MARCH/JUNE 2019

(A) Audit risks

Daryl co.
One of the subsidiary of rick group, uses the local standards which need to be converted into IFRS for
the purpose of consoildation of financial statements and this need to be done by Rick group. Some
items will be excluded as per IFRS and some will be included, this creates the risk that the items will
be missing and there could be incorrect conversion.

Operating segment - 2 marks

Daryl co. Is 18% of group’s total assets, hence it is the significant component of the group.
As per IFRS-8, the Daryl co. Is an reporting segment whose performance need to be disclosed in the
notes to the financial statements brieflly to show individual profits and financial position, there is a
risk that this is not done or incomplete information is provided which is contrary to the accounting
standard. (YOU ARE WRITING THE RISK BUT WHERE IS THE IMPACT ON FS? IN EXAM BOTH
IDENTIFICAITON OF RISK + IMPACT ARE IMPORTANT TO SCORE FULL MARKS)

Goodwill - 3 marks
The goodwill recognized on the Daryl co. Is 4.6% of group’s total assets, hence it is material to the
financial statements.

The Daryl co. Is operated in the foreign country where jurisdiction and culture is different, therefore
the review of impairment need to be conducted regularly as it has not be done so in the several years
which creates the risk that the goodwill is overstated.

Further, there has been number of cancellations in the subscriptions as by Neegan associates, which
indicates that the customers satisfaction has been gone done and they are shifting to another service
and therefore the impairment should be recognized.

Annual incentive scheme (3 marks)

Previous year incentive paid was $8.2m which is 13.6% of PBT and 1% of total asset, hence material to
the financial statements.

Company is running a annual bonus scheme which need to be paid to employees based on the
targets, if the targets have been made then a short term liability at year end should be included based
on the number of employees participated with the amount to be paid to each employee, as per IAS
19. There is a risk that incorrect number of employees or payments that need to be paid is taken
which will over/understate the liabilities and expense.

Legal case ( 2 marks)

The company has filmed where there is no license but the rick group is arguing that the general
license can be used, this seems inappropriate. As the rick group does not have license, it will have to
pay fine, therefore a provision should be recognized. If this is the case then the liabilities are
understated and profits are overstated.
Revenue- 2 marks
As per IFRS-15 Revenue should only be recognised when the performance obligations has been
satisfied. In the case of rick group, if the subscription is non refundable then revenue should be
recognised when the payment is received from the customers. However, if the subscription is
refundable then the revenue should not be recognised until the month end, when PO is satisfied.

Further, there is a risk that the revenue is recognized before the trial period ends which is free and no
revenue should be reccognised during this time, there is a risk that the revenue is recognised before
this trial period ends and payment is received, which will overstate the revenue.

Revenue has been increased by 25.6% in the year which is a significant increase, this creates the
further risk that the revenue is recognized early before the trial period ends.

New subscription 2 marks

The new package has been introduced where at only $5, further two members of family can be
included. If this package is subscribed by the customers then it will increase contract price and
performance obligation to two more members. Therefore, there should be correct split between the
performance obligation based on the stand alone price. As the accounting is complex, there is a risk
that the revenue is recognised incorrectly.

License ( 3 marks)
The licenses are the significant portion of total assets as the business is dependant on the licenses.
The licenses should be amortised on their useful lives as per IAS-38, some licenses have three year life
and some have five years life. However, the rick group amortise all the licenses on five year period
which is incorrect useful life for 3 year licences. This will probably understate the expenses and
overstate the assets as reduced amortisation is charged.

Further, when three year licences are expired, it will still be shown in assets and amorised for next
two years which is misleading for the shareholders of the rick group.

(B) Evaluation of strategies and ethical matters

Materiality
Materiality is determined on assets forthe first time, this means that previously the materiality
figures for statement of financial position items were calculated on the revenue and profits which is
wrong, the items of SOFP should be calculated materiality based on totals assets and P&L items on
profits and revenues.

Even it is not appropriate to change the materiality base just because the company has been turned o
loss making, still the materiality can be calculated based on the profits and revenues.

Payroll accounting service

Payroll expense in companies are usaually a material amount in financial statements and therefore,
the service is material. The Neegan associataes are providing both audit and non audit service to
same company which creates the self review threat as the audit team will review their own firm’s
work which they can be reluctant to do so.

Only the amount of payroll expense is confirmed to the payroll report, no furtehr work has been
perfomed which is an inappropriate plan and this compromise the quality of evidence as this is not
the sufficient evidence. The audit strategy should include the confirmation that no fake employees
has been added, the effects of any increase/decrease in employees/pays has been considered, the
analytical procedures should also be considered.

Related party transaction

The building sold to the director is related party transaction as per relevant accounting standard and
hence it is material to the financial statements.

The related party transaction need to be disclosed in the notes to the financial statements with the
sale value and the amount outstanding and when this amount will be payable. However, this is
ignored as it has been stated immaterial in the audit strategy document.

Confirmation of amount included in receivable is not sufficient, the transaction should be confirmed
that it is related party and it has been successfully transferred through reviewing contract and it
should be identified when it is going to be received.

(C) Principal audit procedures- related party

1- Confirm the small property in fixed asset register and check it has been unused and located.
2- Confirm the property has been solf to CEO which is the related party of the Rick group
3- Review the sale contract to confirm the property has been sold to the CEO
4- Confirm the amount of property sold through invoice and confirm it has been correctly removed
from the asset register.
5- Discuss with finance director when the amount outstanding will be received.
6- Confirm the related party transaction has been identified by the finance director (how??)
7- Review the draft notes to the financial statement to confirm the related party transaction has been
disclosed and all the requiremnets has been followed.
8- If not, discuss with finance director why the related party transaction has not been disclosed and
suggest to include it.

KK: Starting procedure with confirm is vague because if you say confirm the question rises how did
you confirm? Procedure start with action because that’s how the auditor confirm something like
review the fixed asset register for the small property to confirm its unused and located.
CHECK IN PROCEUDRE 1? Please don’t use the word check as check is vague because again the
marker will ask how check ?
Procedure 6 – confirm the RPT has been identified by FD? HOW WILL YOU CONFIRM IT
Procedures should start with action not confirm or should not use word check

(D) Joint audit

If current auditors, lucile associates continues to provide service then it will be beneficial for the
group audit as the previous auditors will have knowledge of the Michonne Co’s, and this time will be
used to consult with the group auditor to follow and work on more procedures.

However, as the Lucile associates are the small firm they might not have enough resources to contact
and work as per the group auditor as they will be lacking the audit software whose results might be
required by the group auditors.

Further, the group auditor will have to contact with lucile associates more and it would have been
easier, if there was one audit firm.

There would be any arguements between the two firms due to their audit planning and strategy to
complete the audit work and the way and procedures will asslso be difference which either of the firm
has to compromise and agree on one plan.
Question-2

(A-I) Implication of fraud and actions

The fraud of $40,000 has been conducted by the manager which is not material by amount but I is
material by nature.

The fraud has been carried out by the manager which is in the senior position, this shows the lack of
itegerity and professional behaviour in the employees of Goodmen group, this shows that the staff of
company is not happy and there could be chances of furtehr frauds.

Due to this fraud, the audit strategy would now include more procedures being performed on the
supplier invoices which will be matched with goods despatch notes being signed by customers to
identify any other fictitious payments being made.

Further, the finance director told the audit team not to carry any further work as amount is
immaterial, this creates doubts on the management integrity with the audit team and the finance
director is trying to limit or prescribe the work of audit which is the auditor’s responisbility.

The Audit team should now be more skeptical and should have the open mind of any further fraud
and should be aware that the amount of fraud or persons included the fraud could be greater then
this.

The fianncial statements should be adjusted with the amount of fraud.

No audit evidence excep the written representation has been obtained which is nether sufficient no
approriate, the audit team should investigate and should carry out the procedures to identify all
fictitious payments.

(ii)
Developments cost

Development cost only need to be capitalised when it meets the developement criteria under IAS-38.

The evidence obtained t confirm the cost of asset is not sufficent as it does not indicate whether it is
research cost or developement cost, there should be procedures to make the split between the two
so that one amount is expensed while other being capitalised.

Cashflow projections are only airthmatically checked, this evidence is not appropriate, it is
necessasory to check the underlying assumptions as it is the only defining work to confirm whether
the costs incurred are the developement costs which has not been performed.

The group finance director is reluctant to answer the questions, the auditor discussions are important
in obtaining sufficient and appropriate evidence. Further, the spreadsheet is password protected
whcih does not give accesss o see assumptions, this limits the scope of auditor. As per the
engagement letter, the auditor is allowed o all information and has right to discuss with any employee
of the company.

Actions
1- Discuss with finance director the access of auditor to all information and ask to remove the
password.
2- If there is still limit imposed than Discuss the matter with TCWG through the report and state that
the finance director is limiting the scope of auditor
Evidence

1- Check the assumptions used by the finance director and confirm whether the development cost
meets the requirement of IAS 38
2- Review the invoices and check whether the invoices paid are for the intial work which need to be
expensed as research expenditure.
3- Confirm the item being developed is technically feasible and the company have enough resource to
complete it

(iii) Trade receivables

The amount of receivable is material to the financial sstatements as it cross the materiality level of
$400,000

The outstanding receivable for 6 months indicates that the impairment review as per IFRS-9 should be
conducted so that any impairment should be charged to p&L.

The agreement of invoice to order does not consider whether the amount of $500,000 will be
received or not. This is an inappropriate evidence

Discussion with group credit controller that the customer is always allowed extended terms does
gives some level of internal assurance, however the auditor should get their own assurance through
the reviewing the recent contact made with hamyln co.

There was no reply from the direct confirmation but there was no reply which indicates that the
impairment need to be charged if there is no reply as the customer could be in financial difficulties.

Evidence
1- Confirm the amount with hamlyn co. Though callling and if it does not pick then the audit team
should personally visit the customer.
2- Review of the recent contact to check wether the customer is in the financial difficulties which is
the indicator of impariment

(B) Critical appraisal

Basis for opinion and opinion

Basis for opinion and opinion is mixed, the opinion paragrph should be included first followed by the
basis of opinion paragraph, this has not been followed.

The receivable amount has been overstated by $450,000, however it has been included that the
receivable has been overstated by $500,000, the incorrect amount has been used.

Further, the materiality level of $450,000 in percentage of assets has not been shown which need to
be included for the better clarification.

It is stated that the financial statements are likely to be materially misstated, it seems that the auditor
are not sure of their opinion issued. As the amount is material, qualified opinion will be issued and the
word ‘likley’ need to be removed from the draft.
It has been concluded by the audit partner that the fraud is immaterial and no furtehr work should be
acrried out, this shows lack of competence in the audit partner as he is in the senior position and still
lacks knowledge. The audit partner should be trained.

The company is listed therefore, the matters need to be consulted in the ‘ key audit matters’
paragraph, the emphasis of matter paragraph should not be used.

It has been stated that the fraud does not impact financial statements, as the ficitious payments were
that need to be removed which affect the financial statement, this has been wrongly communicated.

It has been consulted in the EOMP that the auditors will resign because the adjustment was not
amde, it seems tp be too early as no actions or communication with TCWG were carried to adjust and
resolve it.
Further, it not the appropriate mode to discuss the resignation of auditors in EOMP, this matter need
to consulted with the TCWG which will then consult with the shareholders of the group.

Question- 3

(A-I) Matters to be considered

Lavenza co. Has approached to the firm for the non audit service to provide assurance on the
prospective financial information, the levenza co. Is not the audit client of our firm and this non audit
service can be provided to levenza co. Following the reviews of below matters

Professional liability

Our firm has to give an independent assurance opinion on a cash flow forecast
which is being prepared for its bankers in support of an application for an increase in its existing
overdraft facility. Therefore there is exra responsibility to the bank and this increases the professional
liability of the firm, if the firm is in negligence as the bank will be relying on this report.

Therefore, extra due care will be taken and experienced staff need to be appointed to reduce this risk
and hence it should be considered before accepting the client.

Cashflow forecast

The cashflow forecast is for the period of 12 months, the longer the time period of forecast, the
higher he risk that the assumptions taken are risky. The period of 12 months seems small and
appropriate period.

Time period and experience

It should be consulted with lavenza co. About the time period in which this report should be provided,
it should be confirmed that there is no time pressure which could be that the overdraft is required
urgently and the report should be quickly provided to bank, this will comproise the quality of report
which in turn increases the risk of negligence.

Further, it should be considered our firm has experience in the same industry as the lavenza co.
Operates and whether the firm has done the same work in the past.

The fees should also be considered for providing this service so that the cost of service does not
exceeds the benefits obtained from it.
(A-ii) Examination procedures

1- Discuss with finance director when the new shops will be opened and confirm whether it will
become operational with in 12 months
2- If not, then review the assumptions of increase in total sales despite the fact that the company is
facing decline in revenue
3- Review and discuss the assumption taken for the increase in revenue of high street shops which is
an average increase 8% for every three which looks inappropriate.
4- Review the forecast purchase of inventory and payments made to confirm whether the discounts
are included or excluded.
5- If the discounts has been included, discuss with finance director whether the company would be
able to pay in 14 days as the company is in negative balance and have spent in opening new shops,
check the reasonableness of assumption
6- Review and discuss the increase in inventory whcih is only 5% increase where as the increase in
sales 8%.
7- Discuss the fall in salaries and confirm whether the mployees will made redundant or their pays will
be reduced, what is the reason behind the fall
8- Confirm why the salaries fall by 2% for 9 months and gain increase by 2.8% in the year end to
september 20x6
9- Review the overheads costs to confirm why they are declining even though the sales are increasing
and new shops has been opened
10- Confirm the purchase of shops has been authorised and discussed by the boards through
reviewing the board meeting minutes
11- Review the reasons behingd the opening of new shops and confirm when they will be build and
become operational and confirm from where the company will enhance the funds.
12- Confirm the marketing expense has been authorised by the board and it will be effective and
check the reasonableness of increase in sales due to marking through reviewing any past marking
done
13- Discuss with finance director whether the overdraft facility will be increased despoite the fall in
revenue and liquidity
14- Review the recent contact with bank to check any discripancies and contact with bank to confirm
the increase in overdraft facility

(B) Ehitcal and professional issues

Fee income
The total fee income from the Beaufort Co client has increased to the level where it represented
16·2% of Moritz & Co’s total fee income in 20X5 (15·4%: 20X4). As per IAESBA, if the total fees has
been 15% for three consecutive years, then it creates the self interset threat to objectivity as the firm
will be dependant on once client and this in turn will reduce objectivity as the firm could be
influenced by the client

The managing director of Beaufort Co, Margaret Shelley, has asked your firm for assistance in the
preparation of the share prospectus document and also to provide an accountant’s report which will
be included in the prospectus and which will cover each of these elements, if these sercices are
provided, this will further increase the fee income and dependancy level.

Share prospectus

Moritz & Co has been asked to assist in the preparation of the share prospectus document and to
provide an accountant’s report on financial data, business risks and a business plan which
recommends the shares to investors. Performance of these services for Beaufort Co would create an
advocacy threat for the auditor as the auditor is effectively being asked to promote and represent
their client’s position to the point where the auditor’s objectivity is compromised.

Audit
The company is going through listing process and if the company has been listed then the audit firm
need to consider that the work will be increased as disclosure requirements, new accounting policies,
stock exchange laws will now be audited and due to this fee should be increased.

It should be considered whether the firm has professional competence in the current staff to carry
out the audit once the client has been listed.

Accounting and bookkeeping service

The Moritz & Co also provides accounting and bookkeeping services for Beaufort Co, currently
Beaufort co. Is not listed, and the service is immaterial and this service can be provided with use of
different teams to reduce the self review threat.

As the company is going through listing process and if the audit is being listed in near time, the firm
can not provide accounting and bookkeping service if it material as it will create self review threat and
the auditors would be reluctant to review their own work. Terefore, the firm can not provide this
service

Further, if the auditors are providing this service, then they will be assuming the management
responsibility which is prohibited under the code.