(b) Audit risk evaluation
Generally 1 mark for each ratio (including comparative) calculated, and ½ mark for relevant trends
calculated, up to a maximum of 5 marks. In addition, up to 1 mark for discussion of audit risks in relation
to the ratios calculated. Risks in relation to ratio analysis could include:
– Overstatement of operating expenses
– Overstatement of revenue due to finance director’s comments
– Interest cover and risk relating to disclosure
– Change in effective tax rates and risk tax expense incorrect
– Ongoing investigation and risk of fines and penalties which need to be provided for
– Liquidity issues and risk relating to disclosure
– Increase in receivables days and overstatement of trade receivables
– Onerous lease provision has halved in value, risk of understatement of liability

Other audit risks – up to 1½ marks for each risk identified and explained:
– Allow 1 mark for each correct calculation and comment on materiality
– Whether capital and revenue expenditure appropriately accounted for in respect of the modernisation programme
– Whether assets have been accounted for using the concept of significant components
– Treatment of borrowing costs and whether eligible for capitalisation
– The gain on disposal of shares in Calgary Co is incorrectly recognised in profit for the year
– Non-controlling interest has not been disclosed in respect of profit for the year
– Risk of inadequate disclosure regarding the rationale for, and consequences of, the share disposal
– Management bias due to sale of shares to institutional investor
– Deferred tax – risk of overstatement if the amount is not a recoverable asset
– Lack of financial reporting expert on the Group audit committee increases the risk of incorrect accounting treatments
Maximum marks 18