ACCA F8 - Audit and Assurance Revision Kit 2016

The following factors may increase control risk:
– Changes in key personnel such as the departure of key management
– A lack of personnel with appropriate accounting skills
– Deficiencies in internal control
– Changes in the IT environment
– Installation of significant new IT systems related to financial reporting
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably
low level will not detect a misstatement that exists and that could be material, either individually or when
aggregated with other misstatements.
Detection risk is affected by sampling and non-sampling risk. Factors which may result in an increase
include:
– Poor planning
– Inappropriate assignment of personnel to the engagement team
– Failing to apply professional scepticism
– Inadequate supervision and review of the audit work performed
– Incorrect sample sizes
– Incorrect sampling techniques performed
(Note: Only one example of a factor increasing the relevant risk was needed for each component.)
(b)
Audit risks and responses
Audit risk
Abraham's finance director intends to capitalise the
$2·2 million of development expenditure incurred.
This material amount should only be capitalised if
the related product can generate future profits as set
out in IAS 38 Intangible Assets. There is a risk at
least some of the expenditure does not meet the
criteria. This will mean assets and profits are
overstated.
At the year end it is anticipated that there will be
significant levels of work in progress, likely to
constitute a material balance. The pharmaceuticals
production process is likely to be complex and the
audit team may not be sufficiently qualified to assess
the quantity and value of work in progress. Therefore
they be unable to gain sufficient evidence over a
material area of the financial statements.
Abrahams use standard costing to value inventory
and under IAS 2 Inventories the standard cost
method may be used for convenience, but only if the
results approximate actual cost. However, standard
costs have not been updated since the product was
first manufactured, leading to a risk that standard
costs are out of date. If they are, this could mean
inventory is over or under valued in the statement of
financial position.
Response
An analysis showing developments costs in relation
to each product should be obtained and reviewed.
Testing should be carried out to ensure the technical
and commercial feasibility of each product and
where it can't be proven that future economic
benefits will result from the product developed, the
related costs should be expensed.
Nate & Co should assess their ability to gain the
required level of evidence and if it is not sufficient,
they should approach an independent expert to value
the work in progress. This should be arranged after
obtaining consent from Abrahams' management and
in time for the year-end inventory count.
Standard costs used for inventory valuation should
be compared to actual cost for an appropriate
sample of inventory items. Any significant variations
should be discussed with management to gain
evidence that the valuation is reasonable and
inventory is fairly stated.
Answers 87