AUE3761 Test 2 Solution
June 2023
AUE3761 Test 2
June 2023
SUGGESTED SOLUTION
Dear Student,
Carefully study the suggested solution as feedback in this solution to Test 2.
Required 1: Identify, describe, and assess significant risks of material MARKS
misstatement at the financial statement level
References: Reference: ISA 315 and lesson 3.3 15
1.1 (a)
1. The AFS may be materially misstated due to fraud/manipulation as the business
conducted with SPL, which qualify as a related party (owning of 60% of shares
and the familiarity threat due to family relationship / independence / objectivity), do
not appear to be at arm’s length. (1½) The impact on the AFS may be that ✓^
purchases may be overstated due to manipulation resulting in COS and Inventory
as well as current liabilities being overstated.
2. The AFS may be materially misstated due to manipulation, as directors might
engage in fraudulent financial reporting, for example overstatement of assets and
revenue and understatement of liabilities and expenses to ensure that the increase
in the overdraft facility will be obtained from the bank. (1½) ✓^
3. The AFS may be materially misstated due to fraud related to integrity issues
(professional competence and due care) when relaxing policies to prevent
✓^
investors to call up loans. (1½)
4. The AFS may be materially misstated due to fraud to achieve predetermined
profit margins so that investors do not call up loans. (1½), ✓^
For example:
- The increase in account receivable indicates a fraud risk due to the fictitious
invoices raised.
5. The AFS may be materially misstated due to fraud as the significant increase in
turnover may be due to the fraudulent sales invoices that were captured prior to
yearend (authorised by the CFO). Anything related to these issues should be
✓^
marked with this point. (1½)
6. New auditors – management may attempt to fraudulently make
misrepresentations in the financial records to exploit the new auditors lack of
experience with LS’s financial systems (NB must relate to manipulation to commit
✓^
fraud and not to detection risk). (1½)
1
June 2023
AUE3761 Test 2
June 2023
SUGGESTED SOLUTION
Dear Student,
Carefully study the suggested solution as feedback in this solution to Test 2.
Required 1: Identify, describe, and assess significant risks of material MARKS
misstatement at the financial statement level
References: Reference: ISA 315 and lesson 3.3 15
1.1 (a)
1. The AFS may be materially misstated due to fraud/manipulation as the business
conducted with SPL, which qualify as a related party (owning of 60% of shares
and the familiarity threat due to family relationship / independence / objectivity), do
not appear to be at arm’s length. (1½) The impact on the AFS may be that ✓^
purchases may be overstated due to manipulation resulting in COS and Inventory
as well as current liabilities being overstated.
2. The AFS may be materially misstated due to manipulation, as directors might
engage in fraudulent financial reporting, for example overstatement of assets and
revenue and understatement of liabilities and expenses to ensure that the increase
in the overdraft facility will be obtained from the bank. (1½) ✓^
3. The AFS may be materially misstated due to fraud related to integrity issues
(professional competence and due care) when relaxing policies to prevent
✓^
investors to call up loans. (1½)
4. The AFS may be materially misstated due to fraud to achieve predetermined
profit margins so that investors do not call up loans. (1½), ✓^
For example:
- The increase in account receivable indicates a fraud risk due to the fictitious
invoices raised.
5. The AFS may be materially misstated due to fraud as the significant increase in
turnover may be due to the fraudulent sales invoices that were captured prior to
yearend (authorised by the CFO). Anything related to these issues should be
✓^
marked with this point. (1½)
6. New auditors – management may attempt to fraudulently make
misrepresentations in the financial records to exploit the new auditors lack of
experience with LS’s financial systems (NB must relate to manipulation to commit
✓^
fraud and not to detection risk). (1½)
1
