ACCA F8 - Audit and Assurance Revision Kit 2016

Audit risk
The finished goods value is to be estimated by
Anna Jones, who appears to be basing her
estimate on order value rather that applying
the IAS 2 rule that goods should be valued at
the lower of cost and NRV. This could result
in inventory being overstated in the financial
statements.
The new workshop is undergoing
refurbishment that could result in
inappropriate treatment of capital or non
capital items, potentially misstating noncurrent
assets, or repair costs in the
statement of profit or loss. Again, 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.
The new premises purchase was funded by a
bank loan which may not be classified
correctly between current and non-current
liabilities, or may not be properly presented or
disclosed as required by IFRSs.
There is a risk the company may fail to
comply with the loan covenants, resulting in
the loan being recalled. This could then
possibly lead to going concern issues.
Response(s)
For beds awaiting despatch, establish the lower of cost
and NRV and compare with the figures provided by Anna
Jones. Investigate any differences evaluate the potential
impact on the inventory value in the financial statements.
Obtain a breakdown of the related costs and establish
which are included as non-current assets and which are
treated as repair costs. Review the nature of items
included in non-current assets to ensure only capital
items included and review repairs to ensure no capital
items are included.
Reperform the calculation of the split between current
and non-current liabilities and ensure the loan is properly
presented and terms are disclosed as required by IFRSs.
Obtain and review (or re-perform) covenant calculations
to identify any breaches. If there are any, the likelihood of
the bank demanding repayment will need to be assessed,
along with the potential impact on the company. The
need to avoid breaching the covenants reinforces the
audit team's need to maintain professional scepticism in
areas that could be manipulated.
(Note: Only eight risks and eight related responses were needed to gain 16 marks.)
(c)
(ii)
ISA 501 Audit evidence – specific considerations for selected items sets out the responsibilities of
auditors in relation to the physical inventory count. It states that where inventory is material, auditors
shall obtain sufficient appropriate audit evidence regarding its existence and condition by attending
the physical inventory count.
At the count attendance, Mills & Co will need to evaluate management's instructions and procedures
for recording and controlling the result of the physical inventory count.
They must also observe the performance of the count procedures to assess whether they are
properly carried out.
In addition Mills & Co should inspect the inventory to verify that it exists and look for evidence of
damaged or obsolete inventory. They will also perform test counts to assess the accuracy of the
counts carried out by the company.
Mills & Co are also required by ISA 501 to perform audit procedures over the entity's final inventory
records to determine whether they accurately reflect the count results.
Procedures in relation to property valuation and related disclosures
Obtain a copy of the valuer's report and consider the reliability of the valuation after taking account of:
The basis of valuation
Independence/objectivity
Answers 81