Question 2- PART A Auditors can only control the level of detection risk as the inherent risk and the control risk are out of auditors’ control. PART A Requirement: Discuss the differences between the three types of risks with an explanation of why auditors can only control the detection risk. PART B 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. PART B 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. NOTE: Types of AUDIT RISKS Inherent risk control risk detection risk

Question 2- PART A Auditors can only control the level of detection risk as the inherent risk and the control risk are out of auditors’ control. PART A Requirement: Discuss the differences between the three types of risks with an explanation of why auditors can only control the detection risk. PART B 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. PART B 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. NOTE: Types of AUDIT RISKS Inherent risk control risk detection risk

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 15RQSC

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Question 2- PART A
Auditors can only control the level of detection risk as the inherent risk and
the control risk are out of auditors’ control.

PART A Requirement:
Discuss the differences between the three types of risks with an explanation of why auditors can only control the detection risk.

PART B

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.

PART B 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.

NOTE:

Types of AUDIT RISKS

Inherent risk
control risk
detection risk

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