Solution:

Answer.1:
(i) Yes. For a profit-oriented entity, basis other than profit may also be used if there is no profit in current
as well as previous years.

(ii) 1. Total Revenue

2. Total Expenses

3. Total Assets

(iii) If financial statements are not prepared by client yet, auditor can calculate materiality level from:

1. Interim Financial Statements (projected for whole year)

2. Budgeted financial statements

3. Financial Statements of prior periods

Answer. 2:
At the financial statement level these “responses” are overall ones, which may include:
emphasizing to the audit team the need to maintain an attitude of professional skepticism
assigning more experienced staff
Providing more supervision
the use of experts
Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.
changing the nature, timing and extent of audit procedures (for example, performing more
substantive procedures at the final rather than at the interim audit, or obtaining more “persuasive”
audit evidence).

Answer. 3:
Opening Balance:
i. TPL is a new audit client, therefore, there is a risk associated with opening Balances. Contract
fees and payroll are in local currencies which increases the risk of translation errors.

Revenue and service level credits

i. There is a risk of overstatement.
ii. Revenue per employee has risen from Rs. 71,700 (Rs. 69,600) to Rs. 90,000 (Rs. 88,400).
iii. Revenue has increased by 9% (contract fees have increased by 7.8%).
a. This is inconsistent with the loss of major contracts.
b. Revenue is received in advance and may be recorded in the wrong period.
iv. There is a risk of understatement of SLCs.
v. SLCs are awarded in arrears.
vi. SLCs have fallen from 2.9% of revenue to 1.9% of revenue.
vii. SLCs are calculated using the clients’ six-monthly service level reports.
a. Account managers have under reported failures to meet service levels.
b. An incorrect percentage may be applied when calculating SLCs.
Payroll
i. There is a risk of understatement.
ii. The average salary has fallen from Rs. 36,000 (Rs. 30,000) to Rs. 33,700 (Rs. 29,800).
iii. TPL is subject to multiple local tax rules which increases complexity.
iv. High staff turnover increases the risk of employees not being added to/removed frompayroll
systems.
v. The bonus is based on TPL’s performance against service levels and may be overstated dueto
the under reporting of service level failures.
vi. Payroll software is out of date which may result in the use of inappropriate tax rates /
deductions.

Going concern
i. TPL has made a loss in the year.
ii. It has lost major contracts and its competitors are becoming more efficient/cheaper.
iii. The bank requires TPL to maintain an interest cover of 2.5.
a. The loss in the year means TPL is not meeting the loan covenant.
b. The bank may recall the loan or invoke penalties.
iv. The chatbot trial failed, resulting in:
a. adverse publicity
b. loss of reputation
c. a claim by one client for compensation
d. the possibility of claims from other clients.
v. TPL will experience an adverse impact on profits/cashflows and may be unable to pay its
debts as they fall due.

(THE END)