Question

You are engaged as an audit senior in the public accounting firm of Millie and Partners. As part of the planning process for the audit of Maxie Ltd for the financial year ended 30 June 2018, you requested the minutes of the Board of Directors meetings for the financial year and noted the following: Date of Meeting Extract from Board of Directors Meetings for the year 2017-18 1/9/2017 The board agreed that in order to attract new customers and therefore increase sales, any new customers from 1/9/2017 would receive three months credit before their debt becomes overdue, rather than the one month credit previously allowed. 1/11/2017 The board agreed that a new ‘bonus scheme’ would be implemented from 1/11/2017, which would provide directors with a 5% bonus on profits if they could exceed last year’s profit by 20%. 1/6/2018 The board agreed to revalue land and buildings upwards by 50% in the financial statements at 30/6/2018, in accordance with a property valuation undertaken at the company’s request. Required: Discuss the potential risk of each of the above items from the board of directors meetings and the impact each would have on your audit plan for 30 June 2018

Answer 1

1...There exists the inherent risk of material mis-statement(due to volume & addendant error) of receivables amount carried in the financial statements , wherein, the auditor has to attest to the correctness & accuracy of the balances & their valuation.

So the auditor has to plan the audit of receivables, in a detailed manner--as the no.of pending accounts is bound to be comparatively more than the previous 1 month credit--- obtain confirmation of balances-- reconcile with the general ledger control account .Auditor's work is bound to increase as he has to assert to the accuracy & correctness of the amount carried in the balance sheet.

2...Here, the auditor should expect the risk of profits being inflated as Directors' bonus is dependent on the year's profits.

The auditor should plan to check that only revenues belonging to that period are included & all expenses pertaining to the period are all included or provided.

For this, he needs to check the next period records/entries , for some period in the beginning of the year, to see if they contain any reversal entries.

Also he has to verify for booking of fictitious incomes or deliberate omission of any expenses.

Again, this involves, the auditor's assertion about the accuracy of the value carried in the balance sheet.So, the auditor has the inherent risk of valuation & accuracy in reporting the materially correct amount to the shareholders.

So,his audit plan would include:

Enquiry as to the genuine need for re-valuation--- whether it was not done simply with a view to book more expense ,in the form of depreciation

Confirmation from the valuer---as to the amount& methodology adpoted to revalue

recasting of the depreciation schedules