(b) Evaluation of audit risk
Generally up to 1½ marks for each point discussed, and 1 mark for each calculation of materiality.
– Management bias due to recent stock market listing – pressure on results
– Management bias due to owner’s shareholding – incentive to overstate profit
– Management lacks knowledge and experience of the reporting requirements for listed entities
– Weak corporate governance, potential for Dougal to dominate the board
– Revenue recognition – should the revenue be deferred
– Revenue recognition – whether deferred income recognised over an appropriate period
– E-commerce (allow up to 3 marks for discussion of several risks factors)
– Foreign exchange transactions – risk of using incorrect exchange rate
– Forward currency contracts – risk derivatives not recognised or measured incorrectly
– Portfolio of investments – risk fair value accounting not applied
– New team dealing with complex issues of treasury management
– EPS – incorrectly calculated (allow 3 marks for detailed discussion)
– EPS – risk of incomplete disclosure
– Rapid growth – control risk due to volume of transactions
– Profit margins – risk expenses misclassified (also allow 1 mark for each margin correctly calculated
with comparative)
– Development costs – risk of over-capitalisation of development costs
– Inventory – year-end counts already taken place, difficulties in attending inventory counts
– Opening balances (give mark here if not given in (a) above)
Maximum marks 17