Practice Exam Questions: Accounting
C8-5 (P.162)
Determine likely significant audit risks and key accounts at risk Audit risk: risk that auditor has not uncovered a material misstatement in the financial statements Potential accounts at risk: Provision for compensation claims/litigation Inventory Accounts receivable Accounts payable Brand name
PRACTICE EXAM 2, QUESTION 3, PART 1 (PP.240-241)
Identify 5 business factors and explain their impact on risk of material misstatement Also identify account balance most affected. Business factor (i) Listed on stock exchange Explanation of impact Risk - increased compliance with regulations - increased reliance on financial information by users - pressure on profitability, dividends/share maintenance Risk Pressure to meet forecast to maintain share price Risk Reduced demand may lead to stock obsolescence Risk Current stock may be superseded and become obsolete Risk Pressure to increase profit to comply with covenant Account balance Accounts subject to management discretion to profitability e.g. Provision for doubtful debts / other provision account/s As (i) above
(ii) Struggling to meet forecasts (iii) Poor ski season (iv) Change in design (v) Debt covenant (profit/assets)
Inventory
Inventory
As (i) above
PRACTICE EXAM 2, QUESTION 3, PART 1 (PP.240-241)
Identify 5 business factors and explain their impact on risk of material misstatement Also identify account balance most affected. Business factor (vi) Cut in tariffs Explanation of impact Risk Increased competition and decreased demand for locally produced equipment Risk Recoverability of debts at risk (increased risk of bad debts) Account balance Inventory
(vii) No follow-up procedures for overdue accounts
Accounts receivable (or Provision for doubtful debts)
Determine likely significant audit risks and key accounts at risk Audit risk: risk that auditor has not uncovered a material misstatement in the financial statements Potential accounts at risk: Provision for compensation claims/litigation Inventory Accounts receivable Accounts payable Brand name
PRACTICE EXAM 2, QUESTION 3, PART 1 (PP.240-241)
Identify 5 business factors and explain their impact on risk of material misstatement Also identify account balance most affected. Business factor (i) Listed on stock exchange Explanation of impact Risk - increased compliance with regulations - increased reliance on financial information by users - pressure on profitability, dividends/share maintenance Risk Pressure to meet forecast to maintain share price Risk Reduced demand may lead to stock obsolescence Risk Current stock may be superseded and become obsolete Risk Pressure to increase profit to comply with covenant Account balance Accounts subject to management discretion to profitability e.g. Provision for doubtful debts / other provision account/s As (i) above
(ii) Struggling to meet forecasts (iii) Poor ski season (iv) Change in design (v) Debt covenant (profit/assets)
Inventory
Inventory
As (i) above
PRACTICE EXAM 2, QUESTION 3, PART 1 (PP.240-241)
Identify 5 business factors and explain their impact on risk of material misstatement Also identify account balance most affected. Business factor (vi) Cut in tariffs Explanation of impact Risk Increased competition and decreased demand for locally produced equipment Risk Recoverability of debts at risk (increased risk of bad debts) Account balance Inventory
(vii) No follow-up procedures for overdue accounts
Accounts receivable (or Provision for doubtful debts)