Case A – For Questions 1 – 5

Greenfields Co specialises in manufacturing equipment which can help to reduce toxic

emissions in the production of chemicals. The company has grown rapidly over the past
eight years and this is due partly to the warranties that the company gives to its customers.
It guarantees its products for five years and if problems arise in this period it undertakes to
fix them, or provide a replacement product.

You are the manager responsible for the audit of Greenfields and you are performing the
final review stage of the audit and have come across the following issues.

Receivable balance owing from YM Co

Greenfields has a material receivable balance owing from its customer, YM Co. During the
year-end audit, your team reviewed the ageing of this balance and found that no payments
had been received from YM for over six months, and Greenfields would not allow this
balance to be circularised. Instead management has assured your team that they will
provide a written representation confirming that the balance is recoverable.

Warranty provision
The warranty provision included within the statement of financial position is material. The
audit team has performed testing over the calculations and assumptions which are
consistent with prior years. The team has requested a written representation from
management confirming the basis and amount of the provision are reasonable. Management
has yet to confirm acceptance of this representation.

Other information
You have reviewed a financial summary which is to be included in the annual report and
have found that the details are inconsistent with the financial statements. Your
investigations have shown that the error is in the summary and not the financial statements.

Note:

A. Management has now stated that it is not prepared to confirm that the basis and
amount of the warranty provision are reasonable.
Case B – For Questions 6 – 10

You are an audit manager in a medium-sized audit firm. You are currently planning the audit
of Flowers Anytime (Flowers) for the year ended 31 March 20X7. Flowers, a traditional
flower wholesaler, is a new audit client for your firm.

As this is the first year you are auditing Flowers, it is necessary to understand and evaluate
the company’s system of internal control. The audit firm’s policy requires the following steps
to be taken when performing first year audits:
(1) Perform walkthrough tests
(2) Complete flowcharts and internal control evaluation questionnaires
(3) Revise the audit strategy and audit plan
(4) Perform tests of control

You have obtained the following background information about your new client. When
customers call the company, their orders are taken by clerks who take details of the flowers
to be delivered, the address to which they are to be delivered, and the account details of
the customer. The clerks input these details into the company’s computer system (whilst the
order is being taken) which is integrated with the company’s inventory control system.

The audit junior has made the following notes on the system for the receipt, processing and
recording of the orders:
(1) All orders are recorded on pre-printed, three-part sequentially numbered order forms.
One copy is kept by the sales clerk, one copy is forwarded to the warehouse for the dispatch
of inventory, and one copy being is sent to the customer as evidence of the order.
(2) The sales clerk regularly performs reviews of the standing data on the system, matching
the price of flowers against an up-to-date price list.
(3) To ensure completeness of orders, a sequence check is performed on the sales invoices
manually by the sales clerk and any missing documents are investigated.
(4) Sales invoices are posted on a weekly basis to the sales daybook and accounts
receivable ledger.

Note:

A. During the course of the audit, the audit team identified numerous deficiencies in
internal control relating to the sales system. The amounts exposed to the deficiencies
were high and you have concluded that it is likely that the deficiencies would result
in material misstatements in the financial statements. A deficiency was also identified
in the purchases system but further investigation showed this to be a minor, isolated
issue.
Case C – For Questions 11 – 15

You are an audit senior of UYE & Co (UY) and your firm is the external auditor of CS, a large
private company that runs major sports venues in the UK. CS has a year end of 31
December and you are currently preparing for the interim audit of CS for the six months
ended 30 June 20X4.
You are reviewing the work programme the audit assistant has prepared in relation to work
to be carried out at the interim audit and note the following procedures.
Procedure 1 Update documentation relating to CS’s accounting systems which has been
prepared in prior year audits
Procedure 2 Obtain third party confirmations relating to receivables, payables and cash at
bank
Procedure 3 Review the directors’ assessment of whether CS is a going concern. Consider
whether the assumptions made by the directors are reasonable and whether it is
appropriate to prepare the accounts on the going concern basis
Procedure 4 Perform preliminary analytical procedures in order to identify any major
changes in the business or unexpected trends
You are also aware that CS established an internal audit (IA) department in May 20X4 and
although the Board is still deciding on the exact responsibilities they will have, it is likely
that, among other things, IA will be involved in monitoring the internal controls relating to
CS’s online ticket sales system. The possibility of UYE & Co using the work of the internal
audit department or using them to provide direct assistance has already been raised with
the board.

Note:

A. During the interim audit, you performed internal controls testing and the results of
these indicate that, to date, the control environment is strong and internal controls
are operating effectively. You are assessing what impact the results of testing from
the interim will have on the final audit and have made a list of the following
considerations
1. The significance of the assessed risks of material misstatement at the
assertion level
2. The specific controls that were tested during the interim period, and
significant changes to them since they were tested, including changes in the
information system, processes, and personnel
3. The length of the remaining period under audit
4. The extent to which the auditor intends to reduce further substantive
procedures based on the reliance of internal controls