Audit risk Auditor’s response

The company has a returns policy allowing a Enquire with the finance director how the
customer to return goods within 28 days of returns policy has been applied at the year end
purchase if they are dissatisfied with the and whether the provisions in IFRS 15 have been
product. reflected.

IFRS 15 revenue from contracts with customers Review the assumptions underpinning the
requires that revenue should only be recognised refund liability for reasonableness and whether
to the extent that goods will not be returned. they meet the historic 5% value of returns.
The company should recognise a refund liability
for goods which are expected to be returned. Compare the level of post year-end returns to
the refund liability and discuss any significant
If the company has not correctly accounted for differences with management.
the refund liability, revenue will be overstated
and the refund liability understated.
The company provides a six month warranty on Review the calculation of the warranty provision
its products which require defects to be repaired and assess its reasonableness in light of the
at Corley Appliances co own cost. The directors value of claims received in the period.
have reduced this provision during the year on
the grounds they feel the products they sell are Review the assumptions underpinning the
built to a high standard. warranty provision for reasonableness.

The company does not manufacture the goods Review the level of claims made under warranty
(they only sell them) and therefore this is not a post year end to assess the reasonableness of
reasonable reason for reduction, hence if the the reduced provision.
company has reduced the warranty provision
excessively at the year end, liabilities and
expenses may be understated.

The company purchase goods form its main Discuss with the management the point at which
supplier in Asia and has responsibility for goods inventory is recorded and review the contract
at the point of dispatch, the goods are in transit with the supplier to verify the requirements in
for up to one month. place.

At the year end, there is a risk that the cut-off of Review the controls the company has in place to
purchases may not be accurate as they may not ensure that inventory is recorded from the point
correctly recognise the goods from the point of of dispatch.
dispatch. There is also a risk that inventory and
trade payables are understated at the year end. The audit team should undertake detailed cut-off
testing of purchases of goods at the year end
and the sample of shipping documentation
immediately before and after the year end
relating from its main supplier in Asia should be
increased to ensure that cut-off is complete and
accurate.
The company’s central warehouse and all 20 The audit team should assess which of the
branches will be carrying out an inventory count inventory counts they will attend. This should
at the year-end date of 31 august. include the count for the central warehouse and
a sample of branches which contain the most
It is unlikely that the auditor will be able to material balances of inventory and those which
attend all sites which increases detection risk. It have historically has exceptions reported during
may not be possible to gain sufficient inventory count.
appropriate audit evidence over the inventory
counting controls and completeness and For those not visited, the auditor will need to
existence of inventory for those sites which are review the level of exceptions noted during the
not visited. count and discuss any issues which arose during
the count with management.
Over the last six months, the receivables Review and test the controls surrounding the
collection period has increased from 42 days to way in which the finance director assesses the
55 days and the allowance for receivables will be recoverability of receivables balances and other
at the same level as the prior year. credit control processes to ensure that they are
operating effectively.
Some receivables may not be recoverable and if
an additional allowance for receivables is not Perform extended post year-end cash receipts
included in the financial statements, receivables testing and a review of the aged receivables
will be overstated and the allowance for ledger in order to assess valuation and the need
receivables understated. for an increased allowance for irrecoverable
receivables.

Discuss with the finance director whether an

additional allowance for receivables will be
required against balances older than the
company’s credit terms.
The payables ledger supervisor was dismissed in Discuss with the finance director the details of
June 2015 due to fraud. The value of this fraud the fraud perpetrated by the payables ledger
has been recognised as an expense in the draft supervisor and what procedures have been
statement of profit or loss. adopted to date to identify any further
adjustments which are needed in the financial
If additional frauds committed by the payables statements. In addition, discuss with the finance
ledger supervisor are not discovered, this could director what additional controls have been put
result in expenses being understated and in place to prevent any similar frauds.
payables being overstated. Control risk is also
increased if the fraud has gone undetected for a The audit team should undertake additional
period of time. substantive procedures over the payables
balance, particularly the fictitious supplier set up
on the payables ledger to ensure this has been
removed.

In addition, the team should maintain

professional scepticism and be alert to the risk of
further fraud.
Since the dismissal of the payables ledger Review the unprocessed invoices file at the year
supervisor, purchase invoices have yet to be end to identify any invoices which relate to the
logged onto the payables ledger. supply of pre year-end goods and ensure they
have been properly accrued for in the year-end
There is a risk that the purchases and trade financial statements and recognised as liability.
payables balance at the year- end will be
understated if these invoices are not logged onto Discuss with the finance director the approach to
the payables ledger before it is closed down for be adopted to resolve the issue of unprocessed
the year or accrued for. purchase invoices.
The company purchase and installed new Discuss the accounting treatment with the
dispatch system. The costs which have been finance director and request that the training
capitalised include staff training cost ($0.1m). costs are written off to profit or loss to ensure
treatment is in accordance with IAS 16. If
As IAS 16 property plant and equipment the cost adjusted, review the journal entry for accuracy.
of an asset includes its purchase price and
directly attributable costs only. IAS does not
allow staff training costs to be capitalised as part
of the cost of a non-current asset, as these costs
are not directly related to the cost of bringing
the asset to its working condition.

The training costs should be charged to profit or

loss. Therefore property plant and equipment
and profits are overstated.
The company breached the terms of its overdraft Discuss with the finance director the availability
facility in June 2015 and the bank will only of alternative financing if the bank is unwilling to
confirm the decision whether, or not, to continue to support the company and review the
continue to support the business in November adequacy of any going concern disclosures in the
2015, which is after the auditor’s report will be financial statements.
signed. The company is dependent on the
overdraft facility. The audit team should undertake detailed going
concern testing, in particular, reviewing the
If the bank refuses to continue to support the impact of a non-renewal of the overdraft facility.
company, there may be doubts as to the
company’s ability to continue as a going concern.
The uncertainties may not be adequately
disclosed in the financial statements.