KnS School of Business Studies

ACCA F8 (Audit & Assurance)

AUDIT RISK – For Scenario based questions June 2018

Practical Points that affect Audit Risks

1. Incurred revenue & capital expenditure during the year OR increase in capital expenditure
during the year. OR
2. Increase in subsequent expenditure during the year.

RISKS: There is a risk of incorrect classification between revenue and capital expenditure
resulting in both PPE and profit being understated and over stated

3. Increase in research & development cost (IAS 38)/Expenditure on Brands during the year
eg Costs capitalized as development costs

RISKS: There is a risk of incorrect classification between research and development

expenditure resulting in both I.A and profit being understated and over stated

4. Various provisions made during the year e.g. Provision for lawsuit / warranty or
restructuring
RISK: There is a risk that because of wrong estimates (both intention & unintentional) the
provision could be both overvalued or undervalued

5. There are pending cases against the company OR new cases imposed during the year
RISK: There is a risk of completeness of provisions of inadequate or no disclosure in the
F/S as per IAS 37

6. Imposition of new laws & regulations on the company

RISK: There is a risk of penalty not being recorded in the F/S or risk of incorrect
disclosure in the F/S

7. Inadequate Internal controls/SOP’s / or lack of controls in Sales or Purchase department

RISK: There is a risk of controls not being effective leading to overall ROMM in the F/S
or sales & purchases being overstated or understated

8. During the year employees were made redundant e.g. Branch office was closed
RISK: There is a risk that because of wrong estimates (both intention & unintentional) the
provision could be both overvalued or undervalued

9. There are various locations for inventory counting at B/S date = 100% verification of
inventory at all locations might not be possible by the external auditor.

Prepared by: M.Sajid Kapadia (ACA, FCCA, APFA)

KnS School of Business Studies
ACCA F8 (Audit & Assurance)
AUDIT RISK – For Scenario based questions June 2018
RISK: There is a risk that auditor will not be able to obtain SAAE on the existence and
completeness of inventory locations not visited

10. Bank Loan obtained for 5 / 10 years

RISK: There is a risk of incorrect classification between current and long term portion of
long term loan & risk of incorrect disclosure of security provided against bank loan in the
F/S.

11. Bank loan has loan covenants attached plus the company is facing cash flow problems or
faces liquidity issues.
12. RISK: There is a risk that if these loan covenants are breached and the loan becomes
repayable immediately than the company will face going concern risk.

13. Interest cost increased during the year because of increase in bank loan.
RISK: There is a risk that interest costs will be understated to manipulate profits especially
if there are profit based bonuses for senior management.

14. Assets/Inventory ordered/procured with no certainty that they will be received at the
yearend or not.
RISK: There is a risk of inaccurate cutoff leading to stock and payables both being
overstated at the B/S date.

15. Introduction of new accounting software during the period and run in parallel during the
year
RISK: There is risk of data being lost & balances being misstated if they have not been
transferred completely and accurately.

16. Senior management joins the organization with different prior experience
RISK:

17. Hiring of unqualified/incompetent staff

RISK:

18. Revaluation of assets during the year (treatment of IAS 16)

RISK:

Prepared by: M.Sajid Kapadia (ACA, FCCA, APFA)

KnS School of Business Studies
ACCA F8 (Audit & Assurance)
AUDIT RISK – For Scenario based questions June 2018
19. Doubtful product being manufactured or its expected that new law being imposed will
stop sales of the product

RISK: There is risk of going concern plus if stock is not written down than profit will be
overstated.

20. Top Management/Senior Management from the finance dept. has left the Company very
close to the balance sheet date.
RISK: There is a risk of increased work load for the finance team resulting in control risks
for the external auditor.

21. Default of major customer/receivable during the year OR

22. Receivables balances is increasing over the year as compared to last year
RISK: There is a risk that if receivables are not recoverable and adequate provisioning is
not done than debtors will be overvalued

23. Out of court settlement with the customers / suppliers

RISK: There is risk that resulting provision or liability will be over or under valued.

24. In the case of W.I.P, there is a risk of understatement & overstatement.

25. Excess inventory & fixed assets in the warehouse.

RISK: There is risk of Increased theft & misappropriation of assets resulting in loss of
sundry income
26. First year of audit or it’s a new audit Client
RISK: There is a risk of not detecting the errors in the F/S being the first year resulting in
detection risk being increased.
27. Proper disclosures as per I.F.R.S or local laws not being made in the F/S
RISK: There is a risk of incorrect or inadequate disclosures in the F/S.

28. Sales related bonus being offered to employees.

RISK: There is a risk of sales and debtors being overstated in the F/S by inaccurate cutoff
of sales.
29. Subsequent fraud discovered by senior management after leaving the organization
RISK: There is a risk that if fraud is not adjusted in the F/S that will be overall ROMM in
the F/S

Prepared by: M.Sajid Kapadia (ACA, FCCA, APFA)

KnS School of Business Studies
ACCA F8 (Audit & Assurance)
AUDIT RISK – For Scenario based questions June 2018
30. Risk of improper/ incorrect classification between current and non-current assets, current
and non-current liabilities.
31. Disposal of fixed assets during the year
RISK: There is a risk of wrong calculation of profit on disposal leading to profit being
over and understated.

32. Abnormal gain / loss on disposal of fixed assets during the year.
RISK: There is a risk of unreasonable depreciation policy (accounting estimate) leading to
both P.P.E and profit being under or overstated.

33. Wrong classification in the balance sheet between owned & rented assets of the company.
RISK: There is risk that if rented assets are classified as owned assets than assets will be
overvalued and profit will be overstated

34. Sudden conversion of accumulated losses into profits in the current year.
RISK: There is a risk of admin expenses being understated and profits being overstated.

35. Management bonus is linked on the total assets of the company.

RISK: There is a risk that management will manipulate assets of the company via
estimates and provisions and will lead to assets being overvalued in order to increase their
personnel bonus

36. Management bonus is linked on the profits of the company

RISK: There is a risk that management will manipulate profits of the company via
estimates and provisions and will lead to profits being overstated in order to increase their
personnel bonus.

37. Intangible assets (Patent, Franchise etc.)

RISK: There is a risk that if treatment is not made as per IAS 38 than both I.Asset & profit
will be over or under stated

38. Inventory counting is being done before or after the B/S date-
RISK: There is a risk of inaccurate adjustments resulting in closing stock being
over/under valued in perpetual inventory system.

39. Sudden decrease in Admin expenses without any change in company’s operations.
RISK: There is a risk of profit being overstated.

40. Stock returned after the B/S date being damaged or expired

Prepared by: M.Sajid Kapadia (ACA, FCCA, APFA)

KnS School of Business Studies
ACCA F8 (Audit & Assurance)
AUDIT RISK – For Scenario based questions June 2018
RISK: There is a risk that if inventory is not valued as per IAS 2 then closing stock would
be overvalued.

41. Company has Intangible assets under IAS 38 (Patent, license, Franchise etc.)
RISK: There is a risk that if treatment is not done as per IAS 38 than both Intangible
assets and profits could be over/under stated.
42. Useful life of assets or depreciation rates have been reassessed or reviewed by
management.
RISK: There is a risk that this has been done to manipulate profits or achieve some kind
of profit targets resulting in profit and PPE being overstated.

43. Contingent assets as per IAS 37 should only be recorded when virtually certain.
RISK: There is a risk that assets are not virtually certain and are recorded resulting in
assets being overvalued.

44. Inventory is destroyed by the fire / flood before the B/S Date
RISK: There is a risk that inventory is damaged and not valued as per IAS 2 resulting in
closing stock being overvalued.

45. Closing stock balance has increased as compared to last year.

RISK: There is a risk that stock is old fashioned / or out of demand and not being sold
resulting in its NRV being lower than cost and if not adjusted as per IAS 2 will result in
closing stock being overvalued.

46. The client is requesting to complete the audit early quickly than last year.
RISK: This will result in detection risk for the external auditor plus there will be less time
for the finance team to prepare the financial statements leading to errors in the A/c s and
increase our R.O.M.M.

47. Bank reconciliation are not made on timely basis.

RISK: There is a risk that differences will not be reconciled resulting in the risk of bank
balances being over /under stated.

48. Physical stock is not reconciled with General ledger or book records.
RISK: There is a risk that closing stock could be over/under valued.

49. If physical cash is not reconciled with General ledger (Cash Book cash column)
RISK: There is a risk that cash balance would be over / under valued.

50. New technology has been introduced by the company because of which the old & existing
P & M have been impaired.

Prepared by: M.Sajid Kapadia (ACA, FCCA, APFA)

KnS School of Business Studies
ACCA F8 (Audit & Assurance)
AUDIT RISK – For Scenario based questions June 2018
RISK: There is a risk that if impairment testing is not done as per IAS 36 than both P & M
and profits will be overstated.

51. Sales ledger and creditors ledger were closed 10 days after the B/S date
RISK: There is a risk of incorrect cutoff in both sales and purchases leading to overstated
sales and debtors as well as purchases and payables.

52. Creditors turnover in days have reduced as compared to last year.

RISK: There is a risk of trade payables being undervalued.

Prepared by: M.Sajid Kapadia (ACA, FCCA, APFA)