ACCA F8 - Audit and Assurance Revision Kit 2016

Audit risk
Due to Sunflower conducting numerous inventory
counts simultaneously on 31 December it may not
be possible to attend all counts. As a result there is a
risk sufficient appropriate audit evidence may not be
gained over inventory in the financial statements.
Sunflower’s inventory valuation policy is selling price
less average profit margin. Although IAS 2
Inventories allows this as an inventory valuation
method it is only permitted if it proves a close
approximation to cost. If this is not the case,
inventory could be under or overvalued.
Transfer of opening balances to head office may not
have been performed completely and accurately. If
the opening balances are misstated, for some
statement of financial position accounts (such as
non-current assets) the closing balances may also
be misstated.
The increased workload for the finance department
has forced the financial controller to leave and his
replacement will not start until late December.
The increased workload increases the risk of staff
making errors. In addition the new financial
controller’s lack of experience of Sunflower’s
systems and accounting records may mean he or
she is more likely to produce financial statements
with misstatements or incorrect disclosures. In
addition audit queries may be less likely to be
resolved.
Response
A sample of sites should be visited with those
holding material inventory, including the warehouse,
prioritised. Supermarkets with a history of inventory
count issues should also be visited.
Valuation testing should include a comparison of the
cost of inventory with the selling price less margin to
assess if the method used does result in a close
approximation to cost. The actual NRV (rather than
anticipated selling price) for some items should be
tested to ensure it does not fall below recorded
values.
Enquire of management how the data was
transferred, what controls were in place and which
procedures were performed to confirm the transfer
was complete and accurate. Review the journal(s)
made to transfer the opening balances and compare
with the prior year financial statements to ensure
they were as expected.
Sample sizes and the level of substantive procedures
may need to be increased in light of the increased
inherent risk of overworked staff and an
inexperienced financial controller.
A request that the finance director be available to
answer audit questions should be made in
anticipation that the new financial controller may not
be able to resolve audit issues relating to events
during the year. The audit team should remain alert
to the possibility of errors.
Note. Only five risks and five related responses were required.
(c)
Factors to be considered before establishing an internal audit department
Before establishing an internal audit department the finance director would consider:
(i) The costs of establishing an internal audit department
These are likely to be significant and should be weighted against the benefits and future cost savings.
(ii) The size and complexity of Sunflower
As Sunflower has numerous supermarkets, a central warehouse and a head office, its size and
complexity could benefit from an IA department.
(iii) The effectiveness of the current control environment and past experience of control deficiencies
The less effective the controls in the organisation, the greater the need for an internal audit
department.
(iv) The role of the proposed internal audit department
The finance director needs to establish the nature of the assignments to be carried out by internal
audit. These could be compliance based reviews, control reviews, or observing controls and test
counting at the inventory counts.
238 Mock exam 2: answers