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Flashcards in Planning - Audit risks and procedures Deck (16)
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New client

Audit risks:
- Lack of prior knowledge.
- May easily in a failure to identify events and transactions which impact in the financial statements.

Read most recent FS + auditors report
- Review predecessors working papers
- Check B/F
- Consider performing substantive procedures on opening balances.

1

Going Concern

Audit risks:
Factors that indicate going concern risk:
- rapid expansion
- pending renewal of major contract
- increased borrowings
- dependence in an overdraft facility which may be withdrawn.

Procedures:
- Obtain a written statement from the managing director confirming that s/he believes the company to be a going concern.
- Review post-year end management accounts for performance after year end.
- Obtain cash flow forecasts for the next year to identify if debts can be paid.
- Perform sensitivity analysis ion forecast variables
- Inspect FS for disclosures
- Confirm the validity of assumptions
- Review current contract / covenant terms
- Discuss possible new sources of finance with MD

2

Revenue misstatement

Audit risks:
- Payments in advance and arrears may result in transactions being recognised in the wrong accounting periods.
- Cash sales are open to misappropriation and may not be recorded
- Refunds and credits may not be recorded correctly
- Online sales may not be recorded correctly in accounting system from website.

Procedures:
- Check a sample of contracts in effect at year end that revenue is recognised in the correct period.
- Recalculate deferred / accrued income & trace to FS
- Test control procedures around recording of sales made online
- Obtain copy of agreement to understand how revenue is generated.
- Review management's estimate of of revenue & assess reasonable?
- Compare actual revenue by country / product to forecasts and budgets and investigate significant differences.

3

Understated Liabilities

Audit risks:
- Failure to comply with regulations could result in fines which may not have been provided for.
- Loss of customer goodwill

Procedures:
- Inspection of correspondence with regulators and board minutes to identify compliance issues.
- Ascertain & evaluate procedures in place for ensuring compliance with regulations
- Insurance in place to offset liabilities.
- Inspect financial statements for appropriateness of disclosure.

4

Foreign Currency Translations

Audit risks:
- FX may not be translated at an appropriate rate resulting foreign source income or expenses being misstated in the FS

Procedures:
-Re-perform the translation calculation on a sample of transactions
- Compare the exchange rates to a reliable source e.g. Ft.com

5

Management bias & Doubts over management integrity

E.g. directors' incentive to overstate assets and profits and to understate costs and liabilities in order to maximise share price / satisfy loan covenants

- banks reliance on audited FS increases management's incentive for inflation.

Procedures:
- Specific attention to subjective areas e.g. provision, valuations
- Inspect board minutes for evidence of Conflicts of interest
- Second partner review
- compare forecasts to actual results
- Consider errors in terms of impact on ratios

6

Disclosure of related party transactions

Audit risk:
- may not be adequately disclosed in FS

Procedure:
- Inspect notes to FS to ensure adequate disclosure
- Obtain written representation from directors on completeness of disclosure.
- Enquire of management transactions that have occurred between related parties.

7

Weak control environment

Audit risk
- No finance director / temporary staff / new accounting system may be indicative of a weak control environment, resulting in undetected errors.

Procedure
- Document, evaluate and test internal controls and, if lacking or ineffective, perform full substantive procedures.

8

Tangible Assets & Depreciation

Audit risks:
- Assets may have been inappropriately capitalised or recorded I accurately
- Useful lives may not have been appropriately estimated
- Depreciation charge may not have been pro-rated.

Procedures:
- Trace sample of fixtures & fittings acquired to purchase invoices.
- Enquire of managements as to useful lives & consider if appropriate
- Physically inspect tangible assets.
- Recalculate depreciation charge / calculation for a sample of items
- Select a sample from the asset register and inspect the physical asset for existence and condition.

9

Inventory

Audit risks:
- Competition could mean NRV is lower than cost
- Certain inventory may be obsolete

Procedures
- Controls over counting procedures
- Attend year end stock count and observe effectiveness of controls
- Identify slow moving inventory and discuss with management
- Obtain copies of the last goods received and despatch records to perform cut-off testing.
- NRV below cost? Check by reviewing selling prices after reporting period.

10

Provisions

Audit risks:
- Provisions may be inadequate / overstated

Procedures:
- Compare to prior year provision
- Check reliability of prior year provision

11

Revaluation of Existing Premises

Audit risks:
- Revaluation may be misstated as judgment is involved & adjustments may not be accounted for correctly.

Procedures:
- Compare value to other similar properties in the locality
- Ensure depreciation based in revalued amount
- Inspect notes to financial statements to ensure appropriate disclosures
- Obtain a copy of the valuer's report and consider reliability
- Re-perform the calculation of the revaluation adjustments and ensure correct accounting treatments.

12

Classification of Loan

Audit risks:
Long-term loan may be classified incorrectly between current and non-current liabilities.

Procedures:
- Re-perform the calculation of the split between the current and non-current amounts.
- Inspect the financial statements to ensure outstanding amounts are properly classified.
- Agree amount received to bank statement / loan agreement.

13

Identify the key receipts and payments you would expect to be included in the cash flow forecasts.

Receipts:
- New loan should be sufficient to expand the business
- should take into account level of inflation / price increases
- Timing of receipts should reflect early payment discount / slow payers
- Proceeds from property sales should be considered in comparison to similar properties in the area
- Rebate should be calculated in accordance with contract terms

Payments:
- Supplier payments should reflect increased level of activity
- Purchase of PPE should be biased on quotes and supplier prices list
- Wages and salaries should include PAYE and NIC
- Corporation tax consistent with forecasts
- VAT payments consistent with purchases and sales in profit forecasts
- Finance costs in line with market rates
- Professional fees should include fees for selling agents, accountants and legal costs.

14

Overstated receivables

Can arise from:
- Disputes over invoicing
- Poor credit controls

Procedures:
- External confirmations of receivable balances
- Customer correspondence files for any disputes
- Reasons for overdue balances and likelihood of collecting debt
- Recalculate allowance for receivables.

15

Misstated payroll costs

Causes:
- Temporary staff
- bonuses

Procedures:
- Discuss with HR controls in place for temp. staff
- Bonuses and salary paid in line with contracts