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You are currently planning the audit of your client, DEF plc. Its year end is 31
December 2019 and the forecast profit before tax is £15.5 million.
DEF has a small internal audit (IA) department. During the year, IA started a programme
of physically verifying the company’s assets and comparing the results to the non-current
assets register, as this type of reconciliation had not occurred for some time. To date only
15% of assets have had their existence confirmed as IA has experienced significant staff
shortages and several members of the current IA team are new to DEF plc.
Inventory is held in six locations and on 25 and 26 December a full inventory count will be
held with adjustments for movements to the year end. This is due to a lack of available staff
on 31 December. The number of audit team members are not enough to attend the counts
in all the locations.
In November, there was a fire in one of the inventory warehouses; inventory of £5 million
was damaged and this has been written down to its scrap value of £1 million. An insurance
claim has been submitted for the difference of £4 million. DEF is still waiting to hear from
the insurance company with regards to this claim but has included the insurance proceeds
within the statement of profit or loss and the statement of financial position.
Bank reconciliations are undertaken monthly by an accounts clerk and details of all
reconciling items are included. Where the sum of the reconciling items is significant, the
reconciliation is sent to the financial controller for review.
A directors’ bonus scheme was introduced during the year which is based on achieving a
target profit before tax. In order to finalise the bonus figures, the finance director
of DEF would like the audit to commence earlier so that the final results are available
earlier this year.
Using the information provided, describe Five audit risks and explain the auditor’s response
to each risk. Note: Prepare your answer using three columns headed The Issue, Audit risk
and Auditor’s response respectively.