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.