Traffic Lights 36 mins

Traffic Lights (TL) is a small local charity providing play facilities to families coping with disabilities. Your
firm, Amber & Co (Amber), has been the auditor of the charity for a number of years. The charity is required
to receive audits to qualify for local authority grants, although it is a small charity.
TL operates a number of 'play rooms' in several towns in Wellshire. The play rooms are staffed by volunteers
and operates in premises that have been donated to the charity. There is no charge for attending the play rooms,
but pre-registered attendees may make a donation per visit should they wish to. The vast majority of the play
equipment has also been donated to TL, with some items being purchased by the charity after specific money
raising appeals for those particular items.
TL's income comes from the following sources:
• Donations by families for play sessions, which are placed into a locked donations tin at time of play.
These donations are counted at the end of business on a Monday, noted in a cash book and banked on
a Tuesday morning by a volunteer.
• Donations by local businesses and individuals, which are sent by cheque to the trustees at the
registered office or paid directly by bank transfer.
• Legacies, which are usually paid direct to the charity's bank by the legal advisers handling the legator's
estate.
• Local authority grants, which the charity reapplies for annually, and which are paid by direct transfer
in January if the application is successful.

The charity has limited controls. The operation of the controls is dependent on the volunteers and the trustees
(who are also volunteers). In the past your firm has judged the systems to be working effectively, but inherently
limited due to the use of volunteers and the fact that cash is only banked weekly. The firm has therefore usually
taken a substantive approach to the audit.
Given that most assets have been donated to the charity, TL has an accounting policy to value assets at 'value
to the charity', which equates to fair value in accordance with IAS 16 Property, Plant and Equipment. Assets
are depreciated over their useful lives of:
• Property 50 years
• Play equipment 10 years
Donated assets are recorded in a donated assets register. Purchased assets are recorded in a purchased asset
register.
Required
(a) Discuss the extent to which Amber will be able to use substantive analytical procedures in the audit of TL.
(3 marks)
(b) Describe substantive procedures the auditor could perform to obtain sufficient and appropriate audit
evidence in relation to the valuation of:
(i) Property (4 marks)
(ii) Play equipment (5 marks)
(c) Describe substantive procedures the auditor could perform to obtain sufficient and appropriate audit
evidence in relation to:
(i) Legacies (2 marks)
(ii) Donations (6 marks)
(Total = 20 marks)
Marking Scheme
Marks
(a) 1 mark per well-explained point.
• Expectation of comparability
• Controls
• Suitability of analytical procedures for particular assertions
• Nature of income and assets (donations, grants)
• Proof in total for depreciation 3
(b) 1 mark per well-explained procedure.
(i) Properties
• Review donated assets register for additions
• Compare value of properties with local valuation data, eg estate agents
• Consider time since previous revaluation of assets
• Calculate expectation of proof in total for depreciation on properties
• Compare calculation to trustee's calculation
• Enquire of trustees concerning any disposals
• Visit play premises/review any advertising to confirm disposals or not of premises 4
(ii) Play equipment
• Review purchased asset ledger for any donations in year
• Trace purchased assets to invoice/receipts (cost is likely to represent fair value in this case)
• Review donated asset ledger for any donations/write-offs in year
• Attend play sessions to assess whether any written off assets appear to be in use
• Compare fair value of donated assets to suitable evidence, eg:
– Toy retailers' websites
– eBay for quality used items
– Local 'secondhand' shops
• Recalculate depreciation (as for properties)
• Review useful life 5
(c) (i) Legacies
• Review correspondence to assess existence oflegacies in year
• Enquire of legal advisers about any legacies in year
• Review cash books for legacies (or any unspecified items), trace to bank statements
• Discuss whether any legacies have occurred with trustees 2
(ii) Donations
• Observe cash counting
• Trace a sample of weekly bankings from cash books to bank statements
• Review cash books for unusual items, eg gaps
• Review correspondence to assess existence of donations from businesses/individuals
• Review cash books for donations, trace to bank statements
• Review local press for mention of donations to the charity, trace to bank statements
• Ask trustees about any specific fundraising activity during the year relating to assets
• Cross-check between new purchased assets and related donated funds
• Attend play sessions to gain an impression of any new equipment which might not be included in
register 6
20