March June 2024:

Eight audit risk and response to the risks:

Audit risk Auditor response
1. The audit team is planning for first An experienced and skilled staff should be
audit which will be for the year ending allocated to the risky areas of the FS and
31 July 20X5. As this the new client for auditor should be sceptical during the course of
the auditor hence there is a risk that audit.
auditor may not be able to get Circularise from the previous auditor about the
information about the client and the previous year closing data and review the last
opening balances. Also auditor may not year FS and match the data with the opening
identify the risky areas in financial balances of current year FS to ensure
statement. arithmetical accuracy.
2. Refurbishment costs of $14.2m were
recognised within property, plant and
equipment. There is a risk that the cost
has not been capitalised in accordance
with IAS-16 hence will lead to asset and
profit overstatement.
3. The refurbishment was partly financed Recalculate the current and non-current loans
by a loan of $10m, which is to be repaid to ensure the arithmetical accuracy.
in five annual instalments commencing
in September 20X5. There is risk that Review notes the financial statement to
loan may not be correctly classified as confirm that loan is adequately disclosed.
current and non-current loan, will lead
to misstatement in financial statement.
4. There is a risk that loan is not disclosed
adequately.
5. The advertising expenditure has been Discuss with management to reverse the
included within intangible assets and is transaction and repost it correctly as per IAS-
being amortised. Advertisement 38.
expenditures are revenue expenditures
as it does not confirm the amount of Recalculate the amortisation cost to ensure
inflow will be made through it. Hence that amortisation of advertisement cost is
the wrong classification of expense will removed.
lead to profit and asset overstatement.
6. As it is amortised meanwhile it should
not be done. In financial statement it
clearly seems that operating profit
margin of current year (7%) is lower
than the previous year (11%).
7. The project is expected to be Obtain the supporting document such as bank
completed in August 20X5 and Green payment and invoices to confirm the cost been
Co has incurred costs of $350,000 capitalised.
which are recognised within intangible Review the supporting documents as minutes
assets. There is a risk that it may not be record to ensure to ensure that the project
meeting the criteria of recognition meet criteria of capitalisation according to IAS-
according to IAS-38, hence will asset 38.
 and profits be overstated.
8. The company believes that the Review inventory card to ensure that the
damaged plants can still be sold but at damaged inventory is recorded at lower of cost
a reduced selling price. There is a risk and NRV.
that it may not be valued correctly
according to rule of lower of COST and
NRV, hence will lead to inventory
overstatement.
9. Aidan is planning to retire within the The auditor should be remain alert and
next year and is intending to sell his sceptical throughout the audit terms in
shares in the company. Revenue and assessing the risky areas.
gross profit seems higher as compare
to previous year, there is risk that they
are trying to decorate the financial
statements to make it attractive.
10. The increase in the receivables Obtain post year end cash receipts and
collection period is due to the absence receivable aged analysis to ensure the valuation
of the credit controller, who has been is correct.
on long-term sick leave since April The auditor should remain alert throughout the
20X5. As there is no experienced audit course.
person scene then to manage
receivable collection period, and also
receivable days are increased hence
there is a risk that the bad debts are
not recognised and the receivable are
overstated.

Responsibilities of auditor toward the FS:

 Responsible for the FS audit.
 Responsible for the assessing the assumptions made by the management.
 Responsible to ensure that going concern basis are made adequately.
 Responsible to ensure that FS is free from the errors and frauds.

THREE quality management deficiencies in the approach adopted by Teal &

Co and provide a recommendation:
Deficiencies Recommendation
The audit of intangible assets was reallocated An experience person should be allocated to
from the audit supervisor to a junior member the intangible asset area. Hence another
of the team who had never audited intangible auditor should be hired for the assessment of
assets before. The audit of each area should be intangible assets.
done by the expert in that area which will help
in risk reduction and appropriateness. Audit of
intangible is done by inexperienced person
which could arise to a risk that it may not be
 done accurately will rise to misstatement in
intangible asset area.
The audit supervisor was absent due to illness, The Teal & Co should send another senior
The audit assistants continued their work but partners and supervisors with the team to
no other senior team members were assigned ensure the audit course accordance with SAAE
to Green Co’s audit. Audit should be carried and proper sceptical attitude.
throughout the audit course by a senior partner
to maintain the plans according with strategies
and planning set for audit course. As there is no
supervisor to supervise the audit with
according’s, it may lead to several problems like
audit may not be completed in deadline of
audit, audit may be not done with the plan set
and mention the engagement letter, as they are
inexperience so they may not done audit with
sufficient and appropriate evidences will lead to
wrong review on the FS.
Previous audit was done by the auditor who Auditor should remain alert and sceptical
has no knowledge in retails. But this is the key during the course of audit and especially in the
point of appointment ethics to consider those opening balances.
clients only where auditor is competent with.
Hence there is a risk that previous audit may
not be on the basis of SAAE and the FS of
previous year may be not appropriate.

Significant deficiency:
The professional judgment whereby to assess what makes the
deficiency significant. In most cases when the auditor carry audit and assessing the internal control
system to configure and figuring out the deficiencies, he uses his professional judgement and flag
out the deficiency as significant.

Matter to be considered while assessing the significant deficiencies:

 The deficiency will be significant when it effect the reputation of company.

 The deficiency will be significant if it effects the reputation of SH.
 The deficiency will be significant if it opens way of misusing the resources of company.
 The deficiency around the key controls and policies will also be considered as significant.

Direct controls and TOC’s:

Direct controls Test of controls

Employee has card will sequential numbering Physically inspect that CCTV is working properly
which they use for in and out. This process is and also it is supervised by security staff.
supervised by security staff as well as CCTV
cameras. This a good stuff of control, there will
be control environment and there will no
employee using the card of another while
entering the work place or make attendance on
behalf of that employee.
Access to employees' standing data in the Ask a junior employee to access the standing
payroll system is restricted to payroll managers. data and the system should reject the access.
Standing data also called as master file which is Enter some dummy or weak passwords such as
very sensitive and holds very important data the name of client and entity and system
should only be allowed to access by the senior should deny the request.
responsible parties.
The senior payroll manager reviews the list of Review the copy sample of bank payments and
bank payments and agrees this to the payroll agree to the payroll records to ensure
records. If any discrepancies are noted, these arithmetical accuracy and authorised by the
are investigated by the senior payroll manager senior payroll manager before payment has
who then makes the required adjustment in the done.
payroll records. A senior responsible party
should review the payment list before payment
will make sure that the inconsistences will be
identified and adjusted on timely basis.

FIVE DEFICIENCIES AND RECOMMENDATIONS:

Deficiencies Recommendations
1. The classification of revenue and capital The classifications of revenue and capital
expenditures is made with reference to expenditures should be done accordance with
formal company policy established by IAS-16 set internationally.
the finance director. The classification
of expenditure through company own
formal policies set by the director of
finance will result in biasness and there
is a risk of non-compliance will result in
penalties and fines.
2. Members of the company’s internal Company should implement a robust electronic
audit department undertook a review documentation management system which will
of the lease agreements and ownership help in storage and organisation of important
documents but were unable to locate a documents.
number of the relevant documents. The
documents of leasing and ownership
should be kept as evidence if it is lost
will result in difficulties in verifying the
terms of lease and ownership rights will
lead to loss for the company.
3. The quality and quantities received are The quality and quantity of goods should be
 checked by a warehouse team member reviewed against the purchasing order
against the supplier's delivery note. The generated by the warehouse will give the
quantity and quality of goods checked accurate result of being ordered and get
against the supplier delivery note will received.
not identify the quality and quantity
been ordered in actual by the
warehouse.
4. The passwords of the standing data are There should be regular and frequent changes
changed on monthly basis. As the in passwords through automatic password
standing data is very sensitive hence generator to avoid risk of password leakage.
the passwords to access the standing
data should be changed frequently to
lower the gap will help in reduction of
chances of breaking passwords.
5. The payroll system automatically The payslip emailed to employee should be
calculates the gross and net pay along review and authorised by responsible person
with relevant statutory deductions and such as payroll supervisor to confirm that
produces pay slips which are arithmetical accuracy and inconsistencies
immediately emailed to employees. As identified and adjusted on timely basis.
the payslip is sent to the employee
immediately without a check and
balance by any responsible party, there
is a risk of automation error and also
there may be a wrong input
information entered which could lead
to loss for the company of loss of
employee goodwill.