Using the information provided, describe Five audit risks and explain the auditor’s response to each risk.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
- You are an audit senior of OLA & Co, planning the final audit of a new client, EAHO Construction Co, for the year ending 30 September 2019.
The company specialises in property construction and providing ongoing annual maintenance services for properties previously constructed.
In line with industry practice, EAHO Co offers its customers a five-year building warranty, which covers any construction defects. Customers are not required to pay any additional fees to obtain the warranty. The finance director anticipates this provision will be lower than last year as the company has improved its building practices and therefore the quality of the finished properties.
A full year-end inventory count will be undertaken on 30 September and there is no enough audit team resource to attend all inventory counts.
A review of the
Information from management accounts EAHO Co’s prior year financial statements and August 2019 management accounts contain a material overdraft balance.
Requirement
Using the information provided, describe Five audit risks and explain the auditor’s response to each risk.
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