Comprehensive Audit Report: Risk Assessment, Control Analysis

This auditing report provides a detailed analysis of risk assessment and internal controls within a financial auditing context. It identifies specific risks related to credit period extensions, price reductions, import pricing, inventory valuation, and contingent liabilities, recommending controls such as automated material requisition notes, competitive supplier quotations, and proper GRN systems. The report also addresses quality control issues observed in various companies, including unsigned working papers, lack of written management representation, and improper sampling techniques. Furthermore, it discusses the classification of events occurring after the reporting period according to IAS, distinguishing between adjusting and non-adjusting events, and emphasizes the importance of documenting audit procedures and findings. Desklib provides students access to this document and other solved assignments.

AUDITNG SECTION B
1. a) STEP 1. APRICOT
 Audit risk is the risk that an auditor expresses an inappropriate opinion on
the financial statements. For example:-
Issuing an unqualified report where a qualification is reasonably justified.
Failing to disclose a significant matter in the final audit report etc.
After consideration of the above mentioned data of Apricot Company,
following risk is identifiedqz1a
1. The company increase the credit period to 100 days from 28 days and
reduced the price. Here, my risk is related to the approval authority, who extended
such credit period and the amount of price reduction.
2. At which price products are imports from India, whether these prices were
approved.
3. Whether import price is less than In-house production or not.
4. What is the control over goods-in-transit and who is the responsible authority.
5. Whether the company is liable to pay the cost of insurance for goods-in-transit
6. At what basis the company assessed the scrap value of the redundant plant.
7. What is the probability of pay compensation to FD. Whether it should be shown
in the audit report as contingent liability.
8. What is authenticity of continuous inventory counting system
9. What is the basis of dividing the warehouses in 12 area
STEP 2.
ii. It is vitally important for auditors to assess engagement risks at the planning
stage. The following are the importance of assessing risks at the planning stage
1. This will ensure that attention is focused early on the areas most likely to cause
the material misstatements.
2. A thorough risk assessment will help the auditor to fully understand the entity,
which is vital for an effective audit.

3. Any unusual transactions or balances would be identified early, so that this
could be addressed in a timely manner.
4. In addition, as most auditors adopt a risks based audit approach then these risks
need to be assessed early in order for the audit strategy and detailed work
programmers to be developed.
iii. THE VALUATION OF INVENTORY
1. Identify the basis of dividing the warehouse in 12 areas. Make physical
counts of different items on test basis. If there are high value inventory,
an auditor should spend extra time to such items.
2. Reconcile the inventory count to the general ledger. They will trace the
valuation compiled from the physical inventory count to the general
ledger, to verify that the counted balance was carried forward into the
company’s accounting records.
3. Test inventory in transit. Goods in transit received after 3months. The
auditor should check these goods through reviewing transfer
documentation, letter of credit (if any), Bank guarantee (if any) and any
other document available.
THE COMPLETENESS OF PROVISIONS OF CONTINGENT
LIABILITIES
1. Auditor should assess the probability of arising such liability.
2. Then, estimate the amount which can be paid to the finance director.
Such amount identified with discussion with the company’s advocate.
3. Then, auditor should give his final observation in final “audit report.”
Such amount should be mentioned in the financial statement under
footnote of contingent liability.
2. B. STEP 1
1. Whenever Supreme Ventures required material, production manager sends a
handwritten note to the buying manager. It is one loop hole, because in
handwritten, there is a probability to ask for materials more than required for
material unnecessary to them.

CONTROL.
Material requisition note should be auto-generated from system.
2. Given that the buying manager finds suitable supplier and raise purchase order,
there is a probability to purchase material at higher cost or even from family and
friends at a high cost. CONTROL: Buying manager must first ask for quotations
from suppliers and the director needs to approve purchase order from relevant
supplier.
3. No system for recording receipt of other goods and services. CONTROL: Like
GRN raised by goods receipt department, there must be a control to raise proper
GRN for other goods and services.
4. The accountant clerk match manually GRN with purchase order if available.
CONTROL: There must be a system to auto-generate purchase order whenever
GRN is generated by goods receipt department. It should be automatically matched
with purchase order through system.
5. Here, accounting clerk dealing with major works, there is a possibility to misuse his
power. CONTROL: Diversion of work should be used.
2. c. The issues of quality control in each of the above situations is explained as follows:
Z Company
The review of the working papers revealed that working papers were not signed
off by all the team members. Many of the working papers had no dates and
signatures on them. This is a quality control issue since the auditor have to
maintain these papers as evidence of the audit conducted.
P Company
The audit manager’s stand stating that there were no issues requiring a written
representation from the management is wrong. The audit team must obtain the
written representation from management since it is a part of the mandatory
procedure of the audit process.

J Company
In this situation, only 54 invoices are verified, however, all the 60 invoices will
have to be tested for sampling. Out of 60 invoices, 6 could not be found and there
are no other invoices that are identified. Therefore, the sampling is not suitable
and is incorrect. The audit firm should not look to draw a conclusion based on the
54 invoices, even if they are correct and accurate.
N Company
The sample sites and last year’s files should not be considered for conducting the
current year’s audit process. The audit should be considered invalid and there will
be a risk for the audit members.
QUESTION 4
a.i. IAS – Events occurring after the end of reporting period. The events are classified as
1. Adjusting events- Events that give proof of conditions existing at the end of
reporting period date
2. Non – adjusting events- Events that are based on conditions that is triggered after
the end of the reporting period.
Adjusting events are information relevant to the assets and liabilities/income and
expenses or cash flows recognized at the end of the reporting period.
On the contrary, non – adjusting events since they occurred after the reporting date need
not be reflected in the financial statements at the end of the reporting period. However,
the information can be a part of the disclosure about significant happenings after the
reporting period. The potential loss/gain amount if determinable should also be disclosed.
This will help the user of the financial statements to assess its impact on the cash flows of
the company.
EVENT 1
The fire in the warehouse is a non-adjusting event since it occurred by accident. As the event
did not have a major impact on the business activity, disclosure must be made for the loss of

vehicles damaged to the tune of GH¢108,000 approximately, in fire. The inventory damage of
GH¢ 42,000 need not be disclosed as the same is not significant as per materiality concept.
EVENT 2
Since there were no sale during the reporting period, the company had no idea of the defect of
its inventory. The latent defect (cereal contained too much sugar) was detected after the
reporting period, hence, the same is a non-adjusting event and no adjustment is required in the
financial statements of the reporting period. A disclosure of a potential loss of GH¢1,500,000
need to be made. The insurance claim being the claim amount receivable need not be disclosed.
ii. The auditor will have to document the process followed to identify the findings or issues
that are inconsistent. The audits records to be retained include, procedures performed in
response to the information, and records documenting third party consultations, if any.