CASE: ONE

This scenario relates to four requirements.

It is 1 July 20X5. Dashing Co manufactures women’s clothing and its year end was 30 April 20X5. You
are an audit supervisor of Jaunty & Co and the year‐end audit for Dashing Co is due to commence
shortly. The draft financial statements recognize profit before tax of $2.6m and total assets of $18m. You
have been given responsibility for auditing receivables, which is a material balance, and as part of the
audit approach, a positive receivables circularization is to be undertaken.

At the planning meeting, the finance director of Dashing Co informed the audit engagement partner that
the company was closing one of its smaller production sites and as a result, a number of employees would
be made redundant. A redundancy provision of $110,000 is included in the draft financial statements.

Required:

(a) Describe the steps the auditor should perform in undertaking a positive receivables circularization for
Dashing Co.

(b) Describe substantive procedures, other than a receivables circularization, the auditor should perform
to obtain sufficient and appropriate audit evidence to verify EACH of the following assertions in relation
to Dashing Co’s receivables:

(i) Accuracy, valuation and allocation

(ii) Completeness, and

(iii) Rights and obligations.

(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the redundancy provision at the year end.

(d) A few months have now passed and the audit team is performing the audit fieldwork including the
audit procedures which you recommended over the redundancy provision. The team has calculated that
the necessary provision should amount to $305,000. The finance director is not willing to adjust the draft
financial statements.

Required:
Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain
unresolved.

Case two

This scenario relates to four requirements. It is 1 July 20X5. Hyacinth Co develops and manufactures
computer components and its year end was 30 April 20X5. The company has a large factory, and two
warehouses, one of which is off‐site. You are an audit supervisor of Tulip & Co and the final audit is due
to commence shortly.

Draft financial statements show total assets of $23.2m and profit before tax of $6.4m. The following three
matters have been brought to your attention: Inventory valuation Your firm attended the year‐end
inventory count for Hyacinth Co and confirmed that the controls and processes for recording work in
progress (WIP) and finished goods were acceptable. WIP and finished goods are both material to the
financial statements and the audit team was able to confirm both the quantity and stage of completion of
WIP.

Before goods are dispatched, they are inspected by the company’s quality control department. Just prior
to the inventory count, it was noted that a batch of product line ‘Crocus’, which had been produced to
meet a customer’s specific technical requirements, did not meet that customer’s quality and technical
standards. This inventory had a production cost of $450,000. Upon discussions with the production
supervisor, the finance director believes that the inventory can still be sold to alternative customers at a
discounted price of $90,000. Research and development Hyacinth Co includes expenditure incurred in
developing new products within intangible assets once the recognition criteria under IAS® 38 Intangible
Assets have been met. Intangible assets are amortized on a straight line basis over four years once
production commences.

The amortization policy is based on past experience of the likely useful lives of the products. The opening
balance of intangible assets is $1.9m. In the current year, Hyacinth Co spent $0.8m developing three new
products which are all at different stages of development

Sales tax liability Hyacinth Co is required by the relevant tax authority in the country in which it operates
to charge sales tax at 15% on all products which it sells. This sales tax is payable to the tax authority.
When purchasing raw materials and incurring expenses in the manufacturing process, the company pays
15% sales tax on any items purchased and this can be reclaimed from the tax authority. The company is
required to report the taxes charged and incurred by completing a tax return on a quarterly basis, and the
net amount owing to the tax authority must be remitted within four weeks of the quarter end. The draft
financial statements contain a $1.1m liability for sales tax for the quarter ended 30 April 20X5. Required:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the VALUATION of Hyacinth Co’sinventory.

(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Hyacinth Co’s research and development expenditure.

Case three

This scenario relates to four requirements. It is 1 July 20X5. You are an audit manager of Cranberry & Co
and you are currently responsible for the audit of Gooseberry Co, a company which develops and
manufactures health and beauty products and distributes these to wholesale customers. Its draft profit
before tax is $6.4m and total assets are $37.2m for the financial year ended 30 April 20X5. The final audit
is due to commence shortly and the following matters have been brought to your attention. Research and
development Gooseberry Co spent $1.9m in the current year developing nine new health and beauty
products, all of which are at differentstages of development. Once they meet the recognition criteria under
IAS® 38 Intangible Assets for development expenditure, Gooseberry Co includes the costs incurred
within intangible assets. Once production commences, the intangible assets are amortised on a straight
line basis over three years. Management believes that this amortisation policy is a reasonable
approximation of the assets’ useful lives, as in this industry there is constant demand for innovative new
products. Depreciation Gooseberry Co has a large portfolio of property, plant and equipment (PPE). In
June 20X5, the company carried out a full review of all its PPE and updated the useful lives, residual
values, depreciation rates and methods for many categories of asset. The finance director felt the changes
were necessary to better reflect the use of the assets. This resulted in the depreciation charge of some
assets changing significantly for this year. Bonus The company’s board is comprised of seven directors.
They are each entitled to a bonus based on the draft year‐end net assets, excluding intangible assets.
Details of the bonus entitlement are included in the directors’ service contracts. The bonus, which
related to the 20X5 year end, was paid to each director in May 20X5 and the costs were accrued and
recognised within wages and salaries for the year ended 30 April 20X5. Separate disclosure of the bonus,
by director, is required by local legislation.

Required:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Gooseberry Co’s research and development expenditure.
(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the matters identified regarding depreciation of property, plant and equipment.

(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the directors’ bonuses.

Case: four

This scenario relates to five requirements. It is 1 July 20X5. Airsoft Co is a listed company which
manufactures stationery products. The company’s profit before tax for the year ended 30 April 20X5 is
$16.3 million and total assets as at that date are $66.8 million. You are an audit supervisor of Biathlon &
Co and you are currently finalizing the audit programmesfor the year‐end audit of your existing client
Airsoft Co. You attended a meeting with your audit manager where the following matters were discussed:
Trade payables and accruals Airsoft Co purchasesitsraw materials from a large number of suppliers. The
company’s policy is to close the payables ledger just after the year end and the financial controller is
responsible for identifying goods which were received pre year‐end but for which no invoice has yet been
received. An accrual is calculated for goods received but not yet invoiced (GRNI) and is included within
trade payables and accruals. The audit strategy has identified a risk over the completeness of trade
payables and accruals. The audit team will utilise automated tools and techniques, in the form of audit
software while auditing trade payables and accruals. Bank overdraft and savings accounts Airsoft Co’s
draft financial statements include a bank overdraft of $2.6 million, which relates to the company’s main
current account. In addition Airsoft Co maintains a number of savings accounts. The savings account
balances are classified as cash and cash equivalents and are included in current assets. All accounts have
been reconciled at the year end. Directors’ remuneration Airsoft Co’s board comprises eight directors.
Their overall remuneration consists of two elements: an annual salary, paid monthly and a significant
annual discretionary bonus, which is paid in a separate payment run on 20 April. All remuneration paid to
directors is included within wages and salaries. Local legislation requires disclosure of the overall total of
directors’ remuneration broken down by element and by director.

Required:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the COMPLETENESS of Airsoft Co’s trade payables and accruals.

(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to Airsoft Co’s year‐end bank balances.
Case five

You are the audit manager of Violet & Co and you are currently reviewing the audit files for two
of your clients for which the audit fieldwork is complete. The audit senior has raised the
following issues. Daisy Co Subsequent to the year‐end, the company’s sales ledger has been
corrupted by a computer virus.

Daisy Co’s finance director was able to produce the financial statements prior to this occurring;
however, the audit team has been unable to access the sales ledger to undertake detailed testing
of revenue or year‐end receivables. All other accounting records are unaffected and there are no
backups available for the sales ledger. Daisy Co’s revenue is $15.6m, its receivables are $3.4m
and profit before tax is $2m.

Fuchsia Co Fuchsia Co has experienced difficult trading conditions and as a result it has lost
significant market share. The cash flow forecast has been reviewed during the audit fieldwork
and it shows a significant net cash outflow. Management are confident that further funding can
be obtained and so have prepared the financial statements using the going concern basis with no
additional disclosures; the audit senior is highly sceptical about this. The prior year financial
statements showed a profit before tax of $1.2m; however, the current yearloss before tax is
$4.4m and the forecast net cash outflow forthe next 12 months is $3.2m.

Required:

(i) Discuss the issue, including an assessment of whether it is material.