Audit Practice 2020/21 Answer all of Sections A and B and C Section A You are the audit manager of East & Co and are reviewing the key issues identified in the files of two audit clients

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Audit Practice 2020/21

Answer all of Sections A and B and C

Section A

You are the audit manager of East & Co and are reviewing the key issues identified in the files of two audit clients.

Gulf Industries Co (Gulf)

Gulf’s year end was 31 March 2020 and the draft financial statements show revenue of £28·2 million, receivables of £5·6 million and profit before tax of £4·8 million. The fieldwork stage for this audit has been completed.

A long-standing customer of Gulf owed an amount of £350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Gulf from this customer as they were disputing the quality of certain goods received from Gulf. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

Sea Trading Co (Sea)

Sea is a new client of East & Co, its year end was 31 January 2020 and the firm was only appointed auditors in February 2020, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Sea’s warehouse was undertaken on 31 January 2020 and was overseen by the company’s internal audit department. Neither East & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of £2·4 million, revenue of £10·1 million and inventory of £510,000.

Required: For each of the two issues:

1. Discuss the issue, including an assessment of whether it is material

(20 Marks)

 

2. Recommend ONE procedure the audit team should undertake to try to resolve the issue; and                                                                                      (10 marks)

 

3. Describe the impact on the audit report if the issue remains UNRESOLVED.

(10 marks)

 

 

Section B

Refresh Cola Co (Refresh) manufactures fizzy drinks such as cola and lemonade as well as other soft drinks and its year end is 31 December 2020. You are an audit manager of Greenbank & Co and are currently planning the audit of Refresh. You attended the planning meeting with the audit engagement partner and finance director last week and the minutes from the meeting are shown below. You are reviewing these as part of the process of preparing the audit strategy document.

 

Minutes of planning meeting for Refresh:

 

Refresh’s trading results have been strong this year and the company is forecasting revenue of £85 million, which is an increase from the previous year. The company has invested significantly in the cola and fizzy drinks production process at the factory. This resulted in expenditure of £5 million on updating, repairing and replacing a significant amount of the machinery used in the production process.

 

As the level of production has increased, the company has expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Refresh and some are rented from third parties. There will be inventory counts taking place at all 15 of these sites at the year end.

 

A new accounting general ledger has been introduced at the beginning of the year, with the old and new systems being run in parallel for a period of two months. In addition, Refresh has incurred expenditure of £4·5 million on developing a new brand of fizzy soft drinks. The company started this process in November 2019 and is close to launching their new product into the market place.

 

As a result of the increase in revenue, Refresh has recently recruited a new credit controller to chase outstanding receivables. The finance director thinks it is not necessary to continue to maintain an allowance for receivables and so has released the opening allowance of £1·5 million.

 

The finance director stated that there was a problem in April in the mixing of raw materials within the production process which resulted in a large batch of cola products tasting different. A number of these products were sold; however, due to complaints by customers about the flavour, no further sales of these goods have been made. No adjustment has been made to the valuation of the damaged inventory, which will still be held at cost of £500,000 at the year end.

 

As in previous years, the management of Refresh is due to be paid a significant annual bonus based on the value of year-end total assets.

 

Required:

1. Explain the audit risk                                                                       (10 marks)

 

2. Describe the components of audit risk.                                             (10 marks)

 

3. Using the minutes provided, identify and describe FIVE audit risks, and explain the auditor’s response to each risk, in planning the audit of Refresh Cola Co.

(20 marks)

Section C

 

Independence is a key auditing concept.

 

Imagine that you are an audit senior who has been asked to explain to a new recruit what this term Independence means to the auditor.

 

Your answer should take the form of a 1,000 word essay and should include an explanation of the six potential threats to independence identified by the ethical standards.

(20 marks)

 

•  

Use the online textbook:

 

The Audit Process Principles, Practice and cases

Gray I, Manson S, Crawford L,

Cengage 7th edition

 

 

Annex 1: Marking guide

For your guidance the marking template which will be used for feedback in section C is attached.

Assessment criteria	G	F	E	D	C	B	A
Knowledge – theories, concepts, application The major issues and arguments are addressed. Theories, concepts and cases are relevant and selected to support and illustrate the arguments. Use and application of theories, concepts and cases are correct and support the interpretation being made.
Organisation and presentation The structure of the essay is clear and logically organised, with appropriate use of sub-headings and paragraphs. The essay sticks to the key focus of the question. A coherent and connected line of argument is developed. The essay is written in concise plain English with attention given to grammar and spelling.
Referencing An appropriate referencing style is consistently applied and sufficient and relevant references are consulted.
Evidence of critical thought The essay offers a comprehensive and critical evaluation of the results. The essay discusses the limitations of the evidence in the context of the wider literature. In particular, conclusions are persuasive and supported by the evidence.
Action points Ways in which the research, writing and presentation of the essay could have been improved. If you require further feedback or clarification you are welcome to contact your tutor and arrange an appointment to meet with them.       The scores are for indicative purposes only and do not directly reflect the final mark. Some elements (notably content and critical evaluation) will carry greater weighting than others.