit or
loss. date to identify any further loss.
adjustments which are needed in
If additional frauds committed by the financial statements. In
the payables ledger supervisor are addition, discuss with the finance
not discovered, this could result in director what additional controls
expenses being understated and have been put in place to prevent
payables being overstated. Control any similar frauds.
risk is also increased if the fraud
has gone undetected for a period The audit team should undertake
of time. additional substantive procedures
over the payables balance,
particularly the fictitious supplier
set up on the payables ledger to
ensure this has been removed.

In addition, the team should

maintain professional scepticism
Since the dismissal of the payables Review the unprocessed invoices Since the dismissal of the payables
ledger supervisor, purchase file at the year end to identify any ledger supervisor, purchase
invoices have yet to be logged invoices which relate to the supply invoices have yet to be logged
onto the payables ledger. of pre year-end goods and ensure onto the payables ledger.
they have been properly accrued
There is a risk that the purchases for in the year-end financial
and trade payables balance at the statements and recognised as a
year end will be understated if liability.
these invoices are not logged onto
the payables ledger before it is Discuss with the finance director
closed down for the year or the approach to be adopted to
accrued for.
The company purchased and resolve the
Discuss the issue of unprocessed
accounting treatment The company purchased and
installed a new dispatch system. with the finance director and installed a new dispatch system.
The costs which have been request that the training costs are The costs which have been
capitalised include staff training written off to profit or loss to capitalised include staff training
costs ($0·1m). ensure treatment is in accordance costs ($0·1m).
with IAS 16. If adjusted, review the
As per IAS® 16 Property, Plant and journal entry for accuracy.
Equipment, the cost of an asset
includes its purchase price and
directly attributable costs only. IAS
16 does not allow staff training
costs to be capitalised as part of
the cost of a non-current asset, as
these costs are not directly related
to the cost of bringing the asset to
its working condition.

The training costs should be

charged to profit or loss. Therefore
property, plant and equipment
(PPE) and profits are overstated.
 The company breached the terms Discuss with the finance director The company breached the terms
of its overdraft facility in June 20X5 the availability of alternative of its overdraft facility in June 20X5
and the bank will only confirm the financing if the bank is unwilling to and the bank will only confirm the
decision whether, or not, to continue to support the company decision whether, or not, to
continue to support the business in and review the adequacy of any continue to support the business in
November 20X5, which is after the going concern disclosures in the November 20X5, which is after the
auditor’s report will be signed. The financial statements. auditor’s report will be signed. The
company is dependent on the company is dependent on the
overdraft facility. The audit team should undertake overdraft facility.
detailed going concern testing, in
If the bank refuses to continue to particular, reviewing the impact of
support the company, there may a non-renewal of the overdraft
be doubts as to the company’s facility.
ability to continue as a going
concern. The uncertainties may
not be adequately disclosed in the
financial statements.

2020 - Mar, Jun

(c) Audit risks and auditor’s responses
Audit risk Auditor’s response
Scarlet Co is a new audit client of Orange & Co should ensure that it Scarlet Co is a new audit client of
the firm. The audit engagement has suitably experienced team the firm.
team will be unfamiliar with the deployed on audit. In addition,
accounting policies, transactions sufficient time must be set aside
and balances of the client, hence so that the team members can
there will be increased detection familiarise themselves with the
risk on the audit. new client, document its systems
and controls and understand the
In addition, there is less assurance risks of material misstatement.
over opening balances as Orange
& Co did not perform last year’s Increased audit procedures should
audit. be performed on the opening
balances to confirm their
reasonableness.
The company’s financial Discuss with management the The company’s financial
accountant was taken ill suddenly technical competency and accountant was taken ill suddenly
in May 20X5 and a temporary experience of the temporary in May 20X5 and a temporary
accountant has been drafted in to financial accountant. In addition, accountant has been drafted in to
help prepare the financial the audit engagement team should help prepare the financial
statements. ensure that increased substantive statements.
procedures are undertaken on the
There is an increased risk of errors material areas of the financial
in the financial statements as the statements to reduce audit risk,
temporary financial accountant particularly those requiring
may not be familiar with the judgement.
company’s activities and so
The year-end financial statements The audit engagement team The year-end financial statements
have to be prepared by the end of should maintain professional have to be prepared by the end of
September 20X5 in order to secure scepticism throughout the course September 20X5 in order to secure
bank finance and management of the audit. Detailed cut-off bank finance and management
wish to report strong results. testing on areas such as revenue, wish to report strong results.
inventory and payables should be
This increases the risk that the performed to ensure that cut-off
directors may manipulate the has been correctly applied and
financial statements, by substantive procedures performed
overstating profits and assets and on estimates and judgements to
understating liabilities. ensure accuracy.
A specialised machine was Discuss the accounting treatment A specialised machine was
acquired and staff members had to with the directors and request that acquired and staff members had to
be trained in the achine’s use at a an adjustment is made to ensure be trained in the achine’s use at a
cost of $15,000 which has been appropriate treatment of the cost of $15,000 which has been
capitalised as part of the cost of training costs. Obtain a breakdown capitalised as part of the cost of
the machine. of the remaining capitalised costs the machine.
and agree to supporting
IAS® 16 Property, Plant and documentation to ensure that they
Equipment prohibits training costs meet the recognition criteria in IAS
from being capitalised and 16.
therefore profits and property,
plant and equipment will be
overstated, and expenses
understated if the training costs
are not written off to the
The delivery time of three weeks Discuss with management the The delivery time of three weeks
from the company’s international point at which inventory is from the company’s international
supplier is likely to result in goods recorded and review the contract supplier is likely to result in goods
in transit at the year end. The with the supplier to verify the in transit at the year end. The
company has advised that the requirements in place. company has advised that the
contract with the supplier means contract with the supplier means
that Scarlet Co will be responsible Review the controls the company that Scarlet Co will be responsible
for goods from dispatch and has in place to ensure that for goods from dispatch and
therefore inventory should be inventory is recorded from the therefore inventory should be
recorded when the products are point of dispatch. recorded when the products are
sent by the supplier. Extend cut-off testing by reviewing sent by the supplier.
pre and post year-end GRNs and
There is a risk that inventory is not supplier dispatch notes to verify
recorded on dispatch and that inventory is recorded at the
therefore inventory and liabilities correct point.
Preliminary analytical procedures Extend post year-end cash receipts Preliminary analytical procedures
indicate that the receivables testing and perform a review of indicate that the receivables
collection period has increased the aged receivables listing to collection period has increased
from 38 days to 52 days due to assess the valuation of from 38 days to 52 days due to
customers taking longer to pay. receivables. customers taking longer to pay.

There is a risk that some Discuss with management the

receivables may not be adequacy of any allowance for
recoverable and an allowance for receivables.
receivables is required, hence
receivables may be overstated and
the allowance for
On 29 May 20X5, the directors Obtain the calculation of the On 29 May 20X5, the directors
announced that a brand was being redundancy payments and agree announced that a brand was being
discontinued resulting in four that a provision has been included discontinued resulting in four
members of staff being made as a liability in the year-end members of staff being made
redundant. The costs of financial statements. redundant. The costs of
redundancy are being included in redundancy are being included in
the July 20X5 payroll run. Agree the redundancy payments the July 20X5 payroll run.
have been paid post year end.
As there is a present obligation for
which the costs can be reliably
measured, and which will result in
an outflow of funds, IAS 37
Provisions, Contingent Assets and
Contingent Liabilities would
require this provision to be
recognised in the financial
statements. If a provision is not
recognised profit would be
The directors have each been paid Discuss this matter with The directors have each been paid
a significant bonus at the year end management and review the a significant bonus at the year end
and separate disclosure of this is disclosure in the financial and separate disclosure of this is
required in the financial statements to ensure it complies required in the financial
statements by local legislation. with local legislation. statements by local legislation.

The directors’ remuneration

disclosure will be incomplete and
inaccurate if the bonus paid is
included in the payroll charge for
the year and not separately
disclosed
A customer in has
accordance
returnedwith the
$120,000 Inspect a copy of the credit note A customer has returned $120,000
of faulty goods to the company and confirm an adjustment to of faulty goods to the company
prior to the year-end but a credit revenue and receivables has been prior to the year-end but a credit
note is yet to be issued. recorded pre- year end. note is yet to be issued.

As this sale occurred pre year end

there is a risk that revenue and
receivables are
overstated if the credit note is not
 The company’s suppliers have Request that the bank The company’s suppliers have
been paid on 1 June 20X5 and the reconciliation is amended to been paid on 1 June 20X5 and the
payment has been remove the supplier payments at payment has been included as an
included as an unpresented item the year-end as these should be unpresented item in the year end
in the year end bank accounted for in the 31 May 20X6 bank reconciliation.
reconciliation. financial statements.

This is possible evidence of Review the journal entry correcting

window dressing which results in the payables and bank balances at
understated payables and bank the year end.
balances.
2019 - Sep, Dec
Audit risk Auditor's response
The finance director is planning on Discuss the basis of the revised The finance director is planning on
reducing the estimated return rate assumption of a 5% return rate reducing the estimated return rate
for goods sold on a sale or return with the finance director. Review a for goods sold on a sale or return
basis to wholesale customers from period of 60 days to quantify the basis to wholesale customers from
10% to 5%. levels of return in the specified 10% to 5%.
period and compare this to the
IFRS® 15 Revenue from Contracts assumed rate of 5%. Discuss any
with Customers provides that significant variations with the
revenue and cost of sales should finance director.
only be accounted for to the
extent that the company foresees
that the goods will not be
returned. For the goods which may
be returned, the company should
recognise a refund liability. If, after
60 days, the goods are not
returned, then this liability is
reversed and revenue is
recognised.

By reducing the return rate, there

is a risk that revenue and cost of
The company purchased a patent Agree the useful life of the patent The company purchased a patent
for $800,000 at the end of the is four years to supporting for $800,000 at the end of the
prior year which has a useful life ofdocumentation. The amortisation prior year which has a useful life of
four years. charge should be calculated and four years.
the appropriate journal adjustment
The carrying amount in the discussed with management, in The carrying amount in the
forecast financial statements is order to ensure the accuracy of forecast financial statements is
$800,000 which is the same as the the charge and that the intangible $800,000 which is the same as the
prior year. is correctly valued at the year prior year.
end.
In accordance with IAS® 38
Intangible Assets, this intangible
asset should be amortised over its
four-year life. It does not appear
that management has correctly
accounted for the amortisation and
as a result, intangible assets and
Surplus plant and machinery was Recalculate the loss on disposal Surplus plant and machinery was
sold during the year, resulting in a calculations and agree all items to sold during the year, resulting in a
loss on disposal of $160,000. supporting documentation. loss on disposal of $160,000.

Significant profits or losses on Discuss the depreciation policy for

disposal are an indication that the plant and machinery with the
depreciation policy of plant and finance director to assess its
machinery may not be reasonableness.
appropriate. Therefore
depreciation may be understated Review for other significant gains
and profit and assets overstated or losses on disposal of property,
plant and equipment to assess the
reasonableness
of the company’s depreciation
Harlem Co’s financial controller Discuss with the finance director Harlem Co’s financial controller
has allegedly carried out a number the details of the fraud has allegedly carried out a number
of fraudulent transactions at the perpetrated by the financial of fraudulent transactions at the
company. The investigation into controller and what procedures company. The investigation into
the extent of the fraud has only have been adopted to date to the extent of the fraud has only
recently commenced. identify any adjustments which are recently commenced.
needed in the financial
There is a risk that she may have statements.
undertaken a significant level of
fraudulent transactions leading to Additional substantive testing
an increased control risk which has should be conducted over the
not yet been identified. These affected areas of the accounting
would need to be written off to the records.
statement of profit or loss. If these
have not been uncovered by the In addition, the team should
year end, the financial statements maintain their professional
could include errors resulting in scepticism and be alert to the risk
In May 20X5, the financial The audit team should discuss with In May 20X5, the financial
controller was dismissed and is management and request controller was dismissed and is
threatening to sue the company confirmation from the company’s threatening to sue the company
for unfair dismissal. lawyers of the existence and for unfair dismissal.
likelihood of success of any claim
If it is probable that Harlem Co will from the former financial
make payment to the financial controller.
controller, a provision for unfair
dismissal is required to comply
with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. If
the payment is possible rather
than probable, a contingent
liability disclosure would be
necessary. If Harlem Co has not
done this, there is a risk over
the completeness of any
Harlem Co has had production Discuss with the finance director Harlem Co has had production
problems which have affected the whether any write downs will be problems which have affected the
quality of a significant batch of made to the affected tyres, and quality of a significant batch of
tyres. In addition, the inventory what, if any, modifications may be tyres. In addition, the inventory
holding period has increased from required with regards to the holding period has increased from
34 to 41 days. quality. 34 to 41 days.

Inventory may be overvalued as its Testing should be undertaken to

net realisable value (NRV) may be confirm cost and NRV of the
below its cost. If the tyres can be affected products in inventory and
rectified, the rectification costs that all inventory on a
may mean that cost exceeds net line-by-line basis is valued
realisable value. If the tyres cannot correctly.
be rectified, the inventory may
need to be written off completely.
A significant customer has been Discuss with the director the A significant customer has been
granted a six-month payment rationale for maintaining the granted a six-month payment
break and the receivables allowance for receivables at the break and the receivables
collection period has increased same level as the prior year, collection period has increased
from 38 to 51 days. An allowance despite the increase in receivables from 38 to 51 days. An allowance
for receivables has historically collection period and the payment for receivables has historically
been maintained, and it is break granted to a large customer. been maintained, and it is
anticipated that it will remain at anticipated that it will remain at
the prior year level. Extended post year-end cash the prior year level.
receipts testing and a review of
There is a risk that receivables will the aged receivables ledger to be
be overvalued; some balances performed to assess valuation and
may not be recoverable and so will the need for an increased level of
be overstated if not adequately allowance for receivables.
provided for
The report to management issued Discuss with management whether The report to management issued
after the prior year audit the purchases cycle after the prior year audit
highlighted significant deficiencies recommendations suggested by highlighted significant deficiencies
relating to the purchases cycle. Brooklyn & Co were implemented relating to the purchases cycle.
successfully this year. If so,
If these deficiencies have not been undertake tests of these controls
rectified, the controls over to assess if they are operating
purchases and payables may efficiently.
continue to be weak leading to
increased control risk and risk of If the controls are not in place or
misstatements arising. Cost of operating efficiently, adopt a fully
sales, expenses and trade substantive approach for
payables may not be complete or confirming the completeness and
accurate. accuracy of cost of sales and other
Harlem Co intends to restructure Brooklyn & Co should ensure that Harlem Co intends to restructure
its debt finance after the year end. there is a suitably experienced its debt finance after the year end.
However, the interest cover has audit team. Also, adequate time However, the interest cover has
declined from 4·4 to 2·6 and the should be allocated for team declined from 4·4 to 2·6 and the
level of gearing has increased from members to obtain an level of gearing has increased from
53·7% to 56·5%. understanding of the company and 53·7% to 56·5%.
the significant risks of
In order to maximise the chances overstatement of profits and
of securing the debt finance assets and understatement of
restructure, Harlem Co will need to debt, including attendance at an
present financial statements which audit team briefing.
show the best possible position
and performance. The worsening The team needs to maintain
interest cover and gearing ratio professional scepticism and be
increases the risk that the alert to the increased risk of
directors may manipulate the manipulation.
financial statements, by
overstating profits and assets and Significant estimates and
judgements should be carefully
 Harlem Co has issued shares Review the treatment of the bonus Harlem Co has issued shares
during the year via a bonus issue. issue and agree the increase in during the year via a bonus issue.
Share capital within equity should shares to the share register and Share capital within equity should
increase by the value of the shares share certificates, and agree that increase by the value of the shares
and a reserve should decrease the corresponding reduction in and a reserve should decrease
accordingly. reserves is correct. accordingly.

If the company has not accounted Review board minutes for

for a bonus issue before, there is a authorisation and terms of the
risk that it could have been bonus issue and review if the
incorrectly treated with equity transaction has been conducted in
being under or overstated. In line with this approval. Review the
addition, legal issues may arise if statutory constitution documents
the shares have not been issued in to confirm the legality of the share
accordance with the company’s issue.
statutory constitution.
Review the adequacy of the bonus
Additionally, bonus issues require issue disclosures in the financial
disclosure in the financial statements.
statements and there is a risk that
these may be incomplete or
2019 - Sep, Dec
Control deficiency Control recommendation
Customer credit limits are set by Credit limits should be set by a
receivables ledger clerks. senior member of the receivables
Receivables ledger clerks are not ledger department and not by
sufficiently senior and so may set receivables ledger clerks. These
limits too high, leading to limits should be regularly reviewed
irrecoverable debts, or too low, by a responsible official.
leading to a loss of sales
Receivables ledger clerks record Receivables ledger clerks should
new customer details and credit not be able to access the master
limits in the customer master data data file to add new customers or
file and these changes are not make amendments.
reviewed.
Any such additions/amendments to
There is a risk that customers master file data should be
could be set up incorrectly restricted so that only supervisors
resulting in a loss of customer and above can make changes.
goodwill and sales revenue In
addition, the receivables ledger An exception report of changes
clerks are not senior enough to be made should be generated and
given access to making changes to reviewed by a responsible official.
master file data as this could
Amberjack Co’s credit controller is During the period of the
currently on secondment for six secondment, an alternative
months to the internal audit member of the finance department
department and has not been should be trained in the credit
replaced. During this period, it control role and assigned
does not appear that anyone else responsibility for reviewing the
has been responsible for aged receivables listing and
monitoring ageing receivables. following up on any overdue
customers.
This could result in an increased
risk of irrecoverable debts and
lead to customers not paying their
outstanding balances on time, or
at all, leading to reduced cash
flows.
Goods dispatch notes (GDN) are GDNs should all be sequentially
given the same number as the numbered using a sequence which
order number to which they relate. is different to the order number.
The sales invoices are only raised On a regular basis, a sequence
on receipt of a GDN, and without check of GDNs should be
separate sequential numbers, it is undertaken to identify any missing
difficult for Amberjack Co to dispatch notes.
identify if any GDNs are missing as
they are not likely to be raised in
the same sequence as the sales
orders.

If GDNs are missing and the

company fails to raise invoices in a
timely manner, this could lead to a
Once orders are processed, copies The GDN should be amended to be
of GDNs are sent to the finance at least four-part. One copy should
department, customer and remain be sent to the sales order
in the warehouse. department.

However, the sales order Once the copy of the GDN has
department of Amberjack Co does been received by the order
not receive a copy of the GDN. If department, it should be matched
the sales order department does to the order. A regular review of
not receive a copy of the unmatched orders should be
completed GDNs, they are not able undertaken by the sales order
to monitor if orders are being department to identify any
fulfilled on a timely basis. This unfulfilled orders.
could result in a loss of revenue
Additional staff has been drafted in Only the sales clerks should be
to help the sales clerks produce able to raise sales invoices. As
the sales invoices. As the extra Amberjack Co is expanding,
staff will not be as experienced as consideration should be given to
the sales clerks, there is an recruiting and training more
increased risk of mistakes being permanent sales clerks who can
made in the sales invoices. This produce sales invoices.
could result in customers being
under or overcharged leading to If this is not currently possible,
misstated revenue or dissatisfied temporary staff should be
customers. adequately trained and additional
input checks on invoices
should be introduced.
 Discounts given to customers who During the period of any special
purchased goods during the 10% offers, such as the 10% off
off weekend are manually entered weekend, the authorised sales
onto the sales invoices by sales prices file should be updated by a
clerks. responsible official. These changes
should be reviewed for any input
This could result in unauthorised errors, this review should be
sales discounts being given as evidenced. The invoicing system
there does not seem to be any should confirm that orders were
authorisation required. In addition, placed during the discount
a clerk could forget to manually weekend. Hence the sales invoices
enter the discount or enter an for these periods should
incorrect level of discount for a automatically contain the reduced
customer, leading to the sales prices.
invoice being overstated and a
loss of customer goodwill. The invoicing system should be
amended to prevent sales clerks
Unauthorised discounts in excess from being able to manually enter
of 10% would result in a loss of sales discounts onto invoices.
revenue, either
Customer due toare
statements error
noor Amberjack Co should produce
longer being generated and sent monthly customer statements for
to customers. If statements are not all customers and send them out
sent regularly, this increases the promptly.
likelihood of errors and any
disputed invoices not being quickly
identified and reso
The receivables ledger control The receivables ledger control
account is only reconciled at the account should be reconciled on a
end of April in order to verify the monthly basis to identify any
year-end balance. If the errors which should be
receivables ledger is only investigated and corrected. The
reconciled annually, there is a risk reconciliations should be reviewed
that errors will not be spotted by a responsible official and they
promptly and receivables may be should evidence their review by

2019 - Mar, Jun

Audit risk Auditors response
The external audit team may place The external audit team should The external audit team may place
reliance on the controls testing meet with IA staff, read their reliance on the controls testing
work undertaken by the IA reports and review their files work undertaken by the IA
department. relating to store visits to ascertain department.
the nature of the work undertaken.
If reliance is placed on irrelevant
or poorly performed testing, then Before using the work of IA, the
the external audit team may form audit team will need to evaluate
an incorrect conclusion on the and perform audit procedures on
strength of the internal controls at the entirety of the work which they
Peony Co. This could result in them plan to use, in order to determine
performing insufficient levels of its adequacy for the purposes of
substantive testing, thereby the audit. In addition, the team will
increasing detection risk need to re-perform some of the
testing carried out by IA to assess
Forecast ratios from the finance The classification of costs between Forecast ratios from the finance
director show that the gross cost of sales and operating director show that the gross
margin is expected to increase expenses should be reviewed in margin is expected to increase
from 56% to 60% and the comparison to the prior year and from 56% to 60% and the
operating margin is expected to any inconsistencies investigated. operating margin is expected to
decrease from 21% to 18%. decrease from 21% to 18%.

This movement in gross margin is

significant and inconsistent with
the fall in operating margin. There
is a risk that costs may have been
omitted or included in operating
expenses rather than cost of sales.
Misclassification of expenses
would result in understatement of
cost of sales and overstatement of
Peony Co’s inventory valuation Testing should be undertaken to Peony Co’s inventory valuation
policy is selling price less average confirm cost and NRV of inventory policy is selling price less average
profit margin, as this is industry and that on a line-by-line basis the profit margin, as this is industry
practice. Inventory should be goods are valued correctly. practice.
valued at the lower of cost and net
realisable value (NRV). In addition, valuation testing
should focus on comparing the
IAS 2 Inventories allows this as a cost of inventory to the selling
cost calculation method as long as price less margin for a sample of
it is a close pproximation to cost. If items to confirm whether this
this is not the case, then inventory method is actually a close
could be under or overvalued approximation to cost.
The company utilises a perpetual The timetable of the perpetual The company utilises a perpetual
inventory system at its warehouse inventory counts should be inventory system at its warehouse
rather than a full year-end count. reviewed and the controls over the rather than a full year-end count.
Under such a system, all inventory counts and adjustments to records Under such a system, all inventory
must be counted at least once a should be tested. must be counted at least once a
year with adjustments made to the year with adjustments made to the
inventory records on a timely In addition, the level of inventory records on a timely
basis. Inventory could be under or adjustments made to inventory basis.
overstated if the perpetual should be considered to assess
inventory counts are not all their significance. This should be
completed, such that some discussed with management as
inventory lines are not counted in soon as possible as it may not be
the year. possible to place reliance on the
inventory records at the year end,
During the interim audit, it was which could result in the
noted that there were significant requirement for a full year-end
exceptions with the inventory inventory count.
records being higher than the
inventory in the warehouse. As the
year-end quantities will be based
on the records, this is likely to
A number of assets which had not Discuss the depreciation policy for A number of assets which had not
been fully depreciated were non-current assets with the been fully depreciated were
identified as being obsolete. finance director and assess its identified as being obsolete.
reasonableness. Enquire
This is an indication that the of the finance director if the
company’s depreciation policy of obsolete assets have been written
non-current assets may not be off. If so, review the adjustment for
appropriate, as depreciation in the completeness
past appears to have been
understated.

If an asset is obsolete, it should be

written off to the statement of
profit or loss. Therefore
depreciation may be understated
and profit and assets overstated
Peony Co is planning to include a Discuss with management the Peony Co is planning to include a
current asset of $0·7m, which rationale for including the current asset of $0·7m, which
relates to advertising costs advertising as a current asset. relates to advertising costs
incurred and adverts shown on TV Request evidence to support the incurred and adverts shown on TV
before the year end. assessment of probable future before the year end.
cash flows, and review for
The costs were incurred and reasonableness.
adverts shown in the year ending
20X9 and there is no basis for Review supporting documentation
including them as a current asset for the advertisements to confirm
at the year end. The costs should that all were shown before the
be recognised in operating 20X9 year end.
expenses in the current year
financial statements. Request that management remove
the current asset and record the
If these costs are not expensed, amount as an expense in the
During the year, Peony Co Discuss with management the During the year, Peony Co
outsourced its payroll function to extent of records maintained at outsourced its payroll function to
an external service organisation. A Peony Co for the period since an external service organisation.
detection risk arises as January 20X9 and any monitoring
to whether sufficient and of controls which has been
appropriate evidence is available undertaken by management over
at Peony Co to confirm the payroll.
completeness and accuracy of
controls over the payroll cycle and Consideration should be given to
liabilities at the year end. contacting the service
organisation’s auditor to confirm
The payroll function was the levelwith
Discuss of controls in place,
management thea The payroll function was
transferred to the service extent of records maintained at transferred to the service
organisation from 1 January 20X9, Peony Co for the period since organisation from 1 January 20X9,
which is five months prior to the January 20X9 and any monitoring which is five months prior to the
year end. If any errors occurred of controls which has been year end.
during the transfer process, these undertaken by management over
could result in wages and salaries payroll.
being under/overstated
Consideration should be given to
contacting the service
organisation’s auditor to confirm
the level of controls in
place, a typethe
A $3m loan was obtained in March Re-perform 1 or type 2 report
company’s A $3m loan was obtained in March
20X9. This finance needs to be calculations to confirm that the 20X9. This finance needs to be
accounted for correctly, with split of the loan note is correct accounted for correctly, with
adequate disclosure made. The between non-current and current adequate disclosure made.
loan needs to be allocated liabilities and that total financing
between non-current and current proceeds of $3m were received.
liabilities. Failure to classify the
loan correctly could result in In addition, the disclosures for this
misclassified liabilities loan note should be reviewed in
detail to ensure compliance with
relevant accounting standards
 Peony Co is planning to make Discuss with management the Peony Co is planning to make
approximately 60 employees status of the redundancy approximately 60 employees
redundant after the year end. announcement; if before the year redundant after the year end.
end, review supporting
The timing of this announcement documentation to confirm the
has not been confirmed; if it is timing. In addition, review the
announced to the staff before the basis of and recalculate the
year end, then under IAS 37 redundancy provision.
Provisions, Contingent Liabilities
and Contingent Assets, a
redundancy provision will be
required at the year end as a
constructive obligation will have
been created.

Failure to provide or to provide an

appropriate amount will result in
an understatement of provisions
and expenses.

2018 - Sep, Dec

(c) Audit risks and auditor’s response
Audit rirsk Audit response
During the year, Darjeeling Co has Obtain a breakdown of the During the year, Darjeeling Co has
spent $0·9m on developing new expenditure and verify that it spent $0·9m on developing new
product lines, some of hich are in relates to the development of the product lines, some of hich are in
the early stages of their new products. Review expenditure the early stages of their
development cycle. This documentation to determine development cycle.
expenditure is classed as research whether the costs relate to the
and development under IAS® 38 research or development stage.
Intangible Assets. The standard Discuss the accounting treatment
requires research costs to be with the finance director and
expensed to profit or loss and only ensure it is in accordance with IAS
development costs to be 38.
capitalised as an intangible asset.

The company has included all of

this expenditure as an intangible
asset. If research costs have been
incorrectly classified as
development expenditure, there is
a risk that intangible assets could
be overstated and expenses
Darjeeling Co purchased and Review the purchase Darjeeling Co purchased and
installed a new manufacturing line. documentation for the new installed a new manufacturing line.
The costs include purchase price manufacturing line to confirm the The costs include purchase price
($2·2m), installation costs ($0·4m) exact cost of the servicing and that ($2·2m), installation costs ($0·4m)
and a five-year servicing and it does relate to a five-year period. and a five-year servicing and
maintenance plan ($0·5m). maintenance plan ($0·5m).
Discuss the accounting treatment
As per IAS 16 Property, Plant and with the finance director and the
Equipment, the cost of an asset level of any necessary adjustment
includes its purchase price and to ensure treatment is in
directly attributable costs only. IAS accordance with IAS 16.
16 does not allow servicing and
maintenance costs to be
capitalised as part of the cost of a
non-current asset, as they are not
directly related to the cost of
bringing the asset to its working
condition.

The servicing costs relate to a five-

year period and so should be
charged to profit or loss over this
time. The upfront payment
represents a prepayment for five
years; as the services are
received, the relevant proportion
of the cost should be charged to
profit or loss. If the service
for 20X8 has been carried out,
then $0·1m ($0·5m/5) should be
charged to profit or loss. Therefore
The company has borrowed $4m During the audit, the team would The company has borrowed $4m
from the bank via an eight-year need to confirm that the $4 million from the bank via an eight-year
loan. This loan needs to be loan finance was received. In loan.
correctly split between current and addition, the split between current
non-current liabilities in order to and non-current liabilities and the
ensure correct disclosure. disclosures for this loan should be
reviewed in detail to ensure
compliance with relevant
accounting standards and local
legislation.

Details of security should be

agreed to the bank confirmation
letter.
As the level of debt has increased, The finance costs should be As the level of debt has increased,
there should be additional finance recalculated and any increase there should be additional finance
costs as the loan has an interest agreed to the loan documentation costs as the loan has an interest
rate of 5%. There is a risk that this for confirmation of the 5% interest rate of 5%.
has been omitted from the rate. Interest payments should be
statement of profit or loss leading agreed to the cash book and bank
to understated finance costs and statements to confirm the amount
overstated profit. was paid and is not therefore a
year-end payable.

Darjeeling Co intends to undertake Earl & Co should ensure that there Darjeeling Co intends to undertake
a stock exchange listing in the is a suitably experienced audit a stock exchange listing in the
next 12 months. team. Also, adequate time should next 12 months.
be allocated for team members to
In order to maximise the success obtain an understanding of the
of the potential listing, Darjeeling company and the significant risks
Co will need to present financial of overstatement of revenue,
statements which show the best profits and assets, including
possible position and performance. attendance at an audit team
briefing.
The directors therefore have an
incentive to manipulate the The team needs to maintain
financial statements, by professional scepticism and be
overstating revenue, profits and alert to the increased risk of
assets manipulation.

Significant estimates and

judgements should be carefully
reviewed in light of the
The receivables collection period Review and test the controls The receivables collection period
has increased from 38 to 51 days surrounding how Darjeeling Co has increased from 38 to 51 days
and management has extended identifies receivables balances and management has extended
the credit terms given to which may not be recoverable and the credit terms given to
customers on the condition that procedures around credit control customers on the condition that
sales order quantities were to ensure that they are operating sales order quantities were
increased. The increase in effectively. increased.
receivable days could be solely
due to these increased credit Extended post year-end cash
terms. receipts testing and a review of
the aged receivables ledger to be
However, it could also be due to an performed to assess valuation.
increased risk over recoverability Also consider the adequacy of any
of receivables as they may be allowance for receivables.
This year the company made a Discuss with management the This year the company made a
‘price promise’ to match the price basis of the refund liability of ‘price promise’ to match the price
of its competitors for similar $0·25m and obtain supporting of its competitors for similar
products. Customers are able to documentation to confirm the products. Customers are able to
claim the difference from the reasonableness of the assumptions claim the difference from the
company for one month after the and calculations. company for one month after the
date of purchase of goods. date of purchase of goods.

The company should account for

the price promise in accordance
with IFRS® 15 Revenue from
Contracts with Customers. As the
company may be required to
provide a refund, the anticipated
refund amount should not be
initially recognised as revenue but
instead as a refund liability until
the one-month price promise
period has ended.

This is a highly subjective area,

with many judgements required
with regards to the level of likely
refund due. As this is a new
liability, the directors may not
have correctly accounted for this
sum resulting in overstated
revenue, under/overstated profits
Darjeeling Co has stopped further Review the list of sales of the paint Darjeeling Co has stopped further
sales of one of its paint products product made between June and sales of one of its paint products
and a product recall has been the date of the recall, agree that and a product recall has been
initiated for any goods sold since the sales have been removed from initiated for any goods sold since
June. revenue and the inventory June.
included. If the refunds have not
This product recall will result in been paid before the year end,
Darjeeling Co paying refunds to review the draft financial
customers. The sales will need to statements to confirm that it is
be removed from the 20X8 included within current liabilities.
financial statements and a refund
liability recognised. Also inventory
will need to be reinstated, albeit at
a possibly written down value.
Failing to account for this correctly
could result in overstated revenue,
understated liabilities and
The company is holding a number Discuss with the finance director The company is holding a number
of damaged paint products in whether any write downs will be of damaged paint products in
inventory and overall the inventory made to this product, and what, if inventory and overall the inventory
holding period has increased from any, modifications will be required holding period has increased from
45 days to 54 days. to rectify the quality of the 45 days to 54 days.
product.
Due to the issue with the paint
consistency, the quality of these Testing should be undertaken to
products is questionable and confirm cost and NRV of the
management is investigating affected paint products held in
whether these products can be inventory and that on a line by line
rectified. There is a risk that this basis the goods are valued
inventory may be overvalued as its correctly.
net realisable value may be below
Revenue has increased by 16·8% During the audit a detailed Revenue has increased by 16·8%
in the year; and the gross margin breakdown of sales will be in the year; and the gross margin
has increased slightly from 36·4% obtained, discussed with has increased slightly from 36·4%
to 37·3%. This is a significant management and tested in order to 37·3%.
increase in revenue and, along to understand the sales increase.
with the increase in gross margin, Also increased cut-off testing
may be related to the increased should be undertaken to verify
credit period and price promise that revenue is recorded in the
promotion or could be due to an right period and is not overstated.
 The payables payment period has Detailed going concern testing to The payables payment period has
increased from 40 to 58 days. The be performed during the audit, increased from 40 to 58 days. The
current ratio has decreased from including the review of cash flow current ratio has decreased from
3·08 to 1·65. forecasts and the underlying 3·08 to 1·65.
assumptions. These should be
The quick ratio has also decreased discussed with management to The quick ratio has also decreased
from 1·97 to 0·99. In addition, the ensure that the going concern from 1·97 to 0·99. In addition, the
bank balance has moved from basis is reasonable. bank balance has moved from
$0·56m to an overdraft of $0·81m. $0·56m to an overdraft of $0·81m.

These are all indicators that the

company could be experiencing a
reduction in its cash flow which
could result in going concern
difficulties or uncertainties. These
uncertainties may not be
adequately disclosed in the

2018 - Mar, Jun

(b) Audit risks and auditor’s response
Audit risk Auditor’s response
Blackberry Co values its inventory Discuss with management the Blackberry Co values its inventory
at the lower of cost and net nature of the overheads included at the lower of cost and net
realisable value. Cost includes in inventory valuation. If general realisable value. Cost includes
both production and general overheads are included, request both production and general
overheads. management remove them from overheads.
the valuation to be included in the
IAS 2 Inventories requires that draft financial statements.
costs included in valuing goods
and services should only be those Review supporting documentation
incurred in bringing inventory to to verify those overheads deemed
its present location and condition. to be of a production nature are
valid.
Although production overheads
meet these criteria, general
overheads do not. If these are
included in inventory cost, then
this will result in over-valued
The company is planning to The auditor should attend the The company is planning to
undertake the full year-end inventory count held after the year undertake the full year-end
inventory counts after the year end and note details of goods inventory counts after the year
end and then adjust for received and despatched post year end and then adjust for
movements from the year end. end, in order to agree to the movements from the year end.
reconciliation.
If the adjustments are not
completed accurately, then the During the final audit, the year-end
year-end inventory could be under inventory adjustments schedule
or overstated. should be reviewed in detail and
agreed to supporting
documentation obtained during
the inventory count for all
adjusting items.

The audit team should increase

the extent of inventory cut-off
A patent has been purchased for The audit team will need to agree A patent has been purchased for
$1·1m and this grants Blackberry the purchase price to supporting $1·1m and this grants Blackberry
Co the exclusive right for three documentation and confirm the Co the exclusive right for three
years to customise their portable useful life is three years as per the years to customise their portable
music players to gain a contract. music players to gain a
competitive advantage in their competitive advantage in their
industry. Management has Discuss with management the industry. Management has
expensed the full amount paid to reason for fully expensing the expensed the full amount paid to
the current year statement of $1·1m paid, and request they the current year statement of
profit or loss. correct the treatment. profit or loss.

In accordance with IAS 38 The correcting journal should be

Intangible Assets, this should have reviewed and the amortisation
been included as an intangible charge should be recalculated in
asset and amortised over its three- order to ensure the accuracy of
year life. As the sum has been fully the charge and that the intangible
expensed and not treated in is correctly valued at the year end.
During the year Blackberry Co has The audit team should confirm that During the year Blackberry Co has
raised new finance through issuing proceeds of $1·2m were received raised new finance through issuing
$1·2m of shares at a premium. and that the split of share capital $1·2m of shares at a premium.
This needs to be accounted for and share premium is correct and
correctly, with adequate disclosure appropriately recorded.
made and the equity finance
needs to be allocated correctly In addition, the disclosures for this
between share capital and share finance should be reviewed in
premium. detail to ensure compliance with
relevant accounting standards and
If this is not done, then the local legislation.
accounts may be misstated due to
a lack of disclosure or share capital
and share premium may be
In November 20X7, it was Discuss with the finance director In November 20X7, it was
discovered that a significant what procedures they have discovered that a significant
teeming and lading fraud had been adopted to fully identify and teeming and lading fraud had been
carried out by four members of the quantify the impact of the teeming carried out by four members of the
sales ledger department. and lading fraud. In addition, sales ledger department.
discuss with the finance director,
There is a risk that the full impact what controls have been put in
of the fraud has not been place to identify any similar frauds.
quantified and any additional
fraudulent transactions would Review the receivables listing to
need to be written off in the identify any unusual postings to
statement of profit or loss. If these individual receivable balances as
have not been uncovered, the this could be further evidence of
financial statements could be fraudulent transactions.
misstated.
In addition, the team should
In addition, individual receivable maintain their professional
balances may be scepticism and be alert to the risk
under/overstated as customer of further fraud and errors.
receipts have been misallocated to
During the year Blackberry Co Discuss with management the During the year Blackberry Co
outsourced its sales ledger extent of records maintained at outsourced its sales ledger
processing to an external service Blackberry Co for the period since processing to an external service
organisation. A detection risk February 20X8 and any monitoring organisation.
arises as to whether sufficient and of controls undertaken by
appropriate evidence is available management over sales and
at Blackberry Co to confirm the receivables.
completeness and accuracy of
controls over the sales and Consideration should be given to
receivables cycle and balances at contacting the service
the
The year
salesend.
ledger processing organisation’s
Discuss auditor to confirm
with management the The sales ledger processing
transferred to the service transfer process undertaken and transferred to the service
organisation from 1 February any controls put in place to ensure organisation from 1 February
20X8. If any errors occurred during the completeness and accuracy of 20X8.
the transfer process, these could the data.
result in sales and receivables
being under/overstated. Where possible, undertake tests of
controls to confirm the
effectiveness of the transfer
controls. In addition, perform
substantive testing on the transfer
In December 20X7, the financial of information
The audit teamfrom therequest
should old to the In December 20X7, the financial
accountant of Blackberry Co was confirmation from the company’s accountant of Blackberry Co was
dismissed and is hreatening to sue lawyers of the existence and dismissed and is threatening to
the company for unfair dismissal. likelihood of success of any claim sue the company for unfair
from the former financial dismissal.
If it is probable that Blackberry Co accountant.
will make a payment to the
financial accountant, a provision
for unfair dismissal is required. If
the payment is possible rather
than probable, a contingent
liability disclosure would be
necessary. If Blackberry Co has not
done this, there is a risk over the
completeness of any provisions or
contingent liabilities.
 No supplier statement or purchase The audit team should increase No supplier statement or purchase
ledger control account their testing on trade payables at ledger control account
reconciliations have been the year end, including performing reconciliations have been
erformed in the period from supplier statement reconciliations, erformed in the period from
December 20X7 to the year end. with a particular focus on December 20X7 to the year end.
completeness of trade payables.
This a key control which is being
overridden and as such there is an Request management prepare a
increased risk of errors within year-end purchase ledger control
trade payables and the year-end account reconciliation. The audit
payables balance may be under or team should undertake a detailed
overstated. review of this reconciliation with a
focus on any unusual reconciling
items
A current asset of $360,000 has Discuss with management whether A current asset of $360,000 has
been included within the any notification of payment has been included within the
statement of profit or loss and been received from the liquidators statement of profit or loss and
assets. It represents an anticipated and review the related assets. It represents an anticipated
pay out from liquidators handling correspondence. If virtually pay out from liquidators handling
the bankruptcy of a customer who certain, the treatment adopted is the bankruptcy of a customer who
owed Blackberry Co $0·9m. The correct. If payment has been owed Blackberry Co $0·9m. The
sum of $0·9m was written off in received, agree to post-year end sum of $0·9m was written off in
the prior year cash book. the prior year accounts. However,
accounts. the company has not received a
If receipt is not virtually certain, formal notification from the
However, the company has not management should be requested liquidators confirming the payment
received a formal notification from to remove it from profit and and this would therefore represent
the liquidators confirming the receivables. If the receipt is a possible contingent asset.
payment and this would therefore probable, the auditor should
represent a possible contingent request management include a
asset. contingent asset disclosure note.

To comply with IAS 37 Provisions,

Contingent Liabilities and
Contingent Assets, this should not
be recognised until the receipt is
virtually certain. With no firm
response to date, the inclusion of

2017 SD
Audit risk Auditor's response
Prancer Construction Co is a new Cupid & Co should ensure they Prancer Construction Co is a new
client for Cupid & Co. As the team have a suitably experienced team. client for Cupid & Co.
is not familiar with the accounting In addition, adequate time should
policies, transactions and balances be allocated for team members to
of the company, there will be an obtain an understanding of the
increased detection risk on the company and the risks of material
audit. misstatement including a detailed
team briefing to cover the key
Prancer Construction Co is likely to The auditor should discuss with Prancer Construction Co is likely to
have a material level of work in management the process they will have a material level of work in
progress at the year end, being undertake to assess the progress at the year end, being
construction work in progress as percentage completion for work in construction work in progress as
well as ongoing maintenance progress at the year end. This well as ongoing maintenance
services, as Prancer Construction process should be reviewed by the services, as Prancer Construction
Co has annual contracts for many auditor while attending the year- Co has annual contracts for many
of the buildings constructed. end inventory counts. of the buildings constructed.

The level of work in progress will In addition, consideration should

need to be assessed at the year be given as to whether an
end. Assessing the percentage independent expert is required to
completion for partially value the work in progress or if a
constructed buildings is likely to be management expert has been
quite subjective, and the team used. If the work of an expert is to
should consider if they have the be used, then the audit team will
required expertise to undertake need to assess the competence,
this. If the percentage completion capabilities and objectivity of the
is not correctly calculated, the expert.
inventory valuation may be under
or overstated.
The August 20X7 management Detailed cost and net realisable The August 20X7 management
accounts contain $2·1 million of value (NRV) testing to be accounts contain $2·1 million of
completed properties; this balance performed at the year end and the completed properties; this balance
was $1·4 million in September aged inventory report to be was $1·4 million in September
20X6. reviewed to assess whether 20X6.
inventory requires to be written
The increase in inventory may be down.
due to an increased level of pre
year-end orders. Alternatively, it
may be that Prancer Construction
Co is struggling to sell completed
properties, which may indicate
that they are overvalued. IAS 2
Inventories requires that inventory
should be stated at the lower of
At the year end there will be The auditor should assess for At the year end there will be
inventory counts undertaken at all which of the building sites they will inventory counts undertaken at all
11 of the building sites in progress. attend the counts. This will be 11 of the building sites in progress.
those with the most material
It is unlikely that the auditor will inventory or which according to
be able to attend all of these management have the most
inventory counts, increasing significant risk of misstatement.
detection risk, and therefore they
need to ensure that they obtain For those not visited, the auditor
sufficient evidence over the will need to review the level of
inventory counting controls, and exceptions noted during the count
completeness and existence of and discuss with management any
inventory for any sites not visited. issues, which arose during the
count.
Prancer Construction Co offers its Discuss with management the Prancer Construction Co offers its
customers a building warranty of basis of the provision calculation, customers a building warranty of
five years, which covers any and compare this to the level of five years, which covers any
construction defects. A warranty post year-end claims, if any, made construction defects.
provision will be required under by customers. In particular,
IAS 37 Provisions, Contingent discuss the rationale behind
Liabilities and Contingent Assets. reducing the level of provision this
year.
Calculating warranty provisions
requires judgement as it is an Compare the prior year provision
uncertain amount. with the actual level of claims in
the year, to assess the
The finance director anticipates reasonableness of the judgements
this provision will be lower than made by management.
last year as the company has
improved its building practices and
the quality of its finished
properties. However, there is a risk
that this provision could be
understated,
especially in light of the overdraft
covenant relating to a minimum
level of net assets and is being
Customers who wish to purchase a Discuss with management the Customers who wish to purchase a
property are required to place an treatment of deposits received in property are required to place an
order and a 5% non-refundable advance, to ensure it is order and a 5% non-refundable
deposit prior to the completion of appropriate. deposit prior to the completion of
the building. the building.
During the final audit, undertake
These deposits should not be increased testing over the cut-off
recognised as revenue in the of revenue and completeness of
statement of profit or loss until the deferred income.
performance obligations as per the
contracts have been satisfied,
which is likely to be when the
building is finished and the sale
process is complete. Instead, they
should be recognised as deferred
income within current liabilities.

Management may have incorrectly

treated the deferred income as
revenue, resulting in overstated
revenue and understated
An allowance for receivables has Review and test the controls An allowance for receivables has
historically been maintained, but it surrounding how the finance historically been maintained, but it
is anticipated that this will be director identifies old or potentially is anticipated that this will be
reduced. irrecoverable receivables balances reduced.
and credit control to ensure that
There is a risk that receivables will they are operating effectively.
be overvalued; some balances
may not be recoverable and so will Discuss with the director the
be overstated if not provided for. rationale for reducing the
allowance for receivables.
In addition, reducing the allowance
for receivables will increase asset Extended post year-end cash
values and would improve the receipts testing and a review of
covenant compliance, which the aged receivables ledger to be
increases the manipulation risk performed to assess valuation and
further. the need for an allowance for
 Prancer Construction Co has a Review the covenant calculations Prancer Construction Co has a
material overdraft which has prepared by the company at the material overdraft which has
minimum profit and net assets year end and identify whether any minimum profit and net assets
covenants attached to it. If these defaults have occurred; if so, covenants attached to it. If these
covenants were to be breached, determine the effect on the covenants were to be breached,
the overdraft balance would company. the overdraft balance would
become instantly repayable. become instantly repayable.
The team should maintain their
If the company does not have professional scepticism and be
sufficient cash to meet this alert to the risk that profit and/or
repayment, then there could be net assets have been overstated to
going concern implications. ensure compliance with the
covenants.
In addition, there is a risk of
manipulation of profit and net
assets to ensure that covenants
Preliminary analytical review of the The audit team should increase Preliminary analytical review of the
August management accounts their testing on trade payables at August management accounts
shows payable days of 56 for the year end, with a particular shows payable days of 56 for
August 20X7, compared to 87 days focus on completeness of August 20X7, compared to 87 days
for September 20X6. It is payables. A payables for September 20X6. It is
anticipated that the year-end circularisation or review of supplier anticipated that the year-end
payable days will be even lower. statement reconciliations should payable days will be even lower.
be undertaken.
The forecast profit is higher than
last year, indicating an increase in
trade, also the company’s cash
position has continued to
deteriorate and therefore, it is
unusual for payable days to have
decreased.

There is an increased risk of errors

within trade payables and the
year-end payables may be
2017 MJ
a) Audit risk and the components of audit risk
Audit risk is the risk that the
auditor expresses an inappropriate
audit opinion when the financial
statements are materially
misstated. Audit risk is a function
of two main components, being
the risk of material misstatement
and detection risk. Risk of material
misstatement is made up of a
further two components, inherent
risk and control
Inherent risk.susceptibility of
risk is the
an assertion about a class of
transaction, account balance or
disclosure to a misstatement
which could be material, either
individually or when aggregated
with other misstatements, before
consideration of any related
Control risk is the risk that a
misstatement which could occur in
an assertion about a class of
transaction, account balance or
disclosure and which could be
material, either individually or
when aggregated with other
misstatements, will not be
prevented, or detected and
Detection risk is the risk that the
procedures performed by the
auditor to reduce audit risk to an
acceptably low level will not detect
a misstatement which exists and
which could be material, either
individually or when aggregated
with other misstatements.
Detection risk is affected by

b)
Audit risk Auditor's response
Hurling Co upgraded their website Review a breakdown of the costs Hurling Co upgraded their website
during the year at a cost of $1·1m. and agree to invoices to assess the during the year at a cost of $1·1m.
The costs incurred should be nature of the expenditure and if
correctly allocated between capital, agree to inclusion within
revenue and capital expenditure the asset register or agree to the
As the website has been upgraded, statement of profit or loss.
there is a possibility that the new
processes and systems may not The audit team should document
record data reliably and the revised system and undertake
accurately. tests over the completeness and
accuracy of data recorded from the
This may lead to a risk over website to the accounting records.
completeness and accuracy of
data in the underlying accounting
Hurling Co has entered into a Discuss with management as to Hurling Co has entered into a
transaction to purchase a new whether the warehouse purchase transaction to purchase a new
warehouse for $3·2m and it is was completed by the year end. If warehouse for $3·2m and it is
anticipated that the legal process so, inspect legal documents of anticipated that the legal process
will be completed by the year end. ownership, such as title deeds will be completed by the year end.
ensuring these are dated prior to 1
Only assets which physically exist April 20X7 and are in the company
at the year end should be included name.
in property, plant and equipment.
If the transaction has not been
completed by the year end, there
is a risk that assets are overstated
if the company incorrectly includes
the warehouse at the year end.
Significant finance has been Review share issue documentation Significant finance has been
obtained in the year, as the to confirm that the preference obtained in the year, as the
company has issued $5m of shares are irredeemable. Confirm company has issued $5m of
irredeemable preference shares. that they have been correctly irredeemable preference shares.
classified as equity within the
This finance needs to be accounting records and that total
accounted for correctly, with financing proceeds of $5m were
adequate disclosure made. As the received.
preference shares are
irredeemable, they should be In addition, the disclosures for this
classified as equity rather than share issue should be reviewed in
non-current liabilities. Failing to detail to ensure compliance with
correctly classify the shares could relevant accounting standards.
result in understated equity and
The finance director has extended Discuss with the directors the The finance director has extended
the useful lives of fixtures and rationale for any extensions of the useful lives of fixtures and
fittings from three to four years, asset lives and reduction of fittings from three to four years,
resulting in the depreciation depreciation rates. Also, the four- resulting in the depreciation
charge reducing. Under IAS 16 year life should be compared to charge reducing.
Property, Plant and Equipment, how often these assets are
useful lives are to be reviewed replaced, to assess the useful life
annually, and if asset lives have of assets.
genuinely increased, then this
change is reasonable.

However, there is a risk that this

reduction has occurred in order to
boost profits. If this is the case,
then fixtures and fittings are
A customer of Hurling Co has been Review the revised credit terms A customer of Hurling Co has been
encountering difficulties paying and identify if any after date cash encountering difficulties paying
their outstanding balance of $1·2m receipts for this customer have their outstanding balance of $1·2m
and Hurling Co has agreed to a been made. and Hurling Co has agreed to a
revised credit period. revised credit period.
Discuss with the finance director
If the customer is experiencing whether he intends to make an
difficulties, there is an increased allowance for this receivable. If
risk that the receivable is not not, review whether any existing
recoverable and hence is allowance for uncollectable
overvalued. accounts is sufficient to cover the
amount of this receivable.
A sales-related bonus scheme has Increased sales cut-off testing will A sales-related bonus scheme has
been introduced in the year for be performed along with a review been introduced in the year for
sales staff, with a significant of any post year-end returns as sales staff, with a significant
number of new customer accounts they may indicate cut-off errors. In number of new customer accounts
on favourable credit terms being addition, increased after date cash on favourable credit terms being
opened pre year end. This has receipts testing to be undertaken opened pre year end. This has
resulted in a 5% increase in for new customer account resulted in a 5% increase in
revenue. receivables. revenue.

Sales staff seeking to maximise

their current year bonus may
result in new accounts being
opened from poor credit risks
leading to irrecoverable
receivables. In addition, there is a
risk of sales cut-off errors as new
customers could place orders
within the two-month introductory
Hurling Co has halted further sales Discuss with the finance director Hurling Co has halted further sales
of its new product Luge and a whether any write downs will be of its new product Luge and a
product recall has been initiated made to this product, and what, if product recall has been initiated
for any goods sold in the last four any, modifications may be for any goods sold in the last four
months. required with regards the quality. months.

If there are issues with the quality Testing should be undertaken to

of the Luge product, inventory may confirm cost and NRV of the Luge
be overvalued as its NRV may be products in inventory and that on a
below its cost. line-by-line basis the goods are
valued correctly
Additionally, products of Luge sold Review the list of sales made of Additionally, products of Luge sold
within the last four months are product Luge prior to the recall, within the last four months are
being recalled, this will result in agree that the sale has been being recalled, this will result in
Hurling Co paying customer removed from revenue and the Hurling Co paying customer
refunds. inventory included. If the refund refunds.
has not been paid pre year end,
The sale will need to be removed; agree it is included within current
a refund liability should be liabilities.
recognised along with the
reinstatement of inventory,
although the NRV of this inventory
could be of a minimal value.
Failing to account for this correctly
could result in overstated revenue
Petanque Co, a customer of Caving & Co should write to the Petanque Co, a customer of
Hurling Co, has announced that company’s lawyers to enquire of Hurling Co, has announced that
they intend to commence legal the existence and likelihood of they intend to commence legal
action for a loss of information and success of any claim from action for a loss of information and
profits as a result of the Luge Petanque Co. The results of this profits as a result of the Luge
product sold to them. should be used to assess the level product sold to them.
of provision or disclosure included
If it is probable that the company in the
will make payment to the financial statements.
customer, a legal provision is
required. If the payment is
possible rather than probable, a
contingent liability disclosure
would be necessary. If Hurling Co
has not done this, there is a risk
over the completeness of any
provisions or the necessary
The finance director has requested The timetable should be confirmed The finance director has requested
that the audit completes one week with the finance director. If it is to that the audit completes one week
earlier than normal as he wishes to be reduced, then consideration earlier than normal as he wishes to
report results earlier. A reduction should be given to performing an report results earlier.
in the audit timetable will increase interim audit in late March or early
detection risk and place additional April; this would then reduce the
pressure on the team in obtaining pressure on the final audit.
sufficient and appropriate The team needs to maintain
evidence. professional scepticism and be
alert to the increased risk of errors
In addition, the finance team of occurring.
Hurling Co will have less time to
prepare the financial information
leading to an increased risk of
errors arising in the financial
The company is intending to Discuss the issue with The company is intending to
propose a final dividend once the management and confirm that the propose a final dividend once the
financial statements are finalised. dividend will not be included financial statements are finalised.
This amount should not be within liabilities in the 20X7 This amount should not be
provided for in the 20X7 financial financial statements. provided for in the 20X7 financial
statements, as the obligation only statements, as the obligation only
arises once the dividend is The financial statements need to arises once the dividend is
announced, which is post year be reviewed to ensure that announced, which is post year
end. adequate disclosure of the end.
proposed dividend is included.
In line with IAS 10 Events after the
Reporting Date the dividend
should only be disclosed. If the
dividend is included, this will result
in an overstatement of liabilities
 Audit risk Response
1) An increased detection risk on 1) Assign suitably experienced
the audit team to the audit

2) Less assurance over opening 2) Ensure adequate time is allowed

balances as the audit team did not for team members to obtain an
perform the audit last yea understanding of the company and
the risks of material misstatement

3) Increased audit procedures

should be performed over opening
balances.
There is a risk that the directors 1) Maintain professional scepticism
will try to overstate the profit, and and be alert to the increased risk
therefore their bonuses by of manipulation.
increasing the revenue and income
recorded and decreasing expenses 2) Increased testing should be
performed relating to adjusting
journal entries
The deposits should not be 1) Obtain a copy of the contracts
recognised as revenue with customers and review them
immediately and instead should be to understand the performance
recognised as deferred income obligations.
(contract liabilities) within current
liabilities until the performance 2) Discuss with management the
obligations, as per the contracts, criteria for determining whether
have been satisfied performance obligations have
been satisfied and the treatment
-> There is a risk that revenue is of deposits received to ensure it is
overstated and current liabilities appropriate and consistent with
understated if the deposits have relevant standards.
been recorded within revenue.

WIP is a material balance and the 1) Assess which inventory counts

valuation of WIP is a judgemental the team will attend _ the most
area. material WIP balances or which are
-> As the audit team is not assessed as having the greatest
attending all sites, detection risk is risk of misstatement.
increased as the team will be
unable to directly obtain evidence 2) For those inventory counts not
relating to WIP. attended -> +) obtain and review
documentation relating to the
controls surrounding the counts
+) discuss with management any
issues which arise during the count
There is a risk that the warranty 1) Discuss with management the
provision could be understated, basis of the provision calculation
leading to understated expenses and compare this to industry
and liabilities if the company does averages and the level of post
not record enough warranty year-end claims
provision under IAS 37
2) Discuss the rationale behind
reducing the level of provision this
year.

3) Compare the prior year

provision with the actual level of
claims in the year, to assess the
reasonableness of the judgements
made by management.

There is a risk that intangible 2) Obtain a breakdown of the

assets could be overstated and research expenditure recognised
research expenses understated If in profit or loss and of the
research costs have been development costs capitalised and
incorrectly classified as review supporting documentation
development expenditure because to determine whether they have
IAS 38 Intangible Assets has strict been correctly classified. Any
criteria to capitalise with development expenditure agreed
development expenditure. must meet the relevant criteria for
capitalisation under IAS 38.

2) Discuss the accounting

treatment with the finance director
and ensure it is in accordance with
IAS 38.
There is a risk that prepayments 1) Review the non-current asset
are understated and PPE will be register to determine if the $1m
overstated if the deposit of $1m paid in advance has been
paid in advance has been capitalised.
capitalised within PPE because
only assets which physically exist 2) Discuss the correct accounting
at the year end should be treatment with management to
capitalised as PPE confirm that the amount paid in
advance is recognised as a
prepayment and if incorrectly
recognised review the correcting
journal entry.

1) There is a risk that the split 1) Obtain legal documentation in

between share capital and share support of the rights issue to agree
premium has not been accounted the number of shares issued and
for correctly and that these the rights price.
balances are misstated
2) Recalculate the split of share
capital and share premium and
agree this to the journal entry to
record the rights issue.
1) A detection risk arises as to 1) Discuss with management any
whether sufficient and appropriate changes to the extent of records
evidence is available at Hart Co to maintained at Hart Co since the
confirm the completeness and prior year audit and any
accuracy of controls over the monitoring of controls which has
payroll cycle and liabilities at the been undertaken by management
year end. over payrol.

2) Consideration should be given

to the level of controls in place at 2) Consideration should be given
the service organisation and to contacting the auditor of the
whether the data is reliable. If any service organisation to confirm the
errors occurred these could result level of controls in place. Consider
in the wages and salaries expense the extent to which sufficient
and any accruals being misstated. appropriate audit evidence can be
obtained from records held at Hart
Co in respect of the wages and
The directors’ remuneration Discuss this matter with
disclosure will not be complete if management and review the
the additional information is not requirements of local legislation to
disclosed as local legislation determine if the disclosure in the
financial statements is included
appropriately.
There is a risk that revenue will be Enquire with the finance director
overstated and the refund liability how the returns policy has been
understated if the company has applied at the year end and
not correctly accounted for the whether the provisions in IFRS 15
refund liability. have been reflected.

IFRS® 15 Revenue from Contracts Review the assumptions

with Customers requires that underpinning the refund liability
revenue should only be recognised for reasonableness and whether
to the extent that goods will not be they meet the historic 5% value of
returned. The company should returns.
recognise a refund liability for
goods which are expected to be Compare the level of post year-
returned. end returns to the refund liability
and discuss any significant
differences with management

There is the risk that liabilities and

expenses may be understated if
the company has reduced the
warranty provision excessively at
the year end.

Because the company does not

manufacture the goods (they only
sell them) and therefore this is not
a reasonable reason for reduction
1) There is a risk that the cut-off of 1) Discuss with management the
purchases may not be accurate as point at which inventory is
they may not correctly recognise recorded and review the contract
the goods from the point of with the supplier to verify the
dispatch at the year end. requirements in place.

2) There is also a risk that 2) Review the controls the

inventory and trade payables are company has in place to ensure
understated at the year end. that inventory is recorded from the
point of dispatch.

3) The audit team should

undertake detailed cut-off testing
of purchases of goods at the year
end and the sample of shipping
documentation immediately before
and after the year end relating to
goods from its main supplier in
Asia should be increased to ensure
It is unlikely that the auditor will that audit
The cut-off is complete
team and
should assess
be able to attend all sites which which of the inventory counts they
increases detection risk. It may not will attend. This should include the
be possible to gain sufficient count for the central warehouse
appropriate audit evidence over and a sample of branches which
the inventory counting controls contain the most material balances
and completeness and existence of inventory and those which have
of inventory for those sites which historically had exceptions
are not visited. reported during the inventory
count.

For those not visited, the auditor

will need to review the level of
exceptions noted during the count
and discuss any issues which arose
during the count with
There is the risk that receivables Review and test the controls
will be overstated and the surrounding the way in which the
allowance for receivables finance director assesses the
understated if some receivables recoverability of receivables
may not be recoverable and if an balances and other credit control
additional allowance for processes to ensure that they are
receivables is not included in the operating effectively.
financial statements.
Perform extended post year-end
cash receipts testing and a review
of the aged receivables ledger in
order to assess valuation and the
need for an increased allowance
for irrecoverable receivables.

Discuss with the finance director

whether an additional allowance
for receivables will be required
against balances older than the
1) There is a risk that expenses company’s
The credit
audit team terms.
should undertake
being understated and payables additional substantive procedures
being overstated If additional over the payables balance,
frauds committed by the payables particularly the fictitious supplier
ledger supervisor are not set up on the payables ledger to
discovered. ensure this has been removed.

2) Control risk is also increased if Discuss with the finance director

the fraud has gone undetected for the details of the fraud
a period of time. perpetrated by the payables
ledger supervisor and what
procedures have been adopted to
date to identify any further
adjustments which are needed in
the financial statements. In
addition, discuss with the finance
director what additional controls
have been put in place to prevent
any similar frauds.

In addition, the team should

maintain professional scepticism
There is a risk that the purchases Review the unprocessed invoices
and trade payables balance at the file at the year end to identify any
year end will be understated if invoices which relate to the supply
these invoices are not logged onto of pre year-end goods and ensure
the payables ledger before closing they have been properly accrued
accounting data for in the year-end financial
statements and recognised as a
liability.

Discuss with the finance director

the approach to be adopted to
There is a risk that PPE and profits resolve
Discuss the
the issue of unprocessed
accounting treatment
are overstated because the with the finance director and
training costs should be charged to request that the training costs are
profit or loss. written off to profit or loss to
ensure treatment is in accordance
IAS 16 does not allow staff training with IAS 16.
costs to be capitalised as part of
the cost of a non-current asset If adjusted, review the journal
entry for accuracy.
If the bank refuses to continue to Discuss with the finance director
support the company, there may the availability of alternative
be doubts as to the company’s financing if the bank is unwilling to
ability to continue as a going continue to support the company
concern. The uncertainties may and review the adequacy of any
not be adequately disclosed in the going concern disclosures in the
financial statements. financial statements.

The audit team should undertake

detailed going concern testing, in
particular, reviewing the impact of
a non-renewal of the overdraft
facility.

The audit engagement team will Orange & Co should ensure that it
be unfamiliar with the accounting has suitably experienced team
policies, transactions and balances deployed on audit.
of the client, hence there will be
increased detection risk on the In addition, sufficient time must be
audit. set aside so that the team
members can familiarise
In addition, there is less assurance themselves with the new client,
over opening balances as Orange document its systems and controls
& Co did not perform last year’s and understand the risks of
audit. material misstatement.

Increased audit procedures should

be performed on the opening
balances to confirm their
reasonableness.
There is an increased risk of errors Discuss with management the
in the financial statements as the technical competency and
temporary financial accountant experience of the temporary
may not be familiar with the financial accountant.
company’s activities and so
errors/omissions may go In addition, the audit engagement
unnoticed. team should ensure that increased
substantive procedures are
undertaken on the material areas
of the financial statements to
reduce audit risk, particularly
This increases the risk that the those requiring
The audit judgement.
engagement team
directors may manipulate the should maintain professional
financial statements, by scepticism throughout the course
overstating profits and assets and of the audit.
understating liabilities.
Detailed cut-off testing on areas
such as revenue, inventory and
payables should be performed to
ensure that cut-off has been
correctly applied and substantive
procedures performed on
There is a risk that profits and estimates
Discuss theand judgements
accounting to
treatment
property, plant and equipment will with the directors and request that
be overstated, and expenses an adjustment is made to ensure
understated if the training costs appropriate treatment of the
are not written off to the training costs. Obtain a breakdown
statement of profit or loss. of the remaining capitalised costs
and agree to supporting
IAS® 16 prohibits training costs documentation to ensure that they
from being capitalised and meet the recognition criteria in IAS
16.
There is a risk that inventory is not Discuss with management the
recorded on dispatch and point at which inventory is
therefore inventory and liabilities recorded and review the contract
are understated at the year end. with the supplier to verify the
requirements in place.

Review the controls the company

has in place to ensure that
inventory is recorded from the
point of dispatch.

Extend cut-off testing by reviewing

pre and post year-end GRNs and
supplier dispatch notes to verify
that inventory is recorded at the
There is a risk that some Extend post year-end cash receipts
receivables may not be testing and perform a review of
recoverable and an allowance for the aged receivables listing to
receivables is required, hence assess the valuation of
receivables may be overstated and receivables.
the allowance for
receivables understated. Discuss with management the
adequacy of any allowance for
receivables.
There is a risk that profit would be Obtain the calculation of the
overstated and liabilities and redundancy payments and agree
payables would be understated if a that a provision has been included
provision is not recognised. as a liability in the year-end
financial statements.
As there is a present obligation for
which the costs can be reliably Agree the redundancy payments
measured, and which will result in have been paid post year end.
an outflow of funds, IAS 37
Provisions, Contingent Assets and
Contingent Liabilities would
require this provision to be
recognised in the financial
statements.

The directors’ remuneration Discuss this matter with

disclosure will be incomplete and management and review the
inaccurate if the bonus paid is disclosure in the financial
included in the payroll charge for statements to ensure it complies
the year and not separately with local legislation.
disclosed in accordance with the
local legislation.

There is a risk that revenue and Inspect a copy of the credit note
receivables are overstated if the and confirm an adjustment to
credit note is not correctly revenue and receivables has been
recorded prior to the year end. recorded pre- year end.
There is a risk that understated Request that the bank
payables and bank balances. reconciliation is amended to
remove the supplier payments at
the year-end as these should be
accounted for in the 31 May 20X6
financial statements.

Review the journal entry correcting

the payables and bank balances at
the year end.

There is a risk that revenue and Discuss the basis of the revised
cost of sales may be overstated assumption of a 5% return rate
and liabilities understated if with the finance director. Review a
reducing the rate of return goods period of 60 days to quantify the
levels of return in the specified
period and compare this to the
IFRS® 15 Revenue from Contracts assumed rate of 5%. Discuss any
with Customers provides that significant variations with the
revenue and cost of sales should finance director.
only be accounted for to the
extent that the company foresees
that the goods will not be
returned. For the goods which may
be returned, the company should
recognise a refund liability. If, after
60 days, the goods are not
returned, then this liability is
reversed and revenue is
recognised.
There is a risk that intangible Agree the useful life of the patent
assets and profits are overstated if is four years to supporting
that management has correctly documentation.
accounted for the amortisation.
The amortisation charge should be
IAS® 38 Intangible Assets, this calculated and the appropriate
intangible asset should be journal adjustment discussed with
amortised over its four-year life. management, in order to ensure
the accuracy of the charge and
that the intangible is correctly
valued at the year end.

Significant profits or losses on Recalculate the loss on disposal

disposal are an indication that the calculations and agree all items to
depreciation policy of plant and supporting documentation.
machinery may not be
appropriate. Therefore Discuss the depreciation policy for
depreciation may be understated plant and machinery with the
and profit and assets overstated finance director to assess its
reasonableness.

Review for other significant gains

or losses on disposal of property,
plant and equipment to assess the
reasonableness
of the company’s depreciation
There is a risk that she may have Discuss with the finance director
undertaken a significant level of the details of the fraud
fraudulent transactions leading to perpetrated by the financial
an increased control risk which has controller and what procedures
not yet been identified. These have been adopted to date to
would need to be written off to the identify any adjustments which are
statement of profit or loss. If these needed in the financial
have not been uncovered by the statements.
year end, the financial statements
could include errors resulting in Additional substantive testing
the misstatement of profits. should be conducted over the
affected areas of the accounting
records.

In addition, the team should

maintain their professional
scepticism and be alert to the risk
If it is probable that Harlem Co will The audit team should discuss with
make payment to the financial management and request
controller, a provision for unfair confirmation from the company’s
dismissal is required to comply lawyers of the existence and
with IAS 37 Provisions, Contingent likelihood of success of any claim
Liabilities and Contingent Assets. If from the former financial
the payment is possible rather controller.
than probable, a contingent
liability disclosure would be
necessary. If Harlem Co has not
done this, there is a risk over the
completeness of any provisions or
contingent liabilities disclosures.
Inventory may be overvalued as its Discuss with the finance director
net realisable value (NRV) may be whether any write downs will be
below its cost. If the tyres can be made to the affected tyres, and
rectified, the rectification costs what, if any, modifications may be
may mean that cost exceeds net required with regards to the
realisable value. If the tyres cannot quality.
be rectified, the inventory may
need to be written off completely. Testing should be undertaken to
confirm cost and NRV of the
affected products in inventory and
that all inventory on a
line-by-line basis is valued
correctly.

There is a risk that receivables will Discuss with the director the
be overvalued; some balances rationale for maintaining the
may not be recoverable and so will allowance for receivables at the
be overstated if not adequately same level as the prior year,
provided for despite the increase in receivables
collection period and the payment
break granted to a large customer.

Extended post year-end cash

receipts testing and a review of
the aged receivables ledger to be
performed to assess valuation and
the need for an increased level of
allowance for receivables.
If these deficiencies have not been Discuss with management whether
rectified, the controls over the purchases cycle
purchases and payables may recommendations suggested by
continue to be weak leading to Brooklyn & Co were implemented
increased control risk and risk of successfully this year. If so,
misstatements arising. Cost of undertake tests of these controls
sales, expenses and trade to assess if they are operating
payables may not be complete or efficiently.
accurate.
If the controls are not in place or
operating efficiently, adopt a fully
substantive approach for
confirming the completeness and
accuracy of cost of sales and other
In order to maximise the chances Brooklyn & Co should ensure that
of securing the debt finance there is a suitably experienced
restructure, Harlem Co will need to audit team. Also, adequate time
present financial statements which should be allocated for team
show the best possible position members to obtain an
and performance. The worsening understanding of the company and
interest cover and gearing ratio the significant risks of
increases the risk that the overstatement of profits and
directors may manipulate the assets and understatement of
financial statements, by debt, including attendance at an
overstating profits and assets and audit team briefing.
understating debt liabilities
The team needs to maintain
professional scepticism and be
alert to the increased risk of
manipulation.

Significant estimates and

judgements should be carefully
If the company has not accounted Review the treatment of the bonus
for a bonus issue before, there is a issue and agree the increase in
risk that it could have been shares to the share register and
incorrectly treated with equity share certificates, and agree that
being under or overstated. In the corresponding reduction in
addition, legal issues may arise if reserves is correct.
the shares have not been issued in
accordance with the company’s Review board minutes for
statutory constitution. authorisation and terms of the
bonus issue and review if the
Additionally, bonus issues require transaction has been conducted in
disclosure in the financial line with this approval. Review the
statements and there is a risk that statutory constitution documents
these may be incomplete or to confirm the legality of the share
inaccurate. issue.

Review the adequacy of the bonus

issue disclosures in the financial
statements.
If reliance is placed on irrelevant The external audit team should
or poorly performed testing, then meet with IA staff, read their
the external audit team may form reports and review their files
an incorrect conclusion on the relating to store visits to ascertain
strength of the internal controls at the nature of the work undertaken.
Peony Co. This could result in them
performing insufficient levels of Before using the work of IA, the
substantive testing, thereby audit team will need to evaluate
increasing detection risk and perform audit procedures on
the entirety of the work which they
plan to use, in order to determine
its adequacy for the purposes of
the audit. In addition, the team will
need to re-perform some of the
testing carried out by IA to assess
There is a risk that costs may have The classification of costs between
been omitted or included in cost of sales and operating
operating expenses rather than expenses should be reviewed in
cost of sales because this comparison to the prior year and
movement in gross margin is any inconsistencies investigated.
significant and inconsistent with
the fall in operating margin.

Misclassification of expenses
would result in understatement of
cost of sales and overstatement of
operating expenses.
There is a risk that inventory could Testing should be undertaken to
be under or overvalued because confirm cost and NRV of inventory
inventory should be valued at the and that on a line-by-line basis the
lower of cost and net realisable goods are valued correctly.
value (NRV).
In addition, valuation testing
should focus on comparing the
cost of inventory to the selling
price less margin for a sample of
items to confirm whether this
method is actually a close
approximation to cost.
Inventory could be under or The timetable of the perpetual
overstated if the perpetual inventory counts should be
inventory counts are not all reviewed and the controls over the
completed, such that some counts and adjustments to records
inventory lines are not counted in should be tested.
the year.
In addition, the level of
During the interim audit, it was adjustments made to inventory
noted that there were significant should be considered to assess
exceptions with the inventory their significance. This should be
records being higher than the discussed with management as
inventory in the warehouse. As the soon as possible as it may not be
year-end quantities will be based possible to place reliance on the
on the records, this is likely to inventory records at the year end,
result in overstated inventory which could result in the
requirement for a full year-end
inventory count.
This is an indication that the Discuss the depreciation policy for
company’s depreciation policy of non-current assets with the
non-current assets may not be finance director and assess its
appropriate, as depreciation in the reasonableness.
past appears to have been
understated. Enquire of the finance director if
the obsolete assets have been
If an asset is obsolete, it should be written off. If so, review the
written off to the statement of adjustment for completeness
profit or loss. Therefore
depreciation may be understated
and profit and assets overstated

The costs were incurred and Discuss with management the

adverts shown in the year ending rationale for including the
20X9 and there is no basis for advertising as a current asset.
including them as a current asset Request evidence to support the
at the year end. The costs should assessment of probable future
be recognised in operating cash flows, and review for
expenses in the current year reasonableness.
financial statements.
Review supporting documentation
If these costs are not expensed, for the advertisements to confirm
current assets and profits will be that all were shown before the
overstated. 20X9 year end.

Request that management remove

the current asset and record the
amount as an expense in the
A detection risk arises as to Discuss with management the
whether sufficient and appropriate extent of records maintained at
evidence is available at Peony Co Peony Co for the period since
to confirm the completeness and January 20X9 and any monitoring
accuracy of controls over the of controls which has been
payroll cycle and liabilities at the undertaken by management over
year end. payroll.

Consideration should be given to

contacting the service
organisation’s auditor to confirm
If any errors occurred during the the levelwith
Discuss of controls in place,
management thea
transfer process, these could result extent of records maintained at
in wages and salaries being Peony Co for the period since
under/overstated January 20X9 and any monitoring
of controls which has been
undertaken by management over
payroll.

Consideration should be given to

contacting the service
organisation’s auditor to confirm
the level of controls in
The loan needs to be allocated place, a typethe
Re-perform 1 or type 2 report
company’s
between non-current and current calculations to confirm that the
liabilities. Failure to classify the split of the loan note is correct
loan correctly could result in between non-current and current
misclassified liabilities liabilities and that total financing
proceeds of $3m were received.

In addition, the disclosures for this

loan note should be reviewed in
detail to ensure compliance with
relevant accounting standards
The timing of this announcement Discuss with management the
has not been confirmed; if it is status of the redundancy
announced to the staff before the announcement; if before the year
year end, then under IAS 37 end, review supporting
Provisions, Contingent Liabilities documentation to confirm the
and Contingent Assets, a timing. In addition, review the
redundancy provision will be basis of and recalculate the
required at the year end as a redundancy provision.
constructive obligation will have
been created.

Failure to provide or to provide an

appropriate amount will result in
an understatement of provisions
and expenses.
If research costs have been Obtain a breakdown of the
incorrectly classified as expenditure and verify that it
development expenditure, there is relates to the development of the
a risk that intangible assets could new products. Review expenditure
be overstated and expenses documentation to determine
understated. whether the costs relate to the
research or development stage.
This expenditure is classed as Discuss the accounting treatment
research and development under with the finance director and
IAS® 38 Intangible Assets. The ensure it is in accordance with IAS
standard requires research costs 38.
to be expensed to profit or loss
and only development costs to be
capitalised as an intangible asset.
If the service for 20X8 has been Review the purchase
carried out, then $0·1m ($0·5m/5) documentation for the new
should be charged to profit or loss. manufacturing line to confirm the
Therefore property, plant and exact cost of the servicing and that
equipment (PPE) and profits are it does relate to a five-year period.
overstated and prepayments are
understated. Discuss the accounting treatment
with the finance director and the
level of any necessary adjustment
to ensure treatment is in
accordance with IAS 16.
This loan needs to be correctly During the audit, the team would
split between current and non- need to confirm that the $4 million
current liabilities in order to ensure loan finance was received.
correct disclosure.
In addition, the split between
current and non-current liabilities
and the disclosures for this loan
should be reviewed in detail to
ensure compliance with relevant
accounting standards and local
legislation.

Details of security should be

agreed to the bank confirmation
There is a risk that this has been The finance costs should be
omitted from the statement of recalculated and any increase
profit or loss leading to agreed to the loan documentation
understated finance costs and for confirmation of the 5% interest
overstated profit. rate.

Interest payments should be

agreed to the cash book and bank
statements to confirm the amount
was paid and is not therefore a
There is a risk that the directors year-end
Earl & Co payable.
should ensure that there
have an incentive to manipulate is a suitably experienced audit
the financial statements, by team. Also, adequate time should
overstating revenue, profits and be allocated for team members to
assets because in order to obtain an understanding of the
maximise the success of the company and the significant risks
potential listing, Darjeeling Co will of overstatement of revenue,
need to present financial profits and assets, including
statements which show the best attendance at an audit team
possible position and performance. briefing.

The team needs to maintain

professional scepticism and be
alert to the increased risk of
manipulation.

Significant estimates and

judgements should be carefully
reviewed in light of the
The increase in receivable days Review and test the controls
could be solely due to these surrounding how Darjeeling Co
increased credit terms. identifies receivables balances
which may not be recoverable and
However, it could also be due to an procedures around credit control
increased risk over recoverability to ensure that they are operating
of receivables as they may be effectively.
overvalued and expenses
understated. 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.
There is a risk that overstated Discuss with management the
revenue, under/overstated profits basis of the refund liability of
and liabilities if company did not $0·25m and obtain supporting
recored appropriate refund liablity documentation to confirm the
reasonableness of the assumptions
and calculations.
This product recall will result in Review the list of sales of the paint
Darjeeling Co paying refunds to product made between June and
customers. The sales will need to the date of the recall, agree that
be removed from the 20X8 the sales have been removed from
financial statements and a refund revenue and the inventory
liability recognised. Also inventory included. If the refunds have not
will need to be reinstated, albeit at been paid before the year end,
a possibly written down value. review the draft financial
Failing to account for this correctly statements to confirm that it is
could result in overstated revenue, included within current liabilities.
understated liabilities and
misstated inventory.

There is a risk that this inventory Discuss with the finance director
may be overvalued as its net whether any write downs will be
realisable value may be below made to this product, and what, if
cost. any, modifications will be required
to rectify the quality of the
Due to the issue with the paint product.
consistency, the quality of these
products is questionable and Testing should be undertaken to
management is investigating confirm cost and NRV of the
whether these products can be affected paint products held in
rectified. inventory and that on a line by line
basis the goods are valued
correctly.
This is a significant increase in During the audit a detailed
revenue and, along with the breakdown of sales will be
increase in gross margin, may be obtained, discussed with
related to the increased credit management and tested in order
period and price promise to understand the sales increase.
promotion or could be due to an Also increased cut-off testing
overstatement of revenue. should be undertaken to verify
that revenue is recorded in the
right period and is not overstated.
These are all indicators that the Detailed going concern testing to
company could be experiencing a be performed during the audit,
reduction in its cash flow which including the review of cash flow
could result in going concern forecasts and the underlying
difficulties or uncertainties. assumptions. These should be
discussed with management to
These uncertainties may not be ensure that the going concern
adequately disclosed in the basis is reasonable.
financial statements.

The general overheads do not Discuss with management the

meet requirement to record in nature of the overheads included
inventory cost. If these are in inventory valuation. If general
included in inventory cost, then overheads are included, request
this will result in over-valued management remove them from
inventory. the valuation to be included in the
draft financial statements.

Review supporting documentation

to verify those overheads deemed
to be of a production nature are
valid.
There is a risk that the year-end The auditor should attend the
inventory could be under or inventory count held after the year
overstated if the adjustments are end and note details of goods
not completed accurately received and despatched post year
end, in order to agree to the
reconciliation.

During the final audit, the year-end

inventory adjustments schedule
should be reviewed in detail and
agreed to supporting
documentation obtained during
the inventory count for all
adjusting items.

The audit team should increase

the extent of inventory cut-off
In accordance with IAS 38 The audit team will need to agree
Intangible Assets, this should have the purchase price to supporting
been included as an intangible documentation and confirm the
asset and amortised over its three- useful life is three years as per the
year life. As the sum has been fully contract.
expensed and not treated in
accordance with IAS 38, intangible Discuss with management the
assets and profits are understated. reason for fully expensing the
$1·1m paid, and request they
correct the treatment.

The correcting journal should be

reviewed and the amortisation
charge should be recalculated in
order to ensure the accuracy of
the charge and that the intangible
is correctly valued at the year end.
This needs to be accounted for The audit team should confirm that
correctly, with adequate disclosure proceeds of $1·2m were received
made and the equity finance and that the split of share capital
needs to be allocated correctly and share premium is correct and
between share capital and share appropriately recorded.
premium.
In addition, the disclosures for this
If this is not done, then the finance should be reviewed in
accounts may be misstated due to detail to ensure compliance with
a lack of disclosure or share capital relevant accounting standards and
and share premium may be local legislation.
misstated.

There is a risk that the full impact Discuss with the finance director
of the fraud has not been what procedures they have
quantified and any additional adopted to fully identify and
fraudulent transactions would quantify the impact of the teeming
need to be written off in the and lading fraud. In addition,
statement of profit or loss. If these discuss with the finance director,
have not been uncovered, the what controls have been put in
financial statements could be place to identify any similar frauds.
misstated.
Review the receivables listing to
In addition, individual receivable identify any unusual postings to
balances may be individual receivable balances as
under/overstated as customer this could be further evidence of
receipts have been misallocated to fraudulent transactions.
other receivable balances.
In addition, the team should
maintain their professional
scepticism and be alert to the risk
of further fraud and errors.
A detection risk arises as to Discuss with management the
whether sufficient and appropriate extent of records maintained at
evidence is available at Blackberry Blackberry Co for the period since
Co to confirm the completeness February 20X8 and any monitoring
and accuracy of controls over the of controls undertaken by
sales and receivables cycle and management over sales and
balances at the year end. receivables.

Consideration should be given to

contacting the service
There is a risk that sales and organisation’s
Discuss auditor to confirm
with management the
receivables being transfer process undertaken and
under/overstated if any errors any controls put in place to ensure
occurred during the transfer the completeness and accuracy of
process. the data.

Where possible, undertake tests of

controls to confirm the
effectiveness of the transfer
controls. In addition, perform
substantive testing on the transfer
If it is probable that Blackberry Co of
Theinformation
audit teamfrom therequest
should old to the
will make a payment to the confirmation from the company’s
financial accountant, a provision lawyers of the existence and
for unfair dismissal is required. likelihood of success of any claim
from the former financial
If the payment is possible rather accountant.
than probable, a contingent
liability disclosure would be
necessary.

If Blackberry Co has not done this,

there is a risk over the
completeness of any provisions or
contingent liabilities.
This a key control which is being The audit team should increase
overridden and as such there is an their testing on trade payables at
increased risk of errors within the year end, including performing
trade payables and the year-end supplier statement reconciliations,
payables balance may be under or with a particular focus on
overstated. completeness of trade payables.

Request management prepare a

year-end purchase ledger control
account reconciliation. The audit
team should undertake a detailed
review of this reconciliation with a
focus on any unusual reconciling
items
To comply with IAS 37 Provisions, Discuss with management whether
Contingent Liabilities and any notification of payment has
Contingent Assets, this should not been received from the liquidators
be recognised until the receipt is and review the related
virtually certain. With no firm correspondence. If virtually
response to date, the inclusion of certain, the treatment adopted is
this sum overstates profit and correct. If payment has been
current assets. received, agree to post-year end
cash book.

If receipt is not virtually certain,

management should be requested
to remove it from profit and
receivables. If the receipt is
probable, the auditor should
request management include a
contingent asset disclosure note.
As the team is not familiar with the Cupid & Co should ensure they
accounting policies, transactions have a suitably experienced team.
and balances of the company, In addition, adequate time should
there will be an increased be allocated for team members to
detection risk on the audit. obtain an understanding of the
company and the risks of material
misstatement including a detailed
team briefing to cover the key
The level of work in progress will The auditor should discuss with
need to be assessed at the year management the process they will
end. Assessing the percentage undertake to assess the
completion for partially percentage completion for work in
constructed buildings is likely to be progress at the year end. This
quite subjective, and the team process should be reviewed by the
should consider if they have the auditor while attending the year-
required expertise to undertake end inventory counts.
this. If the percentage completion
is not correctly calculated, the In addition, consideration should
inventory valuation may be under be given as to whether an
or overstated. independent expert is required to
value the work in progress or if a
management expert has been
used. If the work of an expert is to
be used, then the audit team will
need to assess the competence,
capabilities and objectivity of the
expert.
The increase in inventory may be Detailed cost and net realisable
due to an increased level of pre value (NRV) testing to be
year-end orders. Alternatively, it performed at the year end and the
may be that Prancer Construction aged inventory report to be
Co is struggling to sell completed reviewed to assess whether
properties, which may indicate inventory requires to be written
that they are overvalued. IAS 2 down.
Inventories requires that inventory
should be stated at the lower of
cost and NRV.

It is unlikely that the auditor will The auditor should assess for
be able to attend all of these which of the building sites they will
inventory counts, increasing attend the counts. This will be
detection risk, and therefore they those with the most material
need to ensure that they obtain inventory or which according to
sufficient evidence over the management have the most
inventory counting controls, and significant risk of misstatement.
completeness and existence of
inventory for any sites not visited. For those not visited, the auditor
will need to review the level of
exceptions noted during the count
and discuss with management any
issues, which arose during the
count.
A warranty provision will be Discuss with management the
required under IAS 37 Provisions, basis of the provision calculation,
Contingent Liabilities and and compare this to the level of
Contingent Assets. post year-end claims, if any, made
by customers. In particular,
Calculating warranty provisions discuss the rationale behind
requires judgement as it is an reducing the level of provision this
uncertain amount. year.

The finance director anticipates Compare the prior year provision

this provision will be lower than with the actual level of claims in
last year as the company has the year, to assess the
improved its building practices and reasonableness of the judgements
the quality of its finished made by management.
properties. However, there is a risk
that this provision could be
understated,
especially in light of the overdraft
covenant relating to a minimum
level of net assets and is being
used as a mechanism to
manipulate profit and asset levels.
There is a risk that overstated Discuss with management the
revenue and understated liabilities treatment of deposits received in
if management may have advance, to ensure it is
incorrectly treated the deferred appropriate.
income as revenue.
During the final audit, undertake
These deposits should not be increased testing over the cut-off
recognised as revenue in the of revenue and completeness of
statement of profit or loss until the deferred income.
performance obligations as per the
contracts have been satisfied,
which is likely to be when the
building is finished and the sale
process is complete. Instead, they
should be recognised as deferred
income within current liabilities.

There is a risk that receivables will

Review and test the controls
be overvalued; some balances surrounding how the finance
may not be recoverable and so will director identifies old or potentially
be overstated if not provided for. irrecoverable receivables balances
and credit control to ensure that
In addition, reducing the allowance they are operating effectively.
for receivables will increase asset
values and would improve the Discuss with the director the
covenant compliance, which rationale for reducing the
increases the manipulation risk allowance for receivables.
further.
Extended post year-end cash
receipts testing and a review of
the aged receivables ledger to be
performed to assess valuation and
the need for an allowance for
If the company does not have Review the covenant calculations
sufficient cash to meet this prepared by the company at the
repayment, then there could be year end and identify whether any
going concern implications. defaults have occurred; if so,
determine the effect on the
In addition, there is a risk of company.
manipulation of profit and net
assets to ensure that covenants The team should maintain their
are met. professional scepticism and be
alert to the risk that profit and/or
net assets have been overstated to
ensure compliance with the
covenants.

The forecast profit is higher than The audit team should increase
last year, indicating an increase in their testing on trade payables at
trade, also the company’s cash the year end, with a particular
position has continued to focus on completeness of
deteriorate and therefore, it is payables. A payables
unusual for payable days to have circularisation or review of supplier
decreased. statement reconciliations should
be undertaken.
There is an increased risk of errors
within trade payables and the
year-end payables may be
understated.
The costs incurred should be Review a breakdown of the costs
correctly allocated between and agree to invoices to assess the
revenue and capital expenditure. nature of the expenditure and if
As the website has been upgraded, capital, agree to inclusion within
there is a possibility that the new the asset register or agree to the
processes and systems may not statement of profit or loss.
record data reliably and
accurately. The audit team should document
the revised system and undertake
This may lead to a risk over tests over the completeness and
completeness and accuracy of accuracy of data recorded from the
data in the underlying accounting website to the accounting records.
records.
Only assets which physically exist Discuss with management as to
at the year end should be included whether the warehouse purchase
in property, plant and equipment. was completed by the year end. If
If the transaction has not been so, inspect legal documents of
completed by the year end, there ownership, such as title deeds
is a risk that assets are overstated ensuring these are dated prior to 1
if the company incorrectly includes April 20X7 and are in the company
the warehouse at the year end. name.

There is a risk that understated Review share issue documentation

equity and overstated non-current to confirm that the preference
liabilities if irredeemable shares are irredeemable. Confirm
preference shares are classified that they have been correctly
incorrectly into non-current classified as equity within the
liabilities, not equity. accounting records and that total
financing proceeds of $5m were
received.

In addition, the disclosures for this

share issue should be reviewed in
detail to ensure compliance with
relevant accounting standards.
Under IAS 16 Property, Plant and Discuss with the directors the
Equipment, useful lives are to be rationale for any extensions of
reviewed annually, and if asset asset lives and reduction of
lives have genuinely increased, depreciation rates. Also, the four-
then this change is reasonable. year life should be compared to
how often these assets are
However, there is a risk that this replaced, to assess the useful life
reduction has occurred in order to of assets.
boost profits. If this is the case,
then fixtures and fittings are
overvalued and profit overstated.

If the customer is experiencing Review the revised credit terms

difficulties, there is an increased and identify if any after date cash
risk that the receivable is not receipts for this customer have
recoverable and hence is been made.
overvalued.
Discuss with the finance director
whether he intends to make an
allowance for this receivable. If
not, review whether any existing
allowance for uncollectable
accounts is sufficient to cover the
amount of this receivable.
Sales staff seeking to maximise Increased sales cut-off testing will
their current year bonus may be performed along with a review
result in new accounts being of any post year-end returns as
opened from poor credit risks they may indicate cut-off errors. In
leading to irrecoverable addition, increased after date cash
receivables. receipts testing to be undertaken
for new customer account
In addition, there is a risk of sales receivables.
cut-off errors as new customers
could place orders within the two-
month introductory period and
subsequently return these goods
post year end.

If there are issues with the quality Discuss with the finance director
of the Luge product, inventory may whether any write downs will be
be overvalued as its NRV may be made to this product, and what, if
below its cost. any, modifications may be
required with regards the quality.

Testing should be undertaken to

confirm cost and NRV of the Luge
products in inventory and that on a
line-by-line basis the goods are
The sale will need to be removed; valued correctly
Review the list of sales made of
a refund liability should be product Luge prior to the recall,
recognised along with the agree that the sale has been
reinstatement of inventory, removed from revenue and the
although the NRV of this inventory inventory included. If the refund
could be of a minimal value. has not been paid pre year end,
Failing to account for this correctly agree it is included within current
could result in overstated revenue liabilities.
and understated liabilities and
inventory.
If it is probable that the company Caving & Co should write to the
will make payment to the company’s lawyers to enquire of
customer, a legal provision is the existence and likelihood of
required. If the payment is success of any claim from
possible rather than probable, a Petanque Co. The results of this
contingent liability disclosure should be used to assess the level
would be necessary. If Hurling Co of provision or disclosure included
has not done this, there is a risk in the
over the completeness of any financial statements.
provisions or the necessary
disclosure of contingent liabilities.

A reduction in the audit timetable The timetable should be confirmed

will increase detection risk and with the finance director. If it is to
place additional pressure on the be reduced, then consideration
team in obtaining sufficient and should be given to performing an
appropriate evidence. interim audit in late March or early
April; this would then reduce the
In addition, the finance team of pressure on the final audit.
Hurling Co will have less time to
prepare the financial information The team needs to maintain
leading to an increased risk of professional scepticism and be
errors arising in the financial alert to the increased risk of errors
statements occurring.
In line with IAS 10 Events after the Discuss the issue with
Reporting Date the dividend management and confirm that the
should only be disclosed. If the dividend will not be included
dividend is included, this will result within liabilities in the 20X7
in an overstatement of liabilities financial statements.
and understatement of equity.
The financial statements need to
be reviewed to ensure that
adequate disclosure of the
proposed dividend is included.
2021 - Mar, Jun
(a) Preconditions required for an audit
Auditors should only accept a new audit engagement or continue an existing audit engagement if the preconditions for an
audit are present.

ISA 210 Agreeing the Terms of Audit Engagements requires the auditor to:
– Determine whether the financial reporting framework to be applied in the preparation of the financial statements is
acceptable (for example IFRS® Standards). In considering this, the auditor should have assessed the nature of the entity,
the nature and purpose of the financial statements and whether law or regulation prescribes the applicable reporting
framework.
– Obtain the agreement of management that it acknowledges and understands its responsibilities for the
following:
1 preparing the financial statements in accordance with the applicable financial reporting framework;
2 internal control necessary for the preparation of the financial statements to be free from material misstatement whether
due to fraud or error; and
3 providing the auditor with access to information relevant for the audit and access to staff within the entity to obtain audit
evidence.

2021 - Mar, Jun

(c) Professional scepticism and examples where professional scepticism should be applied
Professional scepticism is defined in ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit
inAccordance with International Standards on Auditing as an attitude which includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

Examples where the auditor should apply professional scepticism for Corley Appliances Co are as follows:

Revenue recognition
ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements contains a rebuttable
presumption that fraud in relation to revenue is high risk and hence the auditor must apply professional scepticism to
Corley Appliances Co’s revenue recognition policies, especially in relation to the company’s returns policy which due to
the judgement involved may be used as a way to manipulate revenue.

Warranty provision
Accounting for warranty provisions will include an element of estimation based on previous experiences of the costs
incurred by the company to repair defective goods. The auditor should maintain professional scepticism keeping in mind
that warranty provisions may include management bias to either deliberately over or understate the provision.
Management has reduced the warranty provision in the year on the grounds they feel the goods they sell are built to a
high standard. As the company is not involved in the manufacturing of the goods they sell, it may be unreasonable to
reduce the warranty provision on this basis.

Fraud
As a fraud has been committed during the year, the auditor must maintain professional scepticism recognising the fact
that internal controls may be weak, hence allowing for employee manipulation of such internal control deficiencies. The
auditor must also consider the possibility that other frauds may have taken place during the year through management
override of the entity’s internal controls.

Bank overdraft
The company is reliant on its bank overdraft due to the significant levels of expenditure which it has incurred during the
year on the new dispatch system. Management may want to deliberately overstate profit and understate liabilities so that
the bank renews the overdraft facility.

Receivables valuation
 The receivables collection period has been increasing over the past six months, but the finance director does not
envisage that an increase in the allowance for receivables is required. The auditor must apply professional scepticism in
considering whether management’s assessment of recoverability is reasonable, as any increase in the allowance will
reduce profits.

2020 - Mar, Jun

(a) Engagement letters
Purpose of an engagement letter
The letter of engagement outlines the responsibilities of both the audit firm and the audit client. Its purpose is to:
1 minimise the risk of any misunderstanding between the auditor and the client;
2 confirm acceptance of the engagement; and
3 forms the basis of the contract by outlining the terms and conditions of the engagement.

Items to be included in an engagement letter

1 the objective and scope of the audit;
2 the responsibilities of the auditor;
3 responsibilities of management;
4 identification of the financial reporting framework used in the preparation of the financial statements;
5 expected form and content of any reports to be issued;
6 elaboration of the scope of the audit with reference to legislation;
7 the form of any other communication of the results of the audit;
8 the fact that some material misstatements may not be discovered;
9 arrangements concerning the planning and performance of the audit, including the composition of the audit team;
10 the expectation that management will provide written representations;
11 the basis on which the audit firm will calculate its fees;
a request for management to agree to the terms of the audit engagement and acknowledge receipt of the letter of
12 engagement;
13 arrangements concerning the involvement of internal audit and other staff employed at the company;
14 any obligations to provide audit working papers to third parties;
15 any restrictions on the auditor’s liability; and
16 arrangements to make available draft financial statements and any other information.

(b) Factors to consider prior to accepting Scarlet Co as a new audit client

1 The outgoing auditor’s response
2 Management integrity
3 Pre-conditions for an audit
4 Independence and objectivity
5 Resources available at the time of the audit

The outgoing auditor’s response

Prior to accepting an audit engagement, the auditor is required to contact the previous auditors, after obtaining permission
from Scarlet Co, to ask for all information relevant to the decision as to whether or not the firm should accept
appointment. The auditor should consider the outgoing auditor’s response to assess whether there are any ethical or
professional reasons why the firm should not accept appointment.

Management integrity
If Orange & Co’s audit engagement partner has reason to believe that Scarlet Co’s management lack integrity, there is a
greater risk of fraud and intimidation. Orange & Co need to consider management integrity because if there are serious
concerns regarding this, Orange & Co must not accept the audit engagement.

Pre-conditions for an audit

Orange & Co can only accept an audit engagement if the preconditions are present.
The preconditions confirm that management will use an acceptable financial reporting framework under which they will
prepare the financial statements and confirms that management acknowledges and understands its responsibilities for:
1 Preparing the financial statements in accordance with the applicable financial reporting framework;
 2 Internal
Providingcontrol necessary
the auditor for the preparation
with access of relevant
to information the financial statements
for the audit andtoaccess
be freetofrom
staffmaterial misstatement;
within the entity to obtain audit
3 evidence.
If the preconditions are not present, Orange & Co cannot accept the audit engagement.

Independence and objectivity

The auditor must consider whether there are any threats to independence and objectivity which cannot be reduced to an
acceptably low level by the use of appropriate safeguards, such as if any of Orange & Co’s staff have shares in Scarlet
Co or are related to staff employed at Scarlet Co. If such threats are present and cannot be sufficiently mitigated, Orange
& Co must not accept the audit engagement.

Resources available at the time of the audit

Orange & Co must have adequate resources with the relevant experience available at the time the audit of Scarlet Co is
likely to be carried out. All audit staff deployed to the audit of Scarlet Co must be capable of carrying out the audit in
accordance with International Standards on Auditing (ISAs). If adequate resources will not be available, Orange & Co
must not accept the audit engagement.

2019 - Sep, Dec

(a) Audit responsibility with prevention and detection Fraud and Errors
Auditors conduct an audit in accordance with ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements and are responsible for obtaining reasonable assurance that the financial statements taken
as a whole are free from material misstatement, whether caused by fraud or error.

In order to fulfil this responsibility, the auditor is required to identify and assess the risks of material misstatement of the
financial statements due to fraud.

The auditor needs to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement
due to fraud through designing and implementing appropriate responses. In addition, the auditor must respond
appropriately to fraud or suspected fraud identified during the audit.

When obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the
audit, considering the potential for management override of controls and recognising the fact that audit procedures which
are effective in detecting error may not be effective in detecting fraud.

To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and error, ISA 240 requires
that a discussion is held within the team. For members not present at the meeting, the audit engagement partner should
determine which matters should be communicated to them.

2019 - Sep, Dec

(b) Report to management
Board of directors
Amberjack Co
21 Under the Sea, Shorelife City, Shark Country
1 July 20X5

Dear Sirs,
Audit of Amberjack Co for the year ended 30 April 20X5
Please find enclosed the report to management on deficiencies in internal controls identified during the audit for the year
ended 30 April 20X5. The appendix to this report considers deficiencies in the sales and dispatch system and
recommendations to address those deficiencies.

Please note that this report only addresses the deficiencies identified during the audit and if further testing had been
performed, then more deficiencies may have been reported.

This report is solely for the use of management and if you have any further questions, then please do not hesitate to
contact us.
 Yours faithfully
An audit firm
Appendix

2019 - Mar, Jun

(a) Materiality and performance materiality
Materiality and performance materiality are dealt with under ISA 320 Materiality in Planning and Performing an Audit.
Auditors need to establish the materiality level for the financial statements as a whole, as well as assess performance
materiality levels, which are lower than the overall materiality for the financial statements as a whole.

Materiality
Materiality is defined in ISA 320 as follows: ‘Misstatements, including omissions, are considered to be material if they,
individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the
basis of the financial statements.

If the financial statements include a material misstatement, then they will not present fairly (give a true and fair view) the
position, performance and cash flows of the entity.

A misstatement may be considered material due to its size (quantitative) and/or due to its nature (qualitative) or a
combination of both. The quantitative nature of a misstatement refers to its relative size. A misstatement which is material
due to its nature refers to an amount which might be low in value but due to its prominence and relevance could influence
the user’s decision, for example, directors’ transactions.

As per ISA 320, materiality is often calculated using benchmarks such as 5% of profit before tax or 1% of total revenue or
total assets. These values are useful as a starting point for assessing materiality, however, the assessment of what is
material is ultimately a matter of the auditor’s professional judgement. It is affected by the auditor’s perception of the
financial information, the needs of the users of the financial statements and the perceived level of risk; the higher the risk,
the lower the level of overall materiality.

In assessing materiality, the auditor must consider that a number of errors each with a low value may, when aggregated,
amount to a material misstatement.

Performance materiality
Performance materiality is defined in ISA 320 as follows: ‘The amount set by the auditor at less than materiality for the
financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as a whole.’

Hence performance materiality is set at a level lower than overall materiality for the financial statements as a whole. It is
used for testing individual transactions, account balances and disclosures. The aim of performance materiality is to
reduce the risk that the total of all of the errors in balances, transactions and disclosures exceeds overall materiality.

2018 - Sep, Dec

a) Explain why analytical procedures are used during THREE stages of an audit.
Analytical procedures can be used at all stages of an audit, however, ISA 315 Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity and Its Environment and ISA 520 Analytical Procedures identify
three particular stages.
During the planning stage, analytical procedures must be used as risk assessment procedures in order to help the
auditor to obtain an understanding of the entity and assess the risk of material misstatement.
During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence. Substantive
procedures can either be tests of detail or substantive analytical procedures.
 At the final review stage, the auditor must design and perform analytical procedures which assist them when forming an
overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.

(b) Calculate THREE ratios, for BOTH years, which would assist you in planning the audit of Darjeeling Co.
Ratios to assist the audit supervisor in planning the audit:
20X8 20X7
Gross margin 7,410/19,850 = 37·3% 6,190/16,990 = 36·4%
Inventory holding period 1,850/12,440 * 365 = 54 days 1,330/10,800 * 365 = 45 days
OR
Inventory turnover 12,440/1,850 = 6·7 10,800/1,330 = 8·1
Receivables collection period 2,750/19,850 * 365 = 51 days 1,780/16,990 * 365 = 38 days
Payables payment period 1,970/12,440 * 365 = 58 days 1,190/10,800 * 365 = 40 days
Current ratio 4,600/(1,970 + 810) = 1·65 3,670/1,190 = 3·08
Quick ratio 2,750/(1,970 + 810) = 0·99 (3,670 – 1,330)/1,190 = 1·97

2018 - Sep, Dec

(a) (i) Importance of communicating with those charged with governance
In accordance with ISA 260 Communication with Those Charged with Governance, it is important for the auditors to report
to those charged with governance as it helps in the following ways:
– It assists the auditor and those charged with governance in understanding matters related to the audit, and in
developing a constructive working relationship. This relationship is developed while maintaining the auditor’s
independence and objectivity.
– It helps the auditor in obtaining, from those charged with governance, information relevant to the audit. For example,
those charged with governance may assist the auditor in understanding the entity and its environment, in identifying
appropriate sources of audit evidence and in providing information about specific transactions or events.
– It helps those charged with governance in fulfilling their responsibility to oversee the financial reporting process,
thereby reducing the risks of material misstatement of the financial statements.
– It promotes effective two-way communication between the auditor and those charged with governance.

(ii) Matters to be communicated to those charged with governance

1 – The auditor’s responsibilities with regards to providing an opinion on the financial statements and that they have carried
out their work in accordance with International Standards on Auditing.
2 – The auditor should explain the planned approach to the audit as well as the audit timetable.
3 – Any key audit risks identified during the planning stage should be communicated.
4 – In addition, any significant difficulties encountered during the audit should be communicated.
5 – Also significant matters arising during the audit, as well as significant accounting adjustments.
6 – During the audit, any significant deficiencies in the internal control system identified should be communicated in writing
or verbally.
7 – How the external auditor and internal auditor may work together and any planned use of the work of the internal audit
function.
8 – Those charged with governance should be notified of any written representations required by the auditor.
9 – Other matters arising from the audit which are significant to the oversight of the financial reporting process.
10 – If any suspected frauds are identified during the audit, these must be communicated.
11 – If the auditors are intending to make any modifications to the audit opinion, these should be communicated to those
charged with governance.
– For listed entities, a confirmation that the auditors have complied with ethical standards and appropriate safeguards
12 have been put in place for any ethical threats identified.

2018 - Mar, Jun

16(c) Describe assignments the internal audit department of Raspberry Co could carry out.
Value for money review – The IAD could be asked to assess whether Raspberry Co is obtaining value for money in areas
such as capital expenditure.
 Review of financial/operational controls – The IAD could undertake reviews of controls at head office and the power
station and make recommendations to management over such areas as the purchasing process as well as the payroll
cycle.

Monitoring asset levels – The IAD could undertake physical verification of property, plant and equipment (PPE) at the
production site and head office and compare the assets seen to the PPE register. There is likely to be a significant level of
PPE and the asset register must be kept up to date to ensure continuous production. If significant negative differences
occur, this may be due to theft or fraud.

Regulatory compliance – Raspberry Co produces electricity and operates a power station, hence it will be subject to a
large number of laws and regulations such as health and safety and environmental legislation. The IAD could help to
monitor compliance with these regulations.

IT system reviews – Raspberry Co is likely to have a relatively complex computer system linking production data to head
office.

The IAD could be asked to perform a review over the computer environment and controls.

Cash controls – Raspberry Co’s internal auditors could undertake controls testing over cash payments. 70% of
employees are paid in cash rather than bank transfer, therefore on a weekly basis cash held is likely to be significant,
therefore the cash controls in payroll should be tested to reduce the level of errors.

Fraud investigations – The IAD can be asked to investigate any specific cases of suspected fraud as well as review the
controls in place to prevent/detect fraud.

(b) Areas to be included in the audit strategy document

The audit strategy sets out the scope, timing and direction of the audit and helps the development of the audit plan. ISA
300 Planning an Audit of Financial Statements sets out areas which should be considered and documented as part of the
audit strategy document and are as follows:

Main characteristics of the engagement

The audit strategy should consider the main characteristics of the engagement, which define its scope. For
Prancer Construction Co, the following are examples of things which should be included:
– Whether the financial information to be audited has been prepared in accordance with the relevant financial reporting
framework.
– Whether computer-assisted audit techniques will be used and the effect of IT on audit procedures.
– The availability of key personnel at Prancer Construction Co.
Reporting objectives, timing and nature of communication
It should ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of
the communications required, such as:
– The audit timetable for reporting including the timing of interim and final stages.
– Organisation of meetings with Prancer Construction Co’s management to discuss any audit issues arising.
– Any discussions with management regarding the reports to be issued.
– The timings of the audit team meetings and review of work performed.

Significant factors affecting the audit

The strategy should consider the factors which, in the auditor’s professional judgement, are significant in directing
Prancer Construction Co’s audit team’s efforts, such as:
– The determination of materiality for the audit.
– The need to maintain a questioning mind and to exercise professional scepticism in gathering and evaluating audit
evidence.
Preliminary engagement activities and knowledge from previous engagements
It should consider the results of preliminary audit planning activities and, where applicable, whether knowledge gained on
other engagements for Prancer Construction Co is relevant, such as:
 – Results of any tests over the effectiveness of internal controls.
– Evidence of management’s commitment to the design, implementation and maintenance of sound internal controls.
– Volume of transactions, which may determine whether it is more efficient for the audit team to rely on internal controls.
– Significant business developments affecting Prancer Construction Co, such as the improvement in building practices
and construction quality.

Nature, timing and extent of resources

The audit strategy should ascertain the nature, timing and extent of resources necessary to perform the audit, such as:
– The selection of the audit team with experience of this type of industry.
– Assignment of audit work to the team members.
– Setting the audit budget.

18 (a) Steps in undertaking a positive receivables circularisation for Dashing Co

The following steps should be undertaken in carrying out a positive receivables circularisation:
– Obtain consent from the finance director of Dashing Co in advance of undertaking the circularisation.
– Obtain a list of trade receivables at the year end, cast this and agree it to the sales ledger control account total.
– Select a sample from the receivables list ensuring that a number of nil, old, credit and large balances are selected.
– Circularisation letters should be prepared on Dashing Co’s letterhead paper, requesting a confirmation of the year-end
receivables balance, and for replies to be sent directly to the audit team using a pre-paid envelope.
– The finance director of Dashing Co should be requested to sign all the letters prior to them being sent out by a member
of the audit team.
– Where no response is received, follow this up with another letter or a phone call and where necessary alternative
procedures should be performed
– When replies are received, they should be reconciled to Dashing Co’s receivables records, any differences such as
cash or goods in transit should be investigated further.

2017 MJ
a) Audit risk and the components of audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially
misstated. Audit risk is a function of two main components, being the risk of material misstatement and detection risk.
Risk of material misstatement is made up of a further two components, inherent risk and control risk.

1 Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement which could be material, either individually or when aggregated with other misstatements, before
consideration of any related controls.

2 Control risk is the risk that a misstatement which could occur in an assertion about a class of transaction, account balance
or disclosure and which could be material, either individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by the entity’s internal control.

3 Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will
not detect a misstatement which exists and which could be material, either individually or when aggregated with other
misstatements. Detection risk is affected by sampling and non-sampling risk.
AUDIT PLANNING
2020 - Dec, Sep
1) Explain the benefits of audit planning

1
2
3

5
6
AUDIT PLANNING
2020 - Dec, Sep
1) Explain the benefits of audit planning
Audit planning is addressed by ISA 300 Planning an Audit of Financial
Statements. It states that adequate planning benefits the audit of financial statements in several ways:
- Helping the auditor to devote appropriate attention to important areas of the audit.
- Helping the auditor to identify and resolve potential problems on a timely basis.
- Helping the auditor to properly organise and manage the audit engagement so that it is performed in an
effective and efficient manner.
- Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks and the proper assignment of work to them.
- Facilitating the direction and supervision of engagement team members and the review of their work.
- Assisting, where applicable, in coordination of work done by experts.
AUDIT PLANNING
2019 - Mar, June - (d) Corporate governance weaknesses and recommendation2019 - Mar, June - (d) Corporate governance weaknesses and recommendations
The fact Weakness Recommendation
The finance director is a The audit committee should be made up entirely of The audit committee must be comprised of independent NEDs
member of the audit independent NEDs. only; therefore the finance director should resign from the
committee. committee.
The role of the committee is to maintain objectivity with
regards to financial reporting; this is difficult if the
finance director is a member of the committee as the
finance director will be responsible for the preparation of
the financial statements
The remuneration for No director should be involved in setting their own There should be a fair and transparent policy in place for
directors is set by the finance remuneration as this may result in excessive levels of setting remuneration levels. The NEDs should form a
director. pay being set. remuneration committee to decide on the remuneration of the
executives. The board as a whole should decide on the pay of
the NEDs
Executive remuneration Remuneration should motivate the directors to focus on The remuneration of executives should be restructured to
includes a significant annual the long-term growth of the business, however, annual include a significant proportion based on long-term company
profit related bonus. targets can encourage short-term strategies rather than performance. For example, executives could be granted share
maximising shareholder wealth. options, as this would encourage focus on the longer term
position.
The chairman has sole This is a role which the board as a whole should All members of the board should be involved in ensuring that
responsibility for liaising with undertake. satisfactory dialogue takes place with shareholders, for
the shareholders and example, all should attend meetings with shareholders such as
answering any of their the annual general meeting.
questions.
The board should state in the annual report the steps they have
taken to ensure that the members of the board, and in
particular the non-executive directors, develop an
understanding of the views of major shareholders about the
GOING CONCERN
(d) Going concern procedures
1 – Obtain the company’s cash flow forecast and review the cash in and outflows. Assess the
assumptions for reasonableness and discuss the findings with management to understand if
the company will have sufficient cash flows.
2 – Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.
3 – Evaluate management’s plans for future actions, including their contingency plans in
relation to ongoing financing and plans for generating revenue, and consider the feasibility of
4 these plans.
– Review the company’s post year-end sales and order book to assess if the levels of trade
are likely to increase and if the revenue figures in the cash flow forecast are reasonable.
5 – Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.
6 – Review any bank correspondence to assess the likelihood of the bank renewing the
7 overdraft facility.
– Review post year-end correspondence with suppliers to identify if any have threatened
legal action or any others have refused to supply goods.
8 – Obtain a written representation confirming the directors’ view that Marlin Co is a going
9 concern.
– Inspect any contracts or correspondence with suppliers to confirm supply of the company’s
specialist equipment. If no new supplier has been confirmed, discuss with management their
plans to ensure the company can continue to meet customer demand.
10 – Enquire of the lawyers of Marlin Co as to the existence of any litigation.
11 – Perform audit tests in relation to subsequent events to identify any items which might
indicate or mitigate the risk of going concern not being appropriate.
12 – Review the post year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.
13 – Review post year-end management accounts to assess if in line with cash flow forecast.
14 – Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial
15 – Considerstatements.
whether the going concern basis is appropriate for the preparation of the financial
16 statements.
– Obtain a written representation confirming the directors’ view that Marlin Co is a going
concern.
2019 - Sep, Dec
(c) Going concern indicators
Marlin Co has paid some of its suppliers considerably later than usual and only after many
reminders; hence some of them have withdrawn credit terms meaning the company must
pay cash on delivery. This suggests that the company was struggling to meet their liability as
they fell due and will also put significant additional pressure on the company’s cash flow,
because the company will have to pay for goods on delivery but is likely to have to wait for
cash from its receivables due to credit terms.
Marlin Co’s main supplier who provides over 60% of the company’s specialist equipment has
just stopped trading. If the equipment is highly specialised, there is a risk that Marlin Co may
not be able to obtain these products from other suppliers which would impact on the
company’s ability to trade. More likely, there are other suppliers available but they may be
more expensive or may not offer favourable credit terms which will increase the outflows of
Marlin Co and worsen the cash flow position.
Marlin Co’s overdraft has grown significantly during the year and is due for renewal within the
next month. If the bank does not renew the overdraft and the company is unable to obtain
alternative finance, then it may not be able to continue to meet its liabilities as they fall due,
especially if suppliers continue to demand cash on delivery, and the company may not be
able to continue to trade. In order to conserve cash, Marlin Co has decided not to pay a final
dividend for the year ended 30 April 20X5. This may result in shareholders losing faith in the
company and they may attempt to sell their shares; in addition, they are highly unlikely to
invest further equity, and Marlin Co may need to raise finance to repay their overdraft.
AUDIT REPORT
I) Make provision, Wrong recording non-tangible asset instead of expenses
This is material matter
If the directors refuse to make a provision -> should issue a modified opinion on the
grounds that there is a material misstatement of profit and liabilities. As this is material
but not pervasive a qualified opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion
paragraph.
This would explain the material misstatement in relation to the non-recognition of the
provision and the effect on the financial statements. The opinion paragraph would be
qualified ‘except for’.

II) Disclosure

Adequate disclosure
If Purrfect Co adequately discloses the issue, then an unmodified audit opinion should
be given but the auditor’s report should include an emphasis of matter paragraph. This
would draw attention to the disclosure in the financial statements by cross-referencing
the user to the note in the financial statements which discloses the possible claims,
emphasising that the audit opinion is unmodified.

Inadequate disclosure
If there is no disclosure in the financial statements or the disclosure is considered to be
inadequate, then this indicates that the financial statements are materially misstated.
As this lack of adequate disclosure is likely to be material but not pervasive, then a
qualified opinion will be given. A basis for qualified opinion paragraph will be added to
the auditor’s report discussing the matter and the opinion paragraph will be modified
to state that ‘except for’ the failure to adequately disclose the matter, the financial
statements give a true and fair view.

2020 - Dec, Sep

d) Impact on Auditor’s report - Restructuring provision
The restructuring provision of $2.1 million includes $270,000 of costs which do not
meet the criteria for inclusion as per IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. Hence by including this amount the provision and expenses for this
year are overstated and profits understated.
The error is material as it represents 2.3% of total equity and liabilities/ total assets
(0·27m/11.6m) and hence the finance director should adjust the financial statements
by removing this cost from the provision and instead expensing it to profit or loss as it
is incurred. The argument that the provision is judgemental and has been deemed
reasonable by the board is not valid. IAS 37 has strict criteria for what can and cannot
be included within a restructuring provision. For example, training costs for existing
staff must be specifically excluded.

If the finance director refuses to amend this error the audit opinion will be modified
due to a material misstatement. As management has not complied with IAS 37 and the
error is material but not pervasive, a qualified opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph
and would explain the material misstatement in relation to the incorrect treatment of
the restructuring provision and the effect on the financial statements. The opinion
paragraph would be qualified ‘except for’

2020 - Mar, Jun

(d) Issue and impact on auditor’s report - Contamination event
According to IAS 37, the possibility of additional claims should be disclosed as a
contingent liability as it is possible but not probable and quantifiable.
 As the claims may be significant, this issue represents a matter which is fundamental
to users’ understanding of the financial statements. The impact on the auditor’s report
depends on whether this matter is deemed to be adequately disclosed in the financial
statements.

Adequate disclosure
If Purrfect Co adequately discloses the issue, then an unmodified audit opinion should
be given but the auditor’s report should include an emphasis of matter paragraph. This
would draw attention to the disclosure in the financial statements by cross-referencing
the user to the note in the financial statements which discloses the possible claims,
emphasising that the audit opinion is unmodified.

Inadequate disclosure
If there is no disclosure in the financial statements or the disclosure is considered to be
inadequate, then this indicates that the financial statements are materially misstated.
As this lack of adequate disclosure is likely to be material but not pervasive, then a
qualified opinion will be given. A basis for qualified opinion paragraph will be added to
the auditor’s report discussing the matter and the opinion paragraph will be modified
to state that ‘except for’ the failure to adequately disclose the matter, the financial
statements give a true and fair view.

2020 - Mar, Jun

d) Auditor’s report - Breach regulation
The breaches in regulations and the initial investigation into the breaches occurred
before the year end. The announcement by the authorities that they are taking legal
action provides further evidence regarding these conditions which existed at the year
end date therefore IAS 10 Events after the Reporting Period would classify this as an
adjusting subsequent event. As it seems probable that the fine will be payable, a
provision must be included rather than merely the disclosure. Failure to make such a
provision will cause profits to be overstated and provisions to be understated.

The potential fine of $850,000 (17 x $50,000) is 16% ($850k/$5.3m) of profit before tax
and 2.1% ($850k/$40.1m) of total assets. It is therefore material.

If the directors refuse to make a provision, then Velo & Co should issue a modified
opinion on the grounds that there is a material misstatement of profit and liabilities. As
this is material but not pervasive a qualified opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph.
This would explain the material misstatement in relation to the non-recognition of the
provision and the effect on the financial statements. The opinion paragraph would be
qualified ‘except for’.

2018 - Sep, Dec

(d) Discuss the issue and describe the impact on the auditor’s report of
Jasmine Co of adequate AND inadequate going concern disclosure.
As the outcome regarding the negotiations for the overdraft facility renewal will not be
known at the time of signing the auditor’s report, there is a material uncertainty which
may cast significant doubt on the company’s ability to continue as a going concern.
The impact on the auditor’s report depends on whether this uncertainty is deemed to
be adequately disclosed in the financial statements.

Disclosure adequate
 If the disclosures are adequate, then the auditor’s report will need to include a
material uncertainty related to going concern section. The section will state that the
audit opinion is not modified, indicate that there is a material uncertainty and will cross
reference to the disclosure note made by management. It would be included after the
opinion and basis for opinion paragraph.
Disclosure inadequate
If the disclosures made by management are not adequate, the audit opinion will need
to be modified as there is a material misstatement relating to inadequate disclosure.
The failure to adequately disclose is likely to be material but not pervasive due to the
ongoing nature of the negotiations and so a qualified opinion will be issued.
The opinion paragraph will state that ‘except for’ the failure to adequately disclose the
uncertainty, the financial statements give a true and fair view. The report will contain a
basis for opinion paragraph, subsequent to the opinion paragraph, explaining that a
material uncertainty exists and that the financial statements do not adequately
disclose this matter.

2018 - Mar, Jun

(d) Impact on auditor’s report - R&D expenses
One of the new health and beauty products Gooseberry Co has developed in the year
does not meet the recognition criteria under IAS 38 Intangible Assets for capitalisation
but has been included within intangible assets. This is contrary to IAS 38, as if the
criteria are not met, then this project is research expenditure and should be expensed
to theerror
The statement of profit
is material as itor loss rather
represents thanofcapitalised.
6·9% profit before tax (0·44m/6·4m) and 1·2%
of net assets (0·44m/37·2m) and hence management should adjust the financial
statements by removing this amount from intangible assets and charging it to the
statement of profit or loss instead. IAS 38 requires costs to date to be expensed; if the
project meets the recognition criteria in 20X9, then only from that point can any new
costs incurred be capitalised. Any costs already expensed cannot be written back to
assets.
If management refuses to amend this error, then the auditor’s opinion will need to be
modified. As management has not complied with IAS 38 and the error is material but
not pervasive, then a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed after the opinion paragraph
and would explain the material misstatement in relation to the incorrect treatment of
research and development and the effect on the financial statements. The opinion
paragraph would be qualified ‘except for’.

2017 SD
(d) Impact
The company on auditor’s
has includedreport - Redundancy
a redundancy provisionprovision
of $110,000 in the draft financial
statements, however, audit fieldwork testing has confirmed that the provision should
actually be $305,000. The provision is understated and profit before tax overstated if
the finance director does not amend the financial statements.

The provision included is $110,000, it should be $305,000 hence an adjustment of

$195,000 is required which represents 7·5% of profit before tax (195/2,600) or 1·1% of
total assets (195/18,000) and hence is a material matter.
If management does not adjust the redundancy provision, the auditor’s report will need
to be modified. As provisions are understated and profit overstated, there is a material
misstatement, which is not pervasive. Therefore, a qualified opinion would be
necessary, stating that the opinion is qualified ‘except for’. A basis for qualified opinion
paragraph would also need to be included subsequent to the opinion paragraph. This
would explain the material misstatement in relation to the redundancy provision and
the effect on the financial statements.

Specimen - Impact of misstatement on auditor's report

Dicuss with the management of Vieri why they are refusing to make the amendment to
WIP. Assesss the materiality of the error, if immaterial, it should be added to the
schedule of unadjusted differences. The audit should then assess whether this erros
results in the total of unadjusted differences becoming material; if so, this should be
discussed with management; if not, there would be no impact on the audit report
If the erros is material and management refused to amend the fianancial statement,
the the audit report will need to be modified. It is unlikely that any error would be
perasive as although WIP in total is material, it would not have a pervasive effect on
the financial statement as a whole. As management has not complied with IAS 2
Inventories and if the error is material but not pervasive, the a qualified opinion would
be necessary. The opinion paragraph would be qualiied "exept for".
As basis for qualified opinion paragraph would need to be included after the opinion
paragraph. This would explain the material misstatement in realtion to the valuation of
WIP and the effect on the FS
 AUDIT REPORT
nses
Case 1: Audit issue -> disagreement with customer
Materiality and NOT Pervasive
=> QUALIFIED OPINION (Except… for)

Case 2: Audit issue -> disagreement with customer

Materiality and Pervasive
=> ADVERSE

Case 3: Audit issue -> Limitation on scope

Materiality and NOT Pervasive
=> QUALIFIED OPINION (Except… for)

Audit issue -> Limitation on scope

Materiality and Pervasive
Case 4: => DISCLAIMER
2019 - MAR, JUN - (D) SUBSEQUENT EVENT Subsequent even
A flood has occurred at the off-site warehouse and property, plant and equipment and
inventory valued at $0·7 million have been damaged and now have no scrap value. The
directors do not believe they are likely to be able to claim on the company’s insurance for the
damaged assets. This event occurred after the reporting period and is not an event which
provides evidence of a condition at the year end and so this is a non-adjusting event.

The damaged assets of $0·7 million are material as they represent 10·9% ($0·7m/$6·4m) of
profit before tax and 3·0% ($0·7m/$23·2m) of total assets. As a material non-adjusting event,
the assets do not need to be written down to zero in this financial year. However, the directors
should consider including a disclosure note detailing the flood and the value of assets impacted.
The following audit procedures should be applied to form a conclusion on any
amendment:
1 – Obtain a schedule showing the damaged property, plant and equipment and agree the net
book value to the non-current assets register to confirm the total value of affected assets.
2 – Obtain a schedule of the water damaged inventory, visit the off-site warehouse and physically
inspect the impacted inventory. Confirm the quantity of goods present in the warehouse to the
schedule; agree the original cost to pre year-end production costs.
3 – Review the condition of other PPE and inventory to confirm all damaged assets identified.
4 – Review the damaged property, plant and equipment and inventory and discuss with
management
– Discuss withthe basis for thewhy
management zero scrap
they do value assessment.
not believe that they are able to claim on their
5 insurance; if a claim were to be made, then only uninsured losses would require disclosure, and
this may be an immaterial amount.
6 – Discuss with management whether they will disclose the effect of the flood, as a non-
adjusting event, in the year-end financial statements.

SAFEGUARDS
2020 - Dec,
• Both Sep:
Hart Co Khi
and kiểm toán choshould
its competitor 2 khách hàng làthat
be notified đốiMorph
thủ của nhau
& Co would be acting as
1 auditors for each company and consent should be obtained from management of each
company.
• Morph & Co should consider advising one or both clients to seek additional independent
2 advice.
• Morph & Co must ensure it appoints separate engagement teams, with different engagement
3 partners and team members to each client; once an employee has worked on one audit, such as
Hart Co, then they should be prevented from being on the audit of the competitor for a period of
time.
4 • Adequate procedures should be in place within the firm to prevent access to information, for
example,
• Morph &strict physical
Co must separation
set out of both teams,
clear guidelines confidential
for members and
of each secure datateam
engagement filing.
on issues of
5 security and confidentiality. These guidelines could be included within the audit engagement
letters sent to each client.
6 • Morph & Co should consider the use of confidentiality agreements signed by all members of
the engagement teams of Hart Co and the competitor.
7 • Work performed should be reviewed by an appropriate reviewer who is not involved in the
audit to assess whether key judgements and conclusions are appropriate.
8 • Regular monitoring of the application of the above safeguards should be undertaken by a
senior individual in Morph & Co not involved in either audit.
equent event
2017 MJ 2017 MJ
(c) Ethical threats and safeguards
The fact (i) Ethical threat (ii) Possible safeguard

The engagement partner should discuss the timing of the audit with the
finance director to understand if the audit can commence earlier, so as to
ensure adequate time for the team to gather evidence.
This may create an intimidation threat on the team as
The finance director is keen to report Hurling
they may feel under pressure to cut corners and not If this is not possible, the partner should politely inform the finance director
Co’s financial results earlier than normal and
raise issues in order to satisfy the deadlines and this that the team will undertake the audit in accordance with all relevant ISAs
has asked if the audit can be completed in a
could compromise the objectivity of the audit team and and quality control procedures. Therefore the audit is unlikely to be
shorter time frame.
quality of audit performed. completed earlier.

If any residual concerns remain or the intimidation threat continues, then

Caving & Co may need to consider resigning from the engagement.

Caving & Co is able to assist Hurling Co in that they can undertake roles
A non-executive director (NED) of Hurling Co such as reviewing a shortlist of candidates and reviewing qualifications and
has just resigned and the directors have This represents a self-interest threat as the audit firm suitability.
asked whether the partners of Caving & Co cannot undertake the recruitment of members of the
can assist them in recruiting to fill this board of Hurling Co, especially a NED who will have a However, the firm must ensure that they are not seen to undertake
vacancy. key role in overseeing the audit process and audit firm. management decisions and so must not seek out candidates for the position
or make the final decision on who is appointed.
This represents a familiarity threat as the partner will
The engagement quality control reviewer As Hurling Co is a listed company, then the previous audit engagement
have been associated with Hurling Co for a long period
(EQCR) assigned to Hurling Co was until last partner should not be involved in the audit for at least a period of two years.
of time and so may not retain professional scepticism
year the audit engagement partner. An alternative EQCR should be appointed instead.
and objectivity

Caving & Co should assess whether audit, recruitment and taxation fees
would represent more than 15% of gross practice income for two consecutive
years.

There is a potential self-interest or intimidation threat If the recurring fees are likely to exceed 15% of annual practice income this
as the total fees could represent a significant year, additional consideration should be given as to whether the recruitment
Caving & Co provides taxation services, the
proportion of Caving & Co’s income and the firm could and taxation services should be undertaken by the firm.
audit engagement and possibly services
become overly reliant on Hurling Co, resulting in the
related to the recruitment of the NED.
firm being less challenging or objective due to fear of In addition, if the fees do exceed 15%, then this should be disclosed to those
losing such a significant client. charged with governance at Hurling Co.

If the firm retains all work, it should arrange for a pre-issuance (before the
audit opinion is issued) or post-issuance (after the opinion has been issued)
review to be undertaken by an external accountant or by a regulatory body.

Contingent fees give rise to a self-interest threat and

The finance director has suggested that the Caving & Co will not be able to accept contingent fees and should
are prohibited under ACCA’s Code of Ethics and
audit fee is based on the profit before tax of communicate to those charged with governance at Hurling Co that the
Conduct. If the audit fee is based on profit, the team
Hurling Co which constitutes a contingent fee. external audit fee needs to be based on the time spent and levels of skill and
may be inclined to ignore audit adjustments which
experience of the required audit team members
could lead to a reduction in profit.

A self-interest threat can arise if the fees remain Caving & Co should discuss with those charged with governance the reasons
At today’s date, 20% of last year’s audit fee is outstanding, as Caving & Co may feel pressure to why the final 20% of last year’s fee has not been paid.
still outstanding and was due for payment agree to certain accounting adjustments in order to
three months ago. have the previous year and this year’s audit fee paid. They should agree a revised payment schedule which will result in the fees
being settled before much more work is performed for the current year audit.
In addition, outstanding fees could be perceived as a
loan to a client which is strictly prohibited.