AA Practice Question Part 2 – Practice Platform – Sept – Dec 2021

1. Apricot Co & Peach Co Eight Audit Risk & Response

Audit Risk Audit Response

A new accounting system was introduced in The auditor should perform detailed test of
March 20X5 and did not consider it necessary to control to ensure the balances have been
undertake futher testing implementation correctly inputted and accurately transferred to
the new system
There is a risk that the opening balance on the
new system and transfer of data from the old A walkthrough test should be performed to
system to the new system may be not be document the new system and test of controls
appropriately managed which could lead to a of it
loss of data and if the new system is not
operating effectively there is a risk of Discuss with the management any issues which
misstatement in the accounting records have occurred of when the new system was
used

Peach Co have been developing a new production Inspect the nature of the development
process which will help to reduce sugar in its expenditure cost if it meets the IAS 38 criteria
drinks and the total amount capitalised was and obtain a breakdown these costs and identify
$0.8m as development expenditure if any items being capitilised.

In accordance to IAS 38: Intangible Assets, Discuss with the management the reasobleness
Research Cost is recognised as an expense as of the useful life of the product and should
incurred and Development Cost is capitilised if it reperform the amortisation calculation to
meets the criteria; there is a risk that the ensure they are accurate.
development cost is not according to the IAS 38
criteria which could result in under/ over
statement of Asset & Expenses account

The capitlised expenditure should be amortised

over the life of the process, commencing when
the process is first bought into use in May 20X5
There is a risk that the amortization cost in the
period may be Incorrectly calculated resulting in
misstated amortisation
Peach Co replaced two items of machinery in its Discuss with the management the accounting
production. There were significant staff costs treatment applied and request the relevant staff
involved in preparing site. These costs have been cost are included in PPE
included in the wages & Salaries expense for the
period.

In accordance with IAS 16, states that costs thet

are directly attributable to bringing the asset to Obtain a breakdown of the wages and salaries
the condition necessary for its intended use, are account and review the cost relating to staff cost
capitalised as cost of asset. These directly preparation site of two machinery to be
attributable cost includes cost of site capitalised as cost of machinery
preparation and cost of testing

There is a risk that is not inputted accordingly in

the correct account of the staff cost. This could
result in under/over statement of wages &
salaries and asset account
Despite the old machinery being sold at a Discuss with the management the rationale of
significant loss, during the year the directors of the increase in useful life of the asset
Peach Co decided to extend the useful lives of
plant and machinery by an average of five years. The assets with revised useful life to be
compared to review how often it is being
An extension of useful live is a risk as this is not in replaced and any gains or loss on disposal , this
according with the IAS 16 criteria, as useful life is would provide evidence of the useful life of an
usually reviewed annually and if asset lives have asset
genuinely increase, since the machinery was
sold at a substantial loss last period, therefore
the decision to extend the useful life is
inaccurate

This is resulting in over/understatement of Plant

& Machinery and depreciation expense account
A member of the finance team was dismissed by Discuss with the management how the fraud
Peach Co after it was discovered that thay have was detected and corrected The internal
been fraudulently purchasing non-current assets controls inplace to reduce farud from occuring.
for personal use.
Auditors should perform additional procedures
The fraudulent activity by the finance team have for the non-current asset addtions, and obtain a
lead to incomplete reconciliation of the physical list of all the non- current asset capitalised in the
asset with the non-current asset register by the year and agree the new assets with the
year end date resulting in overstated Non- purchase order
current asset as they may include the personal
assets purchased The assets to be reviewed from the non-current
asset register to confirm existence and being
There is an increase in control risk as the fraud used in the business
was not detected for a period of time
Peach Co has inventories of high-sugar drinks Discuss with the management the reasobleness
which now has a dcreased demand. The directors of selling inventories exceed cost and request the
believe Peach Co can sell the remaining management to update the cost valuation
inventories at a price that marginally exceeds according to IAS 2
cost

In accordance to IAS 2, Inventory cost is valued at

lower of cost or NRV which may have been
incorrectly inputted leading to a over /
 understatement of inventory account
Peach Co’s previous supplier has launched a legal Review the correspondence with Peach co’s
claim against Peach Co. Peach Co lawyers have lawyer to review the likelihood of the supplier
indicated that it is likely to lose the case and an winning the case and the amount payable to
estimated amount of $0.3 m payable them

In accordance to IAS 37 Provisions Contingent

asset, Contingent liablity. A provision is required
if it is a probable and possible is treated as
contingent liability. Which in this case a
provision is required, This may not be accurately
inputted leading to a over/understatement of
liability and expenses
Peach Co obtained a bearing bank loan of $ 1.2 M Review the loan covenant in detail to
on 1 March 20X5 to fund the development of the understand what Peach co is required to comply
new production process and the purchase of new with. Calculate the the covenants to understand
machinery and in order to secure the loan, Peach whether any breaches have occurred and
Co has to maintain a minimum net profit margin discuss impact withmanagement
and meet specific sales targets
Auditors need to maintain professional sceptism
A breach of the covenant could result in fines to remain alert for revenue recognition
and penalties or repay the loan immediately. judgement which affect profit
There is a risk that Peach Co would be
windowdress accounts to meet the covenant
which would result in overstatement of Revenue
and Profit

b.)

Apricot & Co responsibilities in relation to the prevention and detection of fraud & error (4 Marks)

- The auditor’s main responsibility is to provide reasonable assurance that the financial statement
as a whole is free from material misstatement due to fraud or error. Auditor’s need to identify
and assess material misstatement due to fraud during the planning stage

- The auditor is required to maintain professional sceptcism while obtaining sufficient &
appropriate evidences regarding the assessed risks of material misstatement due to fraud &
error by implementing & designing appropriate responses

- The auditor to discuss with the whole engagement team the risks & responsibility of the fruad
and error, as it is required by the ISA to discuss with the audit team

- In relation to any suspicion or fraudulent activity found by the auditor, the auditor should be
appropriately responded to the Those Charged with Governance or appropriate authorities of
the occurrence of fraud
c.)

Ethical Threat Appropriate Safeguard

Peach Co have suggested that instead of a meal, The auditor should politely decline the offer
all the audit staff go away for the weekend to a made by the managing director and only accept if
luxury hotel at Peach Co’s expense. the gifts are trivial and insignificant value

This is a Self interest threat as accepting a luxury

stay is of significant value and therefore could
affect the auditor’s decicions or less likely to
challenge Peach Co assumptions , In addition to
this it is also a famailirity threat as going away for
the weekend with the client staff appears to have
a close relation with each other
Apricot & Co has been approached by Peach Co Apricot & Co may be able to accept this work
to help identify potential acquisition tragets depending on the nature and only if appropriate
discussions at an early stage and no work has safeguards are present.
been undertaken at present
The safeguards include professionals that are
This is a advocacy threat as apricot & co may not in the audit team to perform the service or
appear to be promoting Peach Co as an investor an appropriate reviewer that have performed
the service reviewer
This is also Self- review threat if the potential
acquisition is subsquentially reflected in the
financial statements and the audit team would
less likely challenge the figures included