Tutorial 3 Audit Risk & Auditor's Response

Tutorial 3 (Add-on)

Undertake detailed cut-off testing of purchases of goods at the YE.

Increase samples of (which document ?) before and after the YE to ensure that cut-off is complete.

Auditor's Response

Goods in transit for up to three weeks.

Cut-off risk - inventory, purchases and payables may be under/overstated.

Audit Risk 1

Multiple Choice

Which document for purchases cut-off testing?

• Purchase orders

• GDNs

• GRNs

• Purchase invoices

Tutorial 3 (Add-on)

Obtain a breakdown of the $1.3 expenditure to verify that it relates to the development of the new products.

Discuss the accounting treatment with the finance director to ensure in accordance with IAS38.

Auditor's Response

Incurred expenditure of $1.3 million in developing a new range of cleaning products. Under IAS 38 Intangible Assets, research costs to be ? to ? and development costs to be ? to ?.
Risk the IA could be ? and expenses ? if incorrectly classified research costs as development expenditure.

Audit Risk 2

Multiple Choice

Under IAS 38 Intangible Assets, the standard requires research costs to be ? to ? and development costs to be ? to ?.

• expensed to SPL

  capitalised to SFP

• capitalised to SFP

  expensed to SPL

Multiple Choice

Risk the IA could be ? and expenses ? if incorrectly classified research costs as development expenditure.

• understated

  overstated

• overstated

  understated

Tutorial 3 (Add-on)

Obtain a breakdown of the $0.9 expenditure to confirm the amount of training costs included in NCA.

Discuss the accounting treatment and necessary adjustment with the finance director to ensure in accordance with IAS38.

Auditor's Response

Invested $0.9 million in a complex piece of plant and machinery. The costs include purchase price, installation and training costs.
Training costs are ? under IAS 16 to be capitalised. Therefore plant and machinery and profits are ?.

Audit Risk 3

Multiple Choice

PPE costs include purchase price, installation and training costs.
Training costs are ? under IAS 16 to be capitalised. Therefore plant and machinery and profits are ?

• permitted

  understated

• permitted

  overstated

• not permitted

  understated

• not permitted

  overstated

Tutorial 3 (Add-on)

Throughout the audit, the team will need to be alert to this risk
and maintain ?.

Detailed review and testing on judgemental decisions such as provisions.

Auditor's Response

The bonus scheme for senior management and directors changed to the value of YE total assets.
Risk that management might be motivated to overstate the value of assets through judgements or the use of releasing provisions or capitalisation policy.

Audit Risk 4

Multiple Choice

Throughout the audit, the team will need to be alert to the risk in judgmental area and maintain ?.

• Professional skepticism

• Professional competence and due care

• Professional behaviour