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 internal 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 assets 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 warehouses; 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 claim 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 bonus 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	Auditors Response
1.    Physical Verification of Fixed Assts ( Tangible Assets) and comparining with the Fixed Asset Register (FAR)	Non Matching of Fixed Asset as per FAR. Non recording	If fxed is not updated as per FAR, Verification of the same cannot be made, and same will be very difficult for auditor to review each and every bill to identify the expenses related with Fixed cost. Non Recording in FAR leads to charhing of Fixed assest as Expense. Forgo the benefit of depreciation. Profit will be lower down if whole is charged as expense.
2. Maintenanc of Stock at 6 location. Physical verification count at the end of the year.	Non Verification of Stock regularly at different locations, give risk to pilferage, Non proper recordings , loss of stock.	Stock is maintained at different location, required to be verified on regular basis on the different location. Verification on regular basis keeps an eye on the maintennace of Stock and helps in valuation of the same at the end. If due to some reason it is not feasible for the IA team to count the inventory on physical basis, same can be reconciled with purchase and sale and report of last verification, This method is also used as authenticated method for verification and helps in provide true an dfair view as wll as keep an eye on stock maintenance at different location.
3. Provisionof Loss due to fire	Proper Financial Reporting is not in place	Loss occurred, No verification by the Internal risk management team to review the estimated value of loss, excessively dependency on surveyor and non providion of loss occurred an dthe loss settled by the Insurance company will be shown in oot note as contingent liabilities.
4. Bank Reconciliation	Not All Bank reconcilaition Statement is sent to Controller. Leads to mismanagement , chances of non payments are high.	Apparent that Bank reconciliation is done on monthly basis by L1 officer. But if the amount is of significant nature only then Controller review the same is not justifiable. As review of statement on monthly basis by controller keeps the control preventive in nature. Not Showing to the controller on regular basis or showing only in case of significant matter, decision of amount os significant or not is higly decisive by the controller only and not by L1 officer.
5. Director Bonus Scheme based on targets	Excess reports statement to get the bonus.	Bonus to Directors on the basis of target achievement is not feasible as director salary is restricted to PAT. Secondly , Target acheivement is not giving to ground level staff instead of giving to director. It is more advisable to provide the same a few % to director as a motivational and major portion of acheivement to the ground level staff.