Question

You are currently planning the audit of your client, DEF plc. Its year end is 31 December 2019 and the forecast profit before tax is £15.5 million. DEF has a small interna l audit (IA) department. During the year, IA started a programme of physically verifying the company’s assets and comparing the results to the non - current assets register, as this type of reconciliation had not occurred for some time. To date only 15% of a ssets have had their existence confirmed as IA has experienced significant staff shortages and several members of the current IA team are new to DEF plc. Inventory is held in six locations and on 25 and 26 December a full inventory count will be held with adjustments for movements to the year end. This is due to a lack of available staff on 31 December. The number of audit team members are not enough to attend the counts in all the locations. In November, there was a fire in one of the inventory warehous es; inventory of £5 million was damaged and this has been written down to its scrap value of £1 million. An insurance claim has been submitted for the difference of £4 million. DEF is still waiting to hear from the insurance company with regards to this cl aim but has included the insurance proceeds within the statement of profit or loss and the statement of financial position. Bank reconciliations are undertaken monthly by an accounts clerk and details of all reconciling items are included. Where the sum of the reconciling items is significant, the reconciliation is sent to the financial controller for review. A directors’ bonus scheme was introduced during the year which is based on achieving a target profit before tax. In order to finalise the bonu s figures, the finance director of DEF would like the audit to commence earlier so that the final results are available earlier this year. Requirement Using the information provided, describe Five audit risks and explain the auditor’s response to each risk. Note: Prepare your answer using three columns headed The Issue, Audit risk and Auditor’s response respectively .

Answer 1

Issue	Audit Risk	Auditor Response
Existence	Correctly reporting without any misstaments on assertion of Existense.	i.To establish the existence of tangible fixed assets/non-current assets (PPE) as at the period- end.
Completeness	Correctly reporting without any misstaments on assertion of Completeness	.Additions to PPE during the period under audit have been recorded in the financial statements and do not include any PPE that belong to third parties but does include PPE owned and controlled by the entity although lying with a third party
Valuations	Correctly reporting without any misstaments on assertion of Valuations	PPE have been valued appropriately   and    as per generally accepted accounting policies and practises
Rights and Obligations and Presentation and Disclosure	Correctly reporting without any misstaments on assertion of Rights and Obligations and Presentation and Disclosure	The entity has valid legal ownership rights over the PPE claimed to be held by the entity and recorded in the financial statements Required disclosures for PPE have been appropriately made