Acca aaa s21 Notes

September 2021 to June 2022 exams
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2. Business risk
As mentioned above, business risks occur when something either has gone wrong or might go wrong 
in the business. In the examples below, identify the business risk and suggest how this might lead to 
misstatements in the financial statements.
Suggested answers are provided at the end of this chapter, but you might find it easier to listen to the 
lecture as each item is talked about there.
(1)
A company has started selling goods on the Internet.
(2)
A company has started to export goods.
(3)
The finance director has recently left and at period end, has not been replaced.
(4)
A company has failed to file its tax return on time.
(5)
An employee was badly injured carrying out his duties.
(6)
A computer virus disrupted the IT system for two days. All seems fine now.
(7)
The company changed over from its old to its new IT system part-way through the year. The 
change-over seemed to go smoothy.
September 2021 to June 2022 exams
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3. Suggested answers
3.1. Audit risk
(1)
During an inventory count at a company which makes jam and marmalade, a box containing 12 
jars was dropped and the jars were broken. It was immediately noticed that the contents had a 
bad smell and had obviously gone off or had been contaminated.
‣
Obviously that packet will be written off,
‣
The auditor should investigate other inventory to see if this is an isolated incident of 
contaminated food. First choose jars from the same batch, then choose some others at 
random and perhaps extend to different products.
‣
An explanation should be sought from management as to how the contamination might 
have occurred.
‣
Examine records showing previous production problems.
‣
If other inventory items cannot be shown to be safe with confidence, they will have to be 
written down too.
‣
A recall scheme might be urgently needed to get customers to return the affected products.
‣
If some products have already been sold to consumers, newspaper ads and social media 
should warn them too and ask them to return goods for a refund.
‣
Try to discover if any end-consumers have had health issues after consumption of the 
product.
‣
Assess liabilities for damages and the value of sales to be reversed etc.
‣
Examine the company’s insurance policies to see if they have any policies that could help eg 
public liability insurance.
‣
Consider whether the company would survive any adverse publicity (going concern issues).
‣
If the issue concerns a specific brand which is recognised in the SOFP, consider impairment/
write-downs.
(2)
On the final review of an audit file, the partner in charge discovered that a junior audit assistant 
had marked as ‘Correctly accounted for’ the purchases of a car where the VAT element had been 
posted by the client to Input VAT. [Note: VAT on cars is not recoverable.]
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Make an appropriate journal adjustment for that vehicle.
‣
Investigate the treatments of other vehicles acquired as this might not be an isolated 
mistake. Make adjustments as needed.
‣
Look at the treatment of other amounts where expenditure is not allowable for VAT (such as 
entertainment expenditure).
‣
Encourage the company to come clean with the VAT authorities and assess payments due 
together with any penalties.
‣
Review the performance and skill level of the audit team members. Consider additional 
training.
‣
The error should have been picked up at earlier reviews ie before getting to partner level. 
Look at the review processes and skills of other staff members.