June 2016

34.1
- training about anti money laundering for staff
- assign a ethical partner responsible for consulting
- assign MLRO inside firm
- frequently update any new regulation and policy to staff

34.2
- obtain a sample of contract and agree with the classification of working-in-progress
- perform cut off procedures
- obtain a sample of payment evidence to see they actual paid
- enquire the management for revenue recognition policies and check with the general ledger
- reperform the repayment for a sample of boat to see whether they are 40% of price
- perform 3-way matching of revenue from order to invoice and payment
- trace the price list and match with the actual contract
- test of control over the revenue and document

34.3
- account that steady growth over a short period
- inconsistence between relevant account, such as, revenue increases but cost of sale is
decreases
- quality items like director transaction, related parties transactions
- the account that have amount exceeded to that materiality threshold
- an area that require a high judgement and estimating, such as depreciation, provision
- any area highlighted by the prior auditor

34.4
- provision can be misstated as they related to director’s future claim
- the revenue has increased dramatically during the finance year, approximately 14.8%
- the current provision is not consistent with the growth of revenue, approximately 0.9%
- the non-current provision is exactly along with revenue, which is unusual.
- the change in warranties policies too fast can lead to cut-off provision error.
- the provision policies may no meet the relevant requirements

34.6
- unqualified employees
- can mis-payment the payroll
- employment dissatisfied
- high employment turnover if keep employ unqualified employees
- waste of time and money to training unsuitable staff
- reduce the work quality

35.
35.1
(a) responsibilities of TCWG:
- responsible for preventing, detecting any instance of fraud
- safeguard the company’s asset
- work and communicate with auditor for detecting fraud
- provide a policies and procedures to prevent and detect fraud
- identify any related regulations
- frequently update related regulation
- open training for staff about anti-fraud and create a anti-fraud working environment

(b) Factors that can cause fraud:

Justification Procedure
- Revenue is significantly decreasing, - Obtain the management forecast of profit
approximately 22.7% and check the reasonability.
- The loss has increased from 10 to 1200 - Reperform the forecast
- Those indicated that the unhealthy - Enquire the management about the
financial position of firm criteria for their going concern
Can lead to poor credit point from supplier assessment.
- The company heavily depend on the - Obtain the sale detail and agree the
current loan amount to sale ledger.
- The overdraft facility is 475 mil over 500 - Obtain a sample of payment evidence.
mil - Trace a sample of sale transaction for
- The bank repayment date is already meet receivable ledger to sale invoices.
on 30 Sep 20x6. - Vouch a sample of sale invoice to sale
- High proper that company can not meet detail, to check the existence assertion.
the maturity and be force to bankruptcy. - Enquire the repayment plan of the
- No revenue but heavily invested in the management and any backup plan if the
development bank does not agree to expanding the
- The share price and forecast profit maturity.
continues downward - Obtain the bank confirmation of the loan
- Competitors is strong with the new balance and overdraft balance
engines - Reperform the forecast cash flow
- A fine and suspension may happen as the - Read the board minutes.
upcoming investigation by UK Serious - Test of control over the revenue cycle and
Fraud Office document finding
- Serious fraud identified by internal - Obtain the correspondence of the legal
auditor. advisor for the potential fines
- expanding loan facilities can be a - Inspect the loan contract and review the
motivation to overstatement of assets and terms.
understatement of liabilities - Enquire the management for their further
plan to secure their operating situation.

(b) Inventory of spare parts stored in the UK

Justification Procedure
- The inventory days is double for this year: - Enquire the management for the reason of
20x6: 1050/3900*365 = 98 days the change in inventory days and their
20x5: 858/6277*365= 50 days solution.
- The higher inventory days can lead to out - Obtain the purchase list and agree the
of date and obsolete of inventory. classification of inventory to general
- The inventory is not consistent with the ledger.
revenue, why more inventory in the - Obtain the working forex and check the
continues loss situation. exchange rate from other relevant
- The increasing of inventory is material, sources.
approximately 4% of revenue. It may be - Reperform the working forex
overstated or misclassificated. - Inspect the inventory counts
 - There may be error in forex as purchase - Recalculate the NRV and compare to cost
spare part in many countries of inventory
- The inventory maybe overstated if the - Vouch a sample of purchase to the
cost is higher than NRV, the company still inventory list to ensure completeness
recorded as cost for inventory - Trace from general ledger to purchase
- Each spare part has separate standard, invoice to check existence
then the quality may not meet the
standard as hard to control.
- Gross profit has decreased:
20x5: 26.2%
20x6: 19.5%
- The full inventory counts in Flint never
took places, the inventory can be
obsolete and damage without recognition.

35.3
(a)
- materiality threshold
- timeline
- risk and TOC level
-

(b)
Reasons:

36.1
The obj and independent are importance:
- Objectivity is a state of mind that exclude bias, prejudice and compromise.
- Independence is freedom from situations and relationships which make it probable
that a reasonable and informed third party
- As the separate of management and ownership in a company, It is highlighted the
crucial role of audit for providing assurance to shareholders. The management
sometime manipulate the financial information to promote more investor. And auditor
come to enhance the credibility of financial statement and reduce bias of
management.
- Therefore, the objectivity and independence of auditor is the core of audit service.
36.2

Threats Actions
Shentan - Assign a second independence
Familiarity: long association between the partner
partner with Shentan, reluctant to challenge - Consult the ethical partner
the management - May consider to remove the partner
Potential self-interest and management from the engagement with Shentan
threat if it is the big client to the firm
Maxfield - Separate into 2 team with a
Self-review: audit review their own work information barrier
and reluctant to highlight any misstatement - Audit document that management
as it is their own work has made all decisions.
- Consider resigning one engagement if
the fee exceeds the 10% threshold
- Call ICAEW helpline for advice
- Set out the responsibilities of both
parties in LOE.
- Ensure the mechanical and
informative of engagement
Newbee Group - Resign some of the engagement to
The total fee for Newbee Group accounted reduce the total fee below 10%
for: (95k+47k+45k+129k)/2010k=15% threshold.
The total fee exceed the 10% threshold, - Informed the management for the
which may cause self-interest, intimidation situation.
and management threat. - Then can continues to provide
Self-interest as the fee is big for audit firm service with safeguard.
and they reluctant to challenge the - Document safeguard
management - Assign another partner to review
Intimidation as firm fear to lose the client
Management threat as the auditor try to
please their client and decide align with the
management’s best interest

36.3
Issues
- potential conflict of interest
- may not acting best interest for all client
- confidential of information between client

Actions
- Informed all clients and consent client acceptance
- Informative barriers establish.
- Audit staff aware of the procedures
- Physical control over the data
- Training on the importance of confidentiality and conflicts of interest
- Separates team
- Independent consulting partners