#33 Risk-based audit 2

One of the argument for risk-based audit is: it is more cost efficient to focus on the risky area, rather than the traditional way. The traditional 'bottom-up' approach test almost all the details of the business, and almost every aspect of the businesses are covered (audited).

Whereas, the risk-based only focus on the risky area identified by the auditors.

#32 Accounting for Rental Deposit

A rental deposit is usually required to be paid when a company rents a premise from the landlord. These rental deposits are either refundable at the end of the lease period or will be used to offset against the last few months rental payments. Rental deposits are usually not material to the financial statements. However, for companies in the property or retail industry, the rental deposits received or paid may be significant.

The rental deposit is a financial instrument (i.e. a financial asset to the lessee and a financial liability to the lessor) and should be accounted for under FRS 39. The rental deposit should be recognised at fair value on initial recognition, and the difference between the fair value and the amount paid is carried on the balance sheet as a deferred lease expense/income and recognised as lease expense/income on a straight line basis over the lease term. Interest income/expense is recognised over the lease term as the carrying value of the rental deposit is accreted to the nominal value.

#31 Weakness of Risk-based audit 1

Nowadays, the audit firms, including the Big 4 in the world adopt an top-down audit approach, so called 'Risk- based audit'. The deemed high risk areas (account) are the focus of the auditors ? Only minimal work will be done for the less-risky area.

However, the problem is auditors are the one who use the professional judgement to justify what area are risky. And, auditors might fail to identify the risky area of the business. Hence, no works were done for the risky area of the business!

#30 Auditing for Rental expense

In normal circumstances, the audit approach for rental expense is to examine the rental agreement entered between both parties. The rental expense is stated clearly in the agreement.

Things to pay attention: if there are any other expenses stated in the agreement. Also, we could test vouched the monthly billing to check the monthly expense charged.