5
SPECIFIC ASPECTS OF AUDITING IN A COMPUTER-BASED
ENVIRONMENT
JANUARY 2011
this facility may be utilised by the auditor when auditing salaries and wages in
the client’s financial statements. Similarly, a facility to report trade payable
AUDIT RISK
NOVEMBER 2011
? valuation of inventory – when, for example, there are considerable levels
of aged inventory
? completeness of liabilities – this could arise if provisions have been
incorrectly treated as contingent liabilities
? completeness of revenue – this could be relevant where the entity being
audited has significant cash sales.
Responses to audit risks
Having identified the audit risk candidates are often required to identify the
relevant response to these risks. A common mistake made by candidates is to
provide a response that management would adopt rather than the auditor.
From Question 3b June 2011, in relation to the risk of valuation of receivables,
as Donald Co had a number of receivables who were struggling to pay, many
candidates suggested that management needed to chase these outstanding
customers. This is not a response that the auditor would adopt, as they would
be focused on testing valuation through after date cash receipts or reviewing
the aged receivables ledger.
Auditor’s responses should focus on how the team will obtain evidence to
reduce the risks identified to an acceptable level. Their objective is confirming
whether the financial statement assertions have been adhered to, and whether
the financial statements are true and fair.
Responses are not as detailed as audit procedures; instead they relate to the
approach the auditor will adopt to confirm whether the transactions or
balances are materially misstated. Therefore, in relation to the risk of going
concern, the response is to focus on performing additional going concern
procedures, such as reviews of cash flow forecasts.
Also, auditor responses should not be too vague such as ‘increase substantive
testing’ without making it clear how, or in what area, this would be addressed.
In addition, candidates’ must ensure that they do not provide impractical
responses. A common example of this is to request directly from the
company’s bank as to whether the bank will provide a loan or renew a bank
overdraft. The bank is not going to provide this type of information to the
auditor, especially if they have not yet informed the company, and therefore
this response will not generate any marks.
Limited range of risks identified
In order to score well in risk questions it is advisable to aim to identify a
breadth of points from the question scenario. If the question asks for a specific
number of audit risks, such as five, then it is not sufficient to identify just one
or two risks. In addition, a common mistake is to identify a risk such as going
