Audit Risk
Sitia Sparkle’s goods are usually in transit for up
to three weeks.
This may cause a risk in cutoff as inventory may
take long to be recorded upon reception causing
possible understatement of inventory
The company has incurred $1.3m of expenditure
on developing a new range of cleaning products
to be launched in the market in August 20X5.
This expenditure would have to be correctly
classified as capital expenditure in accordance
with IAS 38, otherwise there would be a possible
understatement of assets
The bonus scheme for senior management has
been changed, basing it on the year-end total
assets’ value.
Audit Response
For a sample of goods in transit, perform detailed
cutoff testing to ensure that goods are recorded
on the period they’re received
Obtain a detailed breakdown of expenditure
costs and inspect to confirm that they were
classified correctly.
While conducting the audit, the team may need
to be alert of potentially fraudulent incidents
concerning the recording and calculation of
assets in the year’s end.
This could cause management to manipulate the
value of the assets in a bid to overstate their
value due to pressure to increase their bonus.
Due to workload on the finance team, a number
of control account reconciliations were not
performed, including the bank reconciliation.
This implies that errors in the recording and
valuation of cash were not detected, leading to
possible over or understatement of bank and
cash.
The $0.9m investment included the purchase
price, installation and training costs.
Training costs are supposed to be written as
incurred instead of capitalized, otherwise this
leads to overstatement of assets and
understatement of expenses.
On previous years, an allowance for receivables
was maintained at 1% of receivables, but
management felt this was unnecessary, and has
credited the opening balance to the profit and
loss account.
This implies that bad debts are not being reduced
due to the exclusion of the allowance, which
including the crediting of the opening balance,
The audit team would maintain professional
skepticism while conducting the audit of bank
and cash and be alert to any errors in the
recording and valuation of bank and cash.
Discuss with management the rules for classifying
capital and revenue expenditures in accordance
with IAS 16.
Enquire the rationale from management the
rationale for removing the allowance for
receivables and crediting it to profit or loss
account.
could understate bad debts and overstate
income.