Audit Risk Auditor’s response

Audit Risk	Auditor’s response
Production and general overheads were included cost of inventory. According to IAS 2 Inventories, cost incurred to bringing in inventory to location and directly attributable costs can be included. Production overheads include, but general overheads do not need to be included to the cost of inventory. There is risk of overvaluing inventory due to the adding general overheads to cost of inventory.	Discuss with management the nature of overheads included in inventory valuation. If general overheads were included, request management to remove them from cost of inventory. Review supporting documentation to verify overheads whether including those overheads are reasonable.
Company purchased patent to $1.1m with right for 3 years and expensed wholly to SoP/L. In accordance with IAS 38 Intangible assets, this patent should be included as intangible assets and should be amortised over its 3 year economic life. Intangible assets and profits are understated.	Audit team will need to enquiry from management about patent’s supporting documentation, purchase price, useful life. And discuss the reason for fully expensing $1.1m paid, then request to correct this treatment. Review and recalculate amortization charge in order to ensure accuracy, completeness of the charge and correctly valued as an intangible asset.
During the year, company has raised finance through issuing $1.2m equity of shares at a premium. This needs to be correctly accounted with adequate disclosures. Equity finance should split between share capital and share premium. If this is not done, accountings may be misstated due to the lack of disclosure or share capital and share premium may be misstated.	Audit team should confirm equity finance was received and correctly accounted as a share capital and share premium. In addition, equity finance disclosure need to be reviewed in detail to ensure consistent with relevant accounting standards and local legislations.
During the year, teaming and lading fraud has been happened by four members of receivables department. There is a risk that fraud effects are not yet completely investigated. This leads to that financial statements may be misstated. So, receivables may be under or overvalued because later receipts have been misallocated to older balances.