ACCA F8 - Audit and Assurance Revision Kit 2016

(b)
Audit risks and responses
Audit risk
Six planes have been ordered pre year end and it
appears as though they may be delivered close to the
year end. On average they are $3.33m each and there is
a risk the assets and/or related liabilities are recorded
in the wrong period, understating or overstating noncurrent
assets.
The company has spent $15m on refurbishing aircraft.
In order to classify this expenditure correctly (as either
capital or revenue) accounting knowledge and
judgement is required. Management at Donald may
have classified the expenditure incorrectly either
overstating or understating profit in the statement of
profit or loss as a result.
Donald Co has capital commitments to fulfil having
already ordered the planes, but has not yet secured
funding because the bank loan of $25m has not been
approved. This could cause going concern problems if
the funding is refused.
Some of Donald’s customers (the travel agents) are
struggling to pay the amounts they owe to the
company. This could result in irrecoverable debts not
being written off and doubtful debts not being provided
for. As a result the receivables balance and profit in the
financial statements may be overstated
Donald Co is making staff redundant as a result of the
closure of their call centre which occurred pre-year
end. There is a risk a redundancy provision has not
been set up for staff not paid before the year end as
required by IAS 37 provisions, contingent liabilities and
contingent assets. Profits may be overstated and
provisions understated.
Response to risk
Due to the monetary value of each aircraft all
aircraft should be inspected and matched to those
included in the Donald’s accounting records. This
will immediately highlight any planes recorded not
received (ie those that don’t exist at the year end
date). It could also help to identify an asset
received but not recorded.
An analysis of the refurbishment costs should be
reviewed and traced to invoices. The invoice
descriptions and supporting documents should be
reviewed to assess the nature of the expenditure.
Once established as either capital or revenue it
should be traced to the general ledger and the
financial statements to ensure it has been
classified correctly as an asset or repairs.
Inquiries should be made as to the status of the
loan application and progress in securing the
funding should be monitored. A detailed going
concern review is required.
The detailed aged receivables analysis should be
discussed with management and a value for a
provision estimated for any potentially
irrecoverable or doubtful debts. The review of
amounts received by customers in respect of year
end debts should be extended as far as possible.
The auditor needs to establish the full redundancy
cost through discussion with management and
should corroborate to supporting evidence where
necessary. The calculated redundancy cost should
be compared to the actual provision included in
the financial statements to ensure it is reasonable.
Top tips: Only five risks and five responses were needed to gain full marks, but other valid risks and
responses are set out below.
Audit risk
Donald Co’s website has consistently encountered
difficulties with recording sales. This could result in
sales of income recorded in the financial statements
being incomplete.
Tickets have been sold twice and some customers will
require refunds. There is a risk that the tickets to be
refunded have not been removed from sales.
Response to risk
Controls testing over the sales cycle should be
increased to assess the extent of any potential
understatement of revenue. Detailed testing
should be performed over the completeness of
income.
The cut-off treatment of customer refunds should
be reviewed around the year end to ensure that
sales to be refunded are not included in the
revenue figure in the financial statements.
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