Question 1 Your firm is the newly appointed external auditor for Tan Ltd (Tan) for the year ending 31 July 2020. As the audit senior responsible for planning the audit of Tan, you have been asked by the engagement partner to take into consideration the following three areas of audit risk: Land and freehold factory Plant and machinery Related party transactions Tan manufactures and sells plastic forks, spoons, knifes and plates to various EU counterparties. Sales are made in both, Sterling and Euros. Due to increased public awareness of the harmful effects of plastic products to the environment, Tan decided to invest in the development of new range of biodegradable products. The finance director of Tan, John Stones, has provided the below information: 1. Tan modified a number of its machinery in order to produce the new products developed. The components purchased for the modification and the associated labour costs were included in Plant and machinery. Labour cost of modification was estimated based on timesheets completed by personnel. Some components were imported from Europe and paid at the local currency. 2. During the year ending 31 July 2020, Tan sold part of the land where the factory is located to Sava Ltd (Sava), which is owned exclusively (100%) by an executive director of Tan 3. Tan decided to recognize the value of its freehold factory and remaining land at its fair value for the first time on 31 July 2020. The valuation of the freehold factory and remaining land was conducted by Kinder Ltd (Kinder) firm of chartered surveyors. Maria Stones, John Stones wife serves as a partner at Kinder. 4. Tan depreciates plant and machinery over 10 years Internal control deficiencies identified within the year are as follows: – Tan normally provides a maximum of 10% discount to customers depending on the volume of products ordered. During the year, it was discovered that for a number of contracts, discount in excess of 10% were provided - Tan has a component purchase process that involves identifying the component required, obtaining quotes from different suppliers included on an approved supplier list, and then placing an order with the cheaper supplier. Over the past year it was discovered that a number of orders were placed from suppliers not on the approved supplier list. Notes to the financial statements for the year ending 31 July 2020 (extract) Land Cost/Fair value At 1 August 2019 Revaluaton Additions Disposals At 31 July 2020 £'000 9.100 2.600 0 (3.900) 7.800 Freehold factoy '000 13.878 3.023 0 0 16.900 Plant and muchinery £'000 2.777 0 776 (30) 3.523 Deprecition At 1 August 2019 Revaluaton Change for the year Disposals At 31 July 2020 0 0 0 10.793 (10.793) 0 0 1.570 0 246 (13) 1.803 0 0 0 Carrying amount At 1 August 2019 At 1 August 2018 7.800 9.100 16.900 3.085 1.720 1.206 Requirements 1.1 Describe items to be considered while determining the members of the audit team to complete the audit engagement (2 Marks) 1.2 Identify audit risks relating to the below areas and procedures to be implemented to address those risks: 3 - Land and freehold factory Plant and machinery - Related party transactions

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