Audit Risk
A new accounting system was implemented via
direct changeover prior to implementation . They
did not consider it necessary to undertake further
testing after implementation .
There is a risk of the closing balance of previous
system and opening balance of new system may
not be equal .
Peach co has commenced developing a new
production process on 1 november 20X4 and total
amount of capitalized was $0.8 m .
If the research expense has been capitalized then
there is a risk of overstatement of intangible asset
and understatement of research expense.
Peach co believes he can sell the remaining
inventories to an international customer at a price
marginally exceeds cost but will have to pay all
cost relating to delivery and shipping of the drinks.
If the NRV is lower then the cost then the
inventory may be overvalued .
Peach co replaced two machinery items in its
production and There were significant involved
cost involved in preparing the sites for the new
machinery. . According to IAS16 the direct
attributable cost must be capitalized. But in the
scenario the staff cost involved in preparing sites
were included in wages and salary expense which
leads to overstatement of salary and wage and
understatement of asset.
Despite the old machinery being sold at loss and
the director of Peach co extended the useful life of
plant and machinery . There is a risk of
understatement of depreciation expense and
overstatement of plant and machinery as useful
life has been extended by an average 5 years .
A number of finance team were dismissed for
fraudulently purchasing non current asset for
personal use. There is a risk that non current
assets may be overstated.
Peach co previous supplier has launched a legal
claim against him for breach of contract . peach
co’s lawyer have indicated that it is likely lose the
case . There is a risk of provision liability being
Auditor’s Response
The auditor should test the opening balance of
new system to closing balance of previous system .
The auditor should discuss with the management
about the policy or standard used for capitalization
. The auditor may advice to capitalize the
development cost in accordance with IAS 38.
The auditor should assess the customer list of
international market to determine the sale and
selling price of inventory.
The auditor should discuss with the management
about the accounting treatment applied and
should suggest that the directly attributable cost
must be capitalized as a part of property plant and
equipment.
The auditor should discuss with the management
about the increase in useful life of plant and
machinery and should review for its
reasonableness . The auditor should compare the
useful life of plant and machine with the average
of the industry.
The auditor should discuss with the management
how they have identified the fraud and whether
any procedure are applied to further adjustment .
The audit team should review the existence of non
current asset . The auditor should maintain
alertness and professional skepticism
The audit team should review the contract . The
auditor should discuss with the lawyer about
likelihood of losing the case and may suggest to
create provision liability .
understated if not created accurately or
recognized a liability.
b.
apricot and co responsibilities in relation to prevention and detection of fraud.
1. the auditor should review the financial statement whether they are made in accordance with
applicable standards.
2. the auditor should maintain professional skepticism and alertness during audit.
3. the auditor should discuss with the management whether any fraud has been identified and what
additional procedures are implemented to prevent further frauds.
4 . the auditor should send experienced team where there is high risk of fraud.
5. the auditor can perform substantive analytical testing to find any material misstatement in financial
statement.
6. The auditor should discuss with the management about the internal control deficiencies and may
suggest safeguards.
C
Ethical threat
Ethical safeguards
Peach co has been an audit client of Apricot for the
last 15 years. There is a risk of familiarity threat
and self interest threat as the auditor would not
like to leave the long standing client and will be
bias during audit.
The auditor should maintain cooling period for 5
years if he has done auditing for cumulative 7
years. During cooling off period he should not be a
engagement team member or consult with the
engagement team or client or neither can provide
any professional services to that client.
The auditor should not accept the any gifts or
offers unless the value is trivial and
inconsequential . gifts and hospitality which are
The audit staff of apricot and the client staff of
peach co have always enjoyed a meal together at
the start of final audit but this year the MD has
suggested instead of meal they will be going away
on weekend to a lunch. This will create a risk of
self interest threat.
trivial and inconsequential but which intended to
influence the behavior of recipient should not be
accepted.
D
The substantive procedure the auditor should perform to obtain sufficient appropriate audit evidence in
relation to peach co development expenses.
1. obtain a breakdown of capitalized cost , cast for mathematically accuracy and agree to the amount
included in financial statements.
2. discuss with the project manager to evaluate it is in compliance to IAS 38.
3. review a breakdown of nature of cost capitalized to identify whether the research expense have been
incorrectly included. If so request the management to remove these and expense the research in SOPL.
4. inspect the board minutes for any discussion relating to intended sale or use of asset.
5. inspect the financial statement disclosure in draft financial statement to ensure compliance with IAS
38.