1 /4

Word processing area - only data in this area will be marked:

Question 77

77.1

Auditors should be detecting fraud.

Auditors should be helping business stop becoming not a going concern.

77.2

The engagement partner can continue as for more years as long as the company is not listed.
If the company is listed then the engagement partner should have been rotated off after five years and can only continue for a maxmium
of two more years under limited circumstances.
There is a familiarity threat.
The engagement partner can continue but independence and objectivity should be reviewed. If threats are too high and can not be
reduced to an acceptable standard then the engagement partner should be removed.
If the engagement partner continues the Ethics Partner should be informed and the reasons why disclosed.
The work carried out by the auditor should be subject to an expanded independent review.
The rest of the audit team should be rotated if necessary.
The engagement partner should sign an independence declaration form.

77.3

The responsiblities of both the directors and the auditors. The directors responsibility to preapre the financial statements in accordance
with the relevant accounting standards. The auditors to provide reasonable assurance that the financial statements are free from error or
material mistatement.
Any significant deficiencies in internal controls should be communicated.
Any disagreements with the management over accounting policies.
If the audit opinion needs to be modified.

77.4

Joseph is commiting a criminal offence of insider dealing.

Joseph should comply with the ICAEW Code of Ethics.
Joseph's integrity is in question.
This increases the audit risk as there is a higher risk of fraud within the financial statements.
Should be reported to the money laundering officer.
Breach of confidentiality.
Gives rise to a self-interest threat

77.5

A written document can be circulated to shareholders

Have the right to request a general meeting and to speak at it.
The reasons for resignation should be documented

77.6

Statement 1 would not be as the disposal of inventory does not contribute to the calculation of how many days the inventory is held for. If
they were written down last year and disposed of this year they would not be included in the inventory numbers.
Statement 2 would explain why their is a fall in days as this is an implementation of an internal control which would ensure that inventory
is being monitored more efficiently improving how many days inventory is held for.
 2 /4

Word processing area - only data in this area will be marked:

Question 78

78.1
Going Concern
Gross profit has decreased by 18.8% from the previous year. The gross profit margin has decreased from 39.1% to 35% from the previous
year. This supports the written information which states that trading conditions have been difficult due to an increased number of competitors.
This increase may have resulted in goods having to be sold at a lower price which decreases the profit margin. According to the British Retail
Consortium difficult trading conditions have been forecast for December X9 and throughout 20Y0 which means that trading is not liekly to
improve in the next year which means that it may be difficult for SALT to continue with making enough of a profit from sales in comparison to
the cost of the goods.

SALT has received criticism in the media which means may result in a decrease in customers. As well as this, it puts off any potential
invenstors. Decrease in customer satisfaction may lead to less sales thus causing low profits.

HMRC has commenced an investigation into breaches of the minimum wage leglisation. If the company are found to have committed an
offence there may be fines issued to the company, which would effect the cash flow of the company. Furthermore, the company may need to
increase there wages which would decrease the profit for the company. As well as this, it could put a bad reputation on the company, which
could lead to employees leaving, less customer sales and or investors, and potentially investors selling their shares.

A significant amount of money will have to be spent on the reorganisation plan, with redundancy costs being significant. The voluntary
redundancy plan means that people who have worked there for longer/are higher in the company may volunteer which will result in higher costs
of redudancy than choosing people on lower salaries who have worked for less time. They are also offering more beneficial terms that the
statutory rates which will mean high costs for the company which may affect cash flow.

The overdraft facility is due for review as well as profit and cash flow forecasts for five years. Due to the trading conditions, hmrc investigation
and reorganisation plans, the profit and cash flow forecasts may lead to the bank thinking that the risk that the company will not be able to
repay the loan is too high and therefore demanding repayment of the overdraft. This will cause cash flow issues. The auditors should review the
cash flow and profit forecasts to calcualte the likelihood of the overdraft facility being extended.

The implementation of an internal audit function will cost the company money. Whilst in the long-term it may prove to be efficient and improve
the losses made from lack of controls in the company, in the short term cash will have to be spent on implementing them which may cause cash
flow issues.

Trade payables have increased by £3,347,000 which is significant. This could mean that suppliers are being paid later and possibily after the 30
days. This could lead to bad relationships with suppliers. This could lead to suppliers discontinuing their business relationships, and also
charging higher prices.

Provision for Redundancy Costs

As the redudancy progamme is voluntary it is hard to predict who will volunteer. Therefore, the provision will be hard to estimate. The auditors
should discuss with management who they think is likely to volunteer and the most likely estimate should be calculated by the auditors and
compared to what has been provided in the financial statements.
The redundancy packages have been offered with terms more beneficial than the statutory rates set out by the UK Government. This means
that the auditors cannot rely on the government regulations and laws and follow this to predict the costs of the redundancies. The auditors
should enquire on what the expected benefits in comparison should be. The provision is likely to be material to the financial statements as 20%
of the workforce is to be made redundant.

78.2
The procedures at stores would include reconciling cash to receipts at the stores to ensure that they match and investigating any differences.
Inventory counts should take place at the warehouses and marches to purchase invoices. Inventory should be investigated for any damage or
substandard goods on receipt.

If the firm decides to use the work of SALT's internal audit function, tests of controls should be included to check that the controls are working
efficiently and the firm is able to rely on them to provide sufficient appropriate evidence. If the internal audit function is deemed sufficient, the
firm can carry out less substantive procedures. Any deficiencies found in the internal controls should be documented and written down and
communicated to management.

Three performance indicators would include...

78.3
If the firm provide a forensic specialist to estimate the value of inventory lost there is a management threat as they have to use their judgement
and therefore are carrying out a job that is normally carried out by management. The firm may become too aligned with the views of
management which may threaten the objectivity and independence of the firm. It also presents a self-review threat as this figure will be used in
the financial statements and the firm are unlikely to criticise a value given by a specialist provided by themselves.The firm should only provide a
forensic specialist if appropriate safeguards can be implemented. A separate engagement team should carry out the engagement, and
information barriers should be put in place. The Ethics partner should be informed and independence declarations should be signed.
If the specialist then acts as an expert witness this would cause an advocacy threat as they would be promoting the interests of the client which
would threaten independence.
Each member being offered goods of their choice up to a retail value of £500 is bribery. This is a criminal offence which the firm should report to
the MLRO. If they partake in the bribe then they themselves will be committing a criminal offence. The Ethics Partner should be informed of the
bribe. It also presents a self-interest threat and intimidation threat, the auditors may be worried about not completing the audit in time for fear of
losing the client.
 3 /4

Word processing area - only data in this area will be marked:

Question 79

79.1
The trade payables should be tested for completeness and accuracy. The sample size has been reduced below the standard sample size by
almost half. No test of controls for the trade payables has been carried out to ensure that these are enough to provide other sufficient
appropriate evidence. The sample size has been decreased because no issues have been found in previous years however this should not
affect the sample size of this years audit and it should be treated independently. The balances have been limited to one sample date of year
end which limits the sample. The trade payables balance is significantly above the materiality threshold which means that there is significant
audit risk in this area and more procedures should be carried out.

79.2
The audit junior should have highlighted this matter to the audit senior. The audit junior should not have tipped off the client about this matter as
it may be money laundering. The audit junior should have reported the instance to the companys money laundering officer. This is because the
Chief Executive is the sole cheque signatory which indicates there has been no other authorisation. It is a transaction involving the directors so
it is material by nature. It is a one-off payment to an overseas agent which means there is a high risk of fraud. There was no supporting
documentation for the transaction.

79.3
Both of these matters should be included in the report to management and those charged with governance as they are instances of significant
deficiencies in internal controls.
If the timesheets are submitted over four weeks late there is a high risk that employees do not remember what they were working on and
therefore there are errors. This may mean that the costs attributed to each project are inaccurate. The importance of completing these
timesheets should be emphasised to the employees and greater punishment should be issued to those who dont submit them on time.
The comparison was last carried out over a year ago which indicates that the control is not being performed. This may lead to PPE which has
been impaired not being recorded in the financial statements. As well as this PPE may be lost of stolen and this would not be noticed. The
register may include items which have been disposed of or may not include assets which have been acquired. This could cause
understatement or overstatement of the assets in the financial statements. The company policy should be reiterated to the employees and
increased to more often than every six months. Management should check that these conparisons are taking place.

79.4
The engagement quality control review should perform an objective evaluation of the significant judgements made by the engagement tea, and
the conclusions reached in formulating the assurance report. Significant matters should be discussed with the engagement partner. The review
should reivew the matters to be communicated to management and those charged with governance and where applicable other parties.
Significant risks identified during the engagement and the responses to those risks should be reviewed. The significance and disposition of
corrected and uncorrected misstatement identified during the engagement should be reviewed.
The engagement quality control reviewer should be suitably qualified, not involved with the engagement team, with sufficient appropriate
experence and authority to objectively evaluate the judgements of the enagement team and the conclusions reached.
They should be eligible for appointment as a statutory auditor and not have been involved in the perofrmance of the audit to which the
engagemen quality control reciew relates.
 4 /4

Word processing area - only data in this area will be marked:

Question 80

80.1
Coniston Ltd
The auditor has not been able to obtain sufficient appropriate evidence, therefore the auditor should issue a qualified opinion. As it is only
affected one area of the financial statements it is unlikely to be pervasive. A paragraph should be added to the auditors report to state that this
evidence was not obtained.

Grasmere Ltd
The auditors should provide limited assurance on the financial statements. ???

Rydal Ltd
As the prospective information has significant assumptions which are unrealistic the firm should request that management amend the forecasts.
If management refuse then the firm should provide a modified opinion in negative terms. If the client refuses to issue the forecast with this
opinon then they should consider resignation.

80.2
Prospective financial information requires an increased level of judgement as they include more estimates. Financial statements include
historical information. The prospective financial information is often limited to one area of the financial statements therefore there is less
evidence and knowledge to back up information and draw conclusions. Examination of prospecitve financial information often is a shorter
engagement therefore less documentation can be reviewed. They are often one off engagements therefore there is less understanding about
the entity and its environment.