J10 identify/explain audit risk identified at planning stage of audit of co [10m] Co supply 60% of goods to H at a significantly reduced SP Per

Per IAS 2 Inventory should stated at lower of cost & NRV as SP much lower for goods sold to H thus inventory may overvalued There is a risk NRV of some inventory items may be lower than costs hence inventory overvalued Recoverability of receivable balances as credit period extended Valuation of plant & equipment [large amount of P&E now redundant] Cut-off of purchase & inventory may not accurate [purchase made 6 months in advance/GIT up to 2 months] [account inventory when received] New inventory system introduced in the year this could result in inventory bal. being misstated Inventory may be overstated as co no longer has slow moving provision Provision/CL disclosure may not be complete Co has extended credit term to H from 1 to 4 months there is an increased risk as balances outstanding become older, that they may become irrecoverable Production facility has large amount of unused P&E per IAS 16 PPE & IAS 36 Impairment of A these should stated at lower of CV & recoverable amount which may be scrap value depending on its age & condition risk that PPE overvalued Co import goods GIT up to 2 months Co account for goods when received Thus at year end only goods received should be included in inventory balance and a respective payable bal. recognized

Co introduced perpetual inventory counting system in the year these will be used for recording inventory at year end If records & new system have not initially been set up correctly there is a risk year end bal. may not be fairly stated Previously co maintain inventory provision of 1% however this year decided to remove it Unless all slow moving/obsolete items are identified at year end & value adjusted there is a risk inventory overstated Cos FD left intend to sue for unfair dismissal however co does not make any provision/CL disclosure for sum due to FD IAS 37 if present obligation probable outflow of resources reliable estimate provision should be recognized If possible obligation or present obligation but not probable outflow cannot be measured reliably CL disclosed Financial controller replaced as temporary FD lack of experience might result in increased risk of errors arising in f/s In addition previous FD is not available to help finance/audit team

Inherent risk is higher due to changes in finance dept

D10/J13 calculate 5 ratios for both to assist in planning audit [5m] D10/J13 using info/ratios, explain audit risk that arise/describe appropriate response to these risks [10m] Audit risk Management manipulation of results (disappointed with previous result undertake strategies to improve) (directors need to reach a profit level to receive bonus) [risk mngt feel pressure manipulate through judgments taken/use of provision Receivable valuation (receivable days significantly extend credit term) * risk of recoverability of receivables as they may be overvalued] Inventory valuation (due to in demand some houses SP may be below cost per IAS 2 stated at lower) (inventory days turnover ) (change made to inventory valuation additional O/H included) [risk inventory is overvalued] Depreciation (extend useful lives resulting in depreciation) *IAS 16 UL are to be reviewed annually if genuinely increased change is reasonable [risk this reduction to achieve profit target P&M overvalued profit overstated] Misclassification of cost between COS & operating exp (GP OP movement is significant) [risk cost omitted included in operating rather than COS] Sales cut-off (generous sales-related bonus introduced) [risk error in sales cut-off employees aim to max. their bonus] Revenue growth (revenue 28% growth COS 10% growth this does not explain in gross margin) [risk sales may be overstated] Going concern risk (current/quick ratio cash bal ) + any other unfavorable (although all ratios above min. level this is still significant along with in OP/GP in payable days could be evidence of going concern difficulties) Completeness of warranty provision (any claim + reason provision should be adjusted ) [risk level of provision not adjusted provision may be understated] Response to risk Throughout the audit team need to be alert to this risk maintain professional scepticism Need to carefully review judgmental decisions compare treatment against prior years Obtain written representation from mngt to confirm basis of any significant judgment

Extended post year-end cash receipts testing a review of aged receivables ledger to be performed to assess valuation

Detailed cost & NRV testing to be performed aged inventory report to be reviewed to assess whether inventory require writing down Change in inventory policy will be discussed with mngt review of additional O/H ensure these are of a production nature

Discuss with directors the rationale for extending useful lives review how often these assets are replaced as this provides evidence of UL of assets

Classification of costs between COS & operating will be compared with prior year to ensure consistency Increased sales cut-off testing will be performed a review of post year-end sales returns as they may indicate cut-off errors

A detailed breakdown of sales will be obtained/discussed/tested to understand in sales

Detailed going concern testing to be performed during audit Discuss with mngt to ensure going concern basis is reasonable

Review level of warranty provision in light of increased level of claims to confirm completeness of provision