1.
2.
3.
4.
5.
6.
7.
8.
Audit risk
Auditor will be unaware of accounting
policies andf estimates used to prepare
financial statement. There might be risk
that comprehensive audit will not be
conducted leading to increase detection
risk .
Directors are getting bonuses on the base
of profit brfore tax so there is risk that
directors will serve for their ownself and
manipulates the figures of profit hense
leading to overstated profit .
According to IFRS15 revenue should only
be recognized with performance
obligation is met . by taking 25% amount
at the time of contract management has
overstated revenue and profit .
Calculation of work-in-progress is based on
estimates and estimates are based on
management judgement. Thre might be
risk that management judgment will be
biased , leading to overstated inventory .
Management is restricting the audit team
to attend only five work-in-progress
counts . There is risk that inventory may
be damaged and may not exist in other
work-in-progress counts . This will leads to
overstated inventory .
According to IAS37 without significant
differences in consturctons techniques and
level of claims finance director will not
reduce the warranty provision . There is
risk that management is reducing the
warranty provision to understated
provision and expenses and overstated
profits.
According to IAS38 research expenditure
should be expensed out and development
expenditure should be capitalized if sector
is met. There is risk that management will
not correctly classify the research and
development expenditure, leading to
overstated intangible assets anf profit.
According to IAS38 amortization should be
recorded but there might be risk that
management will not record amortization.
This will leads to understated expenses
Auditor Response
The audit team should geather detail knowledge of
business and audit team should comproise of
senior auditor with industry average experience.
Review the minutes of remuneration committee
meetings to ensure that bonuses based on profit
brfore tax are approved and recalculate the
bonuses to ensure accuracy.
Discuss the matter with management and obtain
the reason behind of this treatmnnet and Sujest
appropriate adjusting entries .
The audit team should discuss the matter with
management to confirm that estimate is
reasonable and Review the inventory count sheet
to confitm the units taken for the Calculation of
work-in-progress.
The audit team should discuss the matter with
finance director to attend other work-in-progress
counts to ensure existence and obtain break basis
schedule ,cast and compare it with financial
statements to confirm accuracy.
The audit team should discuss the matter with
finance director that without significant
differences in consturctons techniques and level of
claims they are reducing the warranty provisions
and ensure underlying assumption of warranty
provision is reasonable.
The audit team should obtain and review the large
sample of supporting documents to ensure that
management has correctly classify the the
research and development expenditure and
review different independent reports to ensure
that development expenditure will only be
capitalized when sector is met.
The audit team should with the management to
ensure that amortization policy is reasonable and
compare the amortizations residual value, usifull
life and rates with industry averages ro confirm its
and overstated intangible assets and
profits.
reasonableness.
Benefits of audit planning:
1. Audit planning helps the auditor to pay attention to problematic and crucial areas of audit.
2. Audit planning helps the auditor to properly organize the audit engagement so that it can be
work in an efficient and effective manner.
3. Audit planning helps the auditor to identify and include competent and skilled audit
engagement partners in the team.
4. Audit planning helps the auditor to identify and resolve problems relating to crucial and
importants areas of the audit.
5. Audit planning helps to enhance the direction and supervision of engagement team.
Deficiencies
Control recommendations
1.
Key controls
1. Using sequentially numbered key cards
which contains employees number and
name helps the business to ensure that
only bona fide or real employees can
clock-in and clock-out and helps to prevent
business from fake or bogus employees .
this will leads to prevent increase in
payroll cost because of fake employees.
2. Recording data by human resource
supervisor on regular basis reduces the
risk of manipulation in the records and
regular up-dates of records both prevent
increase in payroll cost.
Test of controls
Obtain large sample of employees and Review
their sequentially numbered key cards to ensure
that they contain employees number and name
sequence checks and use test data to ensure its
accuracy.