Tutorial 4A Flashcards
What is the audit risk when performing a first-time audit, and what is the auditor’s response?
- higher detection risk due to unfamiliarity with the client
- opening balance may be misstated since prior audit work is unavailable
AUDITOR RESPONSE:
- gain full understanding of the client’s operations
- perform more substantive testing (e.g. larger samples)
- agree opening balances to prior year financials and confirm with the previous auditor
What is the audit risk when a company operates in a fast-changing tech market, and what is the auditor’s response?
- risk of inventory obsolescence and overstatement
- net realisable value (NRV) may fall below cost
AUDITOR RESPONSE:
- review aged inventory reports
- evaluate reasonableness of inventory provisions
- discuss adequacy of allowance for obsolete stock with management
What is the audit risk when a company relies heavily on one major customer, and what is the auditor’s response?
- going concern risk if the customer is lost
- financial dependency may not be disclosed adequately
AUDITOR RESPONSE:
- design procedures to assess going concern
- review client contracts and correspondence for risks
- apply analytical procedures to evaluate the impact of losing the client
What risk arises from importing key components from overseas suppliers, and what is the auditor’s response?
- risk of supply chain disruption, which could affect production and inventory valuation
- cut-off errors or understatement of liabilities if goods in transit aren’t properly recorded
AUDITOR RESPONSE:
- review purchase and inventory records for goods in transit
- Confirm liability recognition and cut-off procedures for imported goods
What is the audit risk associated with a high balance of WIP, and what is the auditor’s response?
- WIP may be complex to value and subject to management estimation
- potential for overstatement of assets
AUDITOR RESPONSE:
- review cost build-up (materials, labour, overheads)
- perform physical verification and compare to production records
- Assess the reasonableness of assumptions used in WIP valuation
What risks are associated with capitalising development costs for software/apps, and what is the auditor’s response?
- risk of incorrect capitalisation (e.g. research phase expensed, development capitalised)
- risk of impairment if product fails or is delayed
AUDITOR RESPONSE:
- assess compliance with accounting standards (e.g. IAS 38)
- review cost breakdown and project documentation
- evaluate the recoverability of capitalised amounts
What is the risk when there’s a delay in product launch after development spend, and what is the auditor’s response?
- increased risk of impairment if the products will not generate expected economic benefits
- possible disclosure omission around delays and uncertainties
AUDITOR RESPONSE:
- discuss delays with management
- assess whether an impairment review is required
- Confirm appropriate disclosure of the delay and impact
What audit risk is associated with a company preparing for a stock exchange listing, and what is the auditor’s response?
- incentive to manipulate earnings or overstate financial health to attract investors
- pressure on management increases risk of bias
AUDITOR RESPONSE:
- increase professional scepticism
- focus on revenue recognition, provisions and related-party transactions
- review prospects or listing documents if applicable
What audit risks arise in rapidly changing tech markets and what is the auditor’s response?
- obsolescence of goods
- NRV falling below cost
- overstatement of inventory
RESPONSE:
- review aged inventory
- compare NRV allowance
- discuss adequacy of allowance with management
Why is having a single client represent 70% of revenue a risk, and what is the auditor’s response?
- over-reliance on one client
- going concern risk if client lost
- possibly inadequate disclosures
RESPONSE:
- design procedures to assess going concern
- review contracts and correspondence
- Perform analytical procedures on the potential impact
What audit risks are related to listing on the London Stock Exchange and what is the auditor’s response?
- incentives to window-dress accounts
- overstatement of assets and profits
- understatement of liabilities
RESPONSE:
- increase professional scepticism
- test estimates and judgements carefully
- Focus on cut-off testing for sales
What went wrong in the Carillion scandal relevant to auditors?
- accumulation of £7b debt
- management failures and poor transparency
- auditors failed to detect red flags
What business risks did KPMG overlook in auditing Carillion?
- illusory expansion by acquisitions
- excessive public/private contracts
- misleading dividends
- misuse of the Supply Chain Finance Scheme
What signs should raise red flags for going concern issues in a company, and what is the auditor’s response?
- declining profit margins
- high receivables vs. sales
- dependency on delayed or problematic contracts
- rapid expansion causing control issues
AUDITOR RESPONSE:
- perform detailed going concern analysis
- review management forecasts and plans
- assess ability to continue operations for 12 months
What business risks may suggest poor auditor performance or failure to flag issues, and what is the auditor’s reponse?
- illusions of growth making debt
- unsustainable dividend policies
- use of schemes to hide liabilities
- ignoring signs os financial distress
AUDITOR RESPONSE:
- maintain independence
- flag red flags early to management and those charged with governance
- avoid overreliance on management assertions
