Audit Risk and Response (4)

Question 1

Audit risk (irrecoverable)

Answer 1

An increased risk of irrecoverable debts

Question 2

Examples of irrecoverable audit risk?

Answer 2

Due to nature of client’s industry or customers, resulting in assets being potentially overstated

Question 3

Auditor’s response to irrecoverable risk (balance)

Answer 3

Identify year end receivable balance still outstanding at date of the audit by reviewing post year end receipts from customers. Find where outstanding amonuts are provided for

Question 4

Auditor’s response to irrecoverable risk (aged receivables)

Answer 4

Review aged receivables analysis and customer correspondence files for evidence of disputes with receivables and consider adequacy of related receivables allowance

Question 5

Audit risk (client borrowing)

Answer 5

Significant client borrowing and/or overdraft with cash flow problems, may indicate going concern problems

Question 6

Auditor’s response to client borrowing risk (correspondence)

Answer 6

Review correspondence with bank/lender for any evidence of withdrawal or extension of facilities

Question 7

Auditor’s response to client borrowing risk (review)

Answer 7

If there are any bank covenants linked to performance on which facilities depend, review compliance with these

Question 8

Auditor’s response to client borrowing risk (testing)

Answer 8

Increase testing on areas where management could manipulate performance indicators (e.g. provisions)

Question 9

Auditor’s response to client borrowing risk (forecast)

Answer 9

Review post year end results and cash flow forecasts for evidence the company can continue as a going concern