ACCA F8 - Audit and Assurance Revision Kit 2016

(b)
(i)
Audit risk
The firm has recently been appointed as
auditor. There is a lack of cumulative
knowledge and understanding of the
business, which may result in a failure to
identify events and transactions which impact
on the financial statements. Furthermore,
opening balances may be misstated.
The directors only work part time at Sleeptight
and there is no finance director. This may
promote a weak control environment,
resulting in undetected errors or frauds.
The requirement for customers to pay 40% on
ordering and the remainder following delivery
could result in revenue recorded before it
should be, if the deposit is recorded as a sale
and not deferred until delivery. This would
result in revenue being overstated.
Alternatively, revenue could be understated if
the final payment were only recognised when
it is received, rather than on delivery of the
bed.
The two year guarantee on the beds gives rise
to a provision, the measurement of which
involves a high degree judgement, and
therefore carries a risk of misstatement. This
risk is increased by the fact the loan
covenants are profit-related and there is an
incentive to manipulate areas of the financial
statements based on judgements.
Contractors are required to invoice at the end
of each month but often there is delay in
receiving these. There is therefore a risk the
company will not accrue for costs, resulting in
incomplete liabilities and understatement of
expenses.
The current year raw materials costs for
materials also in inventory last year are based
on prices at least a year old. They should be
based on the actual cost or reasonable
average cost. Given that prices fluctuate the
value of year end raw materials may be over
or undervalued due to price rises/decreases
occurring during the year.
Response(s)
Adopt procedures to ensure opening balances are
properly brought forward and corresponding amounts
are correctly classified and disclosed.
Review previous auditor's working papers and consider
performing additional substantive procedures on opening
balances.
The controls will need to be documented and evaluated.
If these are weak the level of substantive testing will need
to be increased accordingly.
Enquire of management the point at which revenue is
actually recognised, and review the system of accounting
for deposits to ensure they are not included in revenue
until goods delivered and signed for.
For a sample of transactions within 8 weeks of the year
end, ensure the revenue recorded is only in respect of
beds delivered to customers in the same period and
ensure they have been signed for.
Establish the basis of the amount provided for and
assumptions made by the financial controller.
Re-perform any calculations and establish the level of
warranty costs in the year, and compare with the
previous provision.
Review the level of repair costs incurred post year-end
and use these to assess the reasonableness of the
provision.
Review invoices and payments to contractors after the
year end, and if they relate to work undertaken before the
year end, ensure they are included as accruals.
For a sample of materials to include the cost of wood,
compare material costs to actual prices on invoices.
Investigate and resolve any significant differences and
evaluate the potential impact on the inventory value in the
financial statements.
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