Audit Risk Auditor’s Response
Increased risk of irrecoverable debts - Inspect after-date cash receipts from
resulting in assets being overstated customers to see if paid post year-end,
proving the debt is appropriately valued.
Review the aged receivables analysis for old
debts that are irrecoverable and agree an
allowance with the management.
The client operates in a fast-paced industry. Examine the instructions to identify
slow-moving inventory lines during inventory
Increased risk of overstated inventory due to count.
getting obsolete or NRV of inventory being
less than cost Obtain an aged inventory listing for inventory
to review for old items.
Risk that recorded assets do not exist due to Focus on testing controls of those assets.
theft
Increase sample size for inspection of
recorded assets, including material assets.
Expenditure incurred may have been Review a breakdown of the costs and match
incorrectly capitalised or incorrectly with the receipts to determine the nature of
expensed as repairs. the costs.
Risk that that non-current assets are over or Review the asset register to ensure only
understated capital expenditure is included.
Agree repairs to expenses in the SOPL.
Management has an incentive to manipulate Increase the level of professional scepticism
performance. and be alert to risks.
Risk of overstated profits Increase testing on judgemental areas such
as revenue recognition policies.
Development costs not meeting the PIRATE Review of breakdown of the development
criteria are capitalised. expenditure and tested in detail to ensure that
only projects which meet the capitalisation
Risk of overstated intangible assets criteria are included as an intangible asset,
with the balance being expensed.
Material work in progress (WIP) inventory Percentage of completion should be
balance at the year-end. Determining the discussed with the management.
value and quantity of WIP is complex.
WIP calculation should be agreeing to the
Risk of misstatement of WIP inventory purchasing invoices, payrolls and timesheets
records for labour.
Increased risk of irrecoverable debts - Inspect after-date cash receipts from
resulting in assets being overstated customers to see if paid post year-end,
proving the debt is appropriately valued.
Review the aged receivables analysis for old
debts that are irrecoverable and agree an
allowance with the management.
The client operates in a fast-paced industry. Examine the instructions to identify
slow-moving inventory lines during inventory
Increased risk of overstated inventory due to count.
getting obsolete or NRV of inventory being
less than cost Obtain an aged inventory listing for inventory
to review for old items.
Risk that recorded assets do not exist due to Focus on testing controls of those assets.
theft
Increase sample size for inspection of
recorded assets, including material assets.
Expenditure incurred may have been Review a breakdown of the costs and match
incorrectly capitalised or incorrectly with the receipts to determine the nature of
expensed as repairs. the costs.
Risk that that non-current assets are over or Review the asset register to ensure only
understated capital expenditure is included.
Agree repairs to expenses in the SOPL.
Management has an incentive to manipulate Increase the level of professional scepticism
performance. and be alert to risks.
Risk of overstated profits Increase testing on judgemental areas such
as revenue recognition policies.
Development costs not meeting the PIRATE Review of breakdown of the development
criteria are capitalised. expenditure and tested in detail to ensure that
only projects which meet the capitalisation
Risk of overstated intangible assets criteria are included as an intangible asset,
with the balance being expensed.
Material work in progress (WIP) inventory Percentage of completion should be
balance at the year-end. Determining the discussed with the management.
value and quantity of WIP is complex.
WIP calculation should be agreeing to the
Risk of misstatement of WIP inventory purchasing invoices, payrolls and timesheets
records for labour.
