Audit risk Risk response

Refund provision Agree the goods return option within the 28 days
The company has the return policy under which in the company’s stated policy.
goods can be returned within the 28 days of the Discuss with the management that whether
purchases. IFRS states that revenue shall be refund provision is made, also discuss with the
recognized when the performing obligation met basis to ensure the assumptions are reliable.
and in case of return option, there should be Review the post year end sales return and
refund provision. There is a risk that the revenue determine whether the refund provision made is
may be immediately recognized as a result reasonable.
revenue would be overstated and the liability
provision would be understated
Warranty provision Discussion should be held with the director on
The company provides six months warranty to the quality of the product, also review any quality
repair the defected product and the warranty control report to assess the improved quality.
provision should be based on the reliable Discuss the basis of warranty provision and
assumptions since it is the judgmental exercise. ensure assumptions are reliable review the post
There is a risk that warranty provision was year end warranty claims and ensure the
deliberately reduced by the director based on the warranty provision at year end is reasonable, if
high quality product and profit may be overstated not then request the management to increase it.
and provision would be understated
Purchase-cutoff Contract with the supplier should be review to
The company purchases the appliances from the verify the responsibility of goods when it is in
supplier in Asia and it takes around a month to transit from the point of dispatch.
receive the appliance. Purchases and payable are The audit team should undertake the detailed
recorded when the risk and reward transferred to cutoff testing by inspecting the shipment
the company which is at the point of shipment in document, confirm the date of the dispatch and
this case. There is a risk that at the year-end 31 agree that purchases are recorded at the same
august 20x5 and thus due to the wrong cutoff date
purchase and payables may be understated.
Year-end inventory count The audit team should visit all the branches to
The company is carrying out the year-end attend the inventory count; if not possible to
inventory count and 20 branches should be attend all, consider to visit the major branches
visited by the audit team to attend the inventory where the large amount of inventory is stored.
count. During the attending of the inventory count,
There is a risk not all the branches would be observe the process and ensure it is in line with
visited by the audit team and thus the sufficient the instruction, perform the test of controls
and appropriate audit evidences may not be there.
obtained, detection risk could arise leaving the For the branches not visited, obtain their records
doubt over the valuation of inventory and adjustments and analyze whether inventory
figure may relied upon.
Allowance for receivables Discussion with the finance director should be
The receivable collection period has increase held to discuss about the assumptions of not
from the target of 42 days to the 55 days in increasing the allowance and ensure they are
actual. The allowance for the receivable should reliable.
be increased. Compare the allowance over the past year and
The finance director believe that there is no need review the post year end payment received for
to increase the allowance, he might be confident the customer (if any) and agree it with the year-
that all the would be pay on time and the end receivables
assumptions is not appropriate and thus
receivables would overstated.
Fraud The audit should be sceptical and to be alert all
The payable ledger supervisor had diverted the the time for other kinds of frauds.
funds form the company’s bank account using Discussion should be held with the management
the using a fictitious supplier, this was expensed. to identify their process to detect the fraud and
There is a risk that there may be some other respond.
frauds which also should have been expensed, if Obtain the profit/loss and agree all the frauds
not, then profit may be overstated. identified were written-off
Training cost The audit team should agree the cost of training
The company had purchased and installed the with the supporting document, discussion should
new automated dispatch system and included in be held with the management about the
PPE along with the cost of training 0.1m which is rationale of capitalizing the training amount.
not allowed to be capitalized under the ias-16, it Request the management to de-recognize this
should be charged as an expense. from the NCA and charge as an expense in the
Since it is capitalized and thus assets and profit profit/loss; also review the correcting entry.
are overstated
Bank overdraft Discussion should be held with the management
The company is depending on the bank overdraft about any other alternate source from where
which the company already exceeded its limit funds would be arranged in case of denial from
and there is no surety whether it will be provided the bank to give more overdraft to the company.
or not as decision will be made in nov 20x5, if the Obtain and read the notes to the accounts to
overdraft facility would not be renewed then ensure all the disclosures have been made in
there may be cash flow problems, hence going relation to material uncertainty over going
concern issues and material uncertainty related concern
to going concern should be disclosed in the
notes. There is a risk of non-disclosure and hence
notes to the account may be incomplete.