Q1

Materiality 30,000
YE 30-Dec-18

1 Review cost of sales, identifying and explaining the key audit risks

Transaction SCR 006972

shows DR office equipment 95,000
credit photgorphy
CR receiveabels
This relates to digital dreams

First, the debit if website develoepment should not be allowacated to office equipment
as this is tangible asset and websites are intangile. We are skeptisal of F Wright accoutning knowledge
and any other journals that he post as this is not in the right account

We are also reducing our reveivables and photogorphy therefore menaing we are capitlising this cost
we would need to review the invoicing that this has been raised against as to what actual photograpgy
was done and compare this to what is in the account
It looks that they are incorreclty capitalised. Cost of sales may therefore be understated.

Cost acqiring and development that is not intergral to hardware should be capilised as intgable asset
this does nto inlude internal website development costs which should be expensed to as they are incurred
unless reprenting a technolgical advance which can lead to future economci beneift
From my point about we would need to review the supporting doucments around this and calacuate if we can gain future benefut
it seems that there is no future benefit and that they are overstating assets

As this is a round number of 95,000 we should challenge management as costs usually are specific and allocated accordingly
the nature of this figure would imply that this is not an exact cost and as estimate

Obtain a schedule of development costs and check that costs meet the relevant capitalisation criteria

Cost of sales have increased by 9%, this is significantly less than the 14% increase in revenue which indicates that cost of sales may be understated.
We would need to enquire to management as to whyy COS increase less than revenue
we would also review invocies close to YE to determin if they are in the correct period ensure cut off is correcly done

When reviewing the COS os ales we can see mock up and new media are material to CSO
these can be overstaed and mock up 49% and new media increaes 39%
we would ask managmenet why this have increase and trace back to sample invoices of these amounts to ensure they are correct in the ledger

Photography has decreased by 17% and this could be understaeed

We can review tranasaction post year end as see ig they are in correct period and review other accoutns to see if missllowaction of photogiy

Perform preliminary analytical procedures by comparing monthly cost of sales with monthly income.

We can see a large amout of sales psoted for

Sept 350k
May 313k
Dec 402k
But when we look at spet 89.8k COS
May has 11k COS
Dec 41.2k
this is concenring as we would expect review to recongised when the cost are incurred inline with cos to sell

2 relating to work-in-progress:
a) financial reporting treatment
with regards to recognising the WIP we would need to see when the ivoices is filled
which point does frank and elephant become entitlted to recgonise
this as review. IRRS 15 revenue from contract requires renveue to be recognised
when as performance obligation is satifies. The performance obligation in the case the service
short-term marketing projects which is tilling the postion so an intiall recognistion point at the date which the offer
is accepeted. The customer is not going to pay unless part of the marketing project has been dleivered

direct cost incurred prior before the contract is expensed and may not be cairred into working progressis

Given the nature that they are short term contract we would not expect much WIP as they would be shortly
forfilied. We would have to review when the contract was started and compare to the work being done to date
as well as any payment received by the customers.

B) key audit risks

Frank wants to recognise contracts not complete as working progression

making closing adjustment to the financial statements therefore there is an an intention to
overstate revenue and assets.
making the tender
1,541 should be expened to the travel and legal expense accout
as these are incurred before the contract is taken out

the mock ups cotsts would be reviewed comparing the the material used to make the
such invoices from designer and comapring this to the ledger

Staff salaries should be compared to payroll summaries and reviewed against timesheets if they are submitted
As time was spent specificity for this task therefore we would inspect how this was tracked and trace back to the accounts

the extra time not recoverable should be expenesed and evidence of the total time should be reviewed
and recalcuatation using the time spend and cost per hour can be done

budgeted admin costs are used rather than actual costs therefore we would need to revaluate this amount
is is also not specific to the contract and a generic figure which possibilty represent fixed costs
C) Review comments on Elaine's audit work and set out key additional audit procedures

First issue is how was this sample one item taken, what was the basis of this item
was it material. We can see that it is below materiality. Was this done on random bases
we would need to see the working papers and caculation as well as the sample size

When we are testing for cost of sales we a looking for understatement we would start
with book value and compare to contract or invoice. We would nee to review what % of the
work is outstanding

With regards to the marketing contract sample from the cost entires to nominal ledger
there was no verification to 3rd party docuements, we would need to redo this test and review
the marketing contract and compare this to the ledger and costing account.

3 potential acquisition and financing of a new office in Paris

Appropriate financial reporting treatment using the working assumptions set out by Frank Wrigh

The acquisiton is almost finisiled by Nov 18 but when was it actually finalised
as to when the building was under our control as this will impact if we can capilise in this year
and potetila deprecation charges

Forward contract € 1,800.00 For Aug 19

The loss on the forecast purhcase of building with the loan should not be accounted for as the sale has not yet taken place.
However, the gain on the forward should be accounted for under IFRS 9.

This was not entered into the data set!

recognised as cash flow hedge

the finincial insturment here is the forward contract

the financial item was the purchase building

The change in the fair value of the expected cash flows on the hedged item
which is not recognised in the financial statements should be calculated as follows:

Forward contract £ £ 1,500.00 Exchange rate 1.2

Forwar contract £ YE £ 1,551.72 YE rate 1.16
-€ 51.72
At Nov 18
The forward contract is potentially recognised, but it has a zero fair value and there is no related cash transaction to record.
however the exsitance of contract ans associated risk would be disclosed as per IFRS 7

At the YE £'000
DEBIT Forward contract- Financial asset 52
CREDIT Profit or loss 52

As there has been a increase in the fair value of the hedge intstuement the forwadd contract and recogniesd
the gain on the forward contract in the profit and loss rather than cash flow

DEBIT Profit or loss 52

CREDIT Firm commitment 52
To recognise the increase in fair value of the hedged item
in relation to change in forward exchnage rate and recognise the offset the profit previously

Any further profit or loss is similarly recognised at 2019.

IF the transaction is treated as a cash flow hedge then the increase in the fair value of the hedged item
(the firm commitment) is not recognised in the financial statements at 30 Dec

The gain is reclassified from OCl (Other Comprehensive Income) in the next accounting period.
We assume that elpehant do not want the hedged accounting method to change the profit or loss and the
reserves for the year ended 30 Dec - in which case the hedged transaction should
be treated as a tair value hedge as the net impact on profit or loss is AS nil.
The cash tlow hedge results in a credit to reserves.
AIM Listed company
navagation for cars
Work 6 month contract

Q2 YE 31 March 20X9
No adjustment for deferred tax have been made
tax rate 23%

A) provides explanations and calculations of the financial reporting implications, including deferred taxation, for each of the transactions in the file
(Exhibit 1)

(1) Non-current assets YE 31 March 20X9

Capital allowance 20% reducing balance from start of year

CA TB Difference Tax 23%

Opening 6,400 3,400 3,000 690 deferred tax bef

CA > Tax Base = Deferred Tax Liab

Orrignal cost 9,600 not 4 years old 1920 Depn charge to PL

Purchase Oct X8 6 motnths Tax purpose 20% RB methdo

Cost 2,200 Cost 2,200
Depn 220 Allowance 20% 220
CA YE 1,980 CA YE 1,980

Start Depn YE
Tax base brought forward 3,400 Carrying value 6,400 1,920 4,480
Additions 2,200 Add 2,200 220 1,980
5,600 YE CA 8600 6460
tax allowance
On 6400 -1280
on the 2,200 -220
Tax base carried forward 4,100

YE CA TB Difference Tax 23%

8,600 4,100 4,500 1035 deferred tax bef

We would compare the 690 defered tax bfwd to the increase in the asset 1035
therefore increase
345
By DR tax and credit defereed tax asset

As there is a temporaty difference in reudce balance by 20% and the derpication of 5 yers
the den charge is 1920 v the tax allwoance of 1280 this is a timing difference of 5040
there is also depn charge that needs to be put the the accounts of 1920 and 220 which we will alos adjsut for

The acquisition of the new factory should be at cost and deprericated at 5 years as first year aquired 6 months in
only 6 motnhs depn should be taken
its carrying amount is 1980

CA TB Difference Tax 23%

The land 15,000 0 15,000 3450
cost 5,800
revaultion 15,000
9,200

Because a revaluation under lAS 16 does not affect taxable profits, a deferred
tax adjustment is required, calculated as the difference between the tax base of the asset and the carrying amount.

The deferred tax treatment of an investment property depends upon the valuation model that is adopted.
The land was previously held at cost and is now revlauted under fair value method
Where investment property is held under the cost model, the accounting treatment is the same as tor IAS 16
where revaluation gains are recognised through other comprehensive income, thus not affecting profit or ICO

therefore a gain under IAS 16 9200 is subject o defered tax as this is recoinsed by OIC the amount of revlaition serplus
at the Ye 31 March was redcued the by the amount of deferred tax balance as we have no revlaution surplus we can not take this from there

We would incresae the tax in the accounts and the CA and the tax base being 0 as sell in the future tax liablity by 23%
we would take this out of the revlaution surplus and case as deferred tax liability

(2) Acquisition of a subsidiary YE 31 March 20X9

Jan X9
100% Acq YE Difference Tax base was the same
NA 2600 2800 200

FV of asset 3400
Difference 800

sold goods
Revenue 1500
80% after YE 1200
Mark up 25%
Cost 960
Profit 240

Inventory pruchase 600

Mark up 25%
Cost 480
Profit 120
Accounting for Snowball as a subsidiary means that 100% of its results, assets and liabilities will be consolidated
within the group financial statements
As they have 100% of control over the company any profits reported between them need to be elimaited
on consolidation

In order to reflect the single entity concept, the intragroup sale must be eliminated on consolidation
thefore removing renveu at YE
DR revenue 1200 and cr cos
Since payment has already been made, no adjustment is required to eliminate any intra-group receivable or payable.

As some f the inventory was at the yE a PURP ajdusmtnet must be made on cosndiation
this should reduce losing stock and profit
the PURP at YE was 120
DR COS icicle 120 and cr invetory 120

Deferred tax
However the single entity concept requires the unrealised intra-group profit to be eliminated until the goods are sold on external to the group.
This gives rise to a temporary difference and so will have a deferred tax impact in the consolidated FS.
When the goods are sold on, the profit will be recognised in the consolidated FS, but no further tax charge
will be suffered as Snowball would have incurred the tax charge when it made the sales to Icicle – the group has a deferred tax asset.

CA TB Difference Tax 23%

480 600 -120 -27.6
Ajust the Icile
DR DTA (SFP) 27.6
CR Tax charge 27.6

(3) Warranty claim In April 20X8, Icicle YE 31 March 20X9

Warremt 36 months
Sold 100,000
Price 60
6,000,000

Year DF
1 5,000 25 125,000 1 124,999
2 8,000 25 200,000 1 199,999
3 7,000 25 175,000 1 174,999
499,998 rounded 500,000

allowed for tax purposes when the repairs take plac

therefore the tax base is 0

IAS 37 states that a provision should be recognised it an entity has

a present obligation as a result of a past event which will result in a transter of economic beneftit
which will be probable and a reliable estimate can be made of the amount of the obligation.

We have obligation to provide a 36 month warirtyu

and this is measureable by the units and cost of the futre taking the total expexeted cost for the year 500,000
we would therefore reduce our sales by 500,000 and provide for this balance as we can not recognise all this revenue until each year
has passed and that the products that warrenty has expeired we can regonise as revenue
Deferred part of this as this warranty was incoprated as part of the date

CA TB Difference Tax 23%

500 0 500 115

We would refer take the accountign beneifit of the repiar cost when they arise ie repairs take place
but need to recongise the deffered tax off of the revenue that we have deferred until the repairs have sorted

(4) Tax losses YE 31 March 20X9

tax carried forward 390

March 20Y0, 500

directors are now highly confident but we are not aware of tax prupose
Potentially an adjustment is required for deferred tax in respect of the tax losses
The future profits may allow icilce to recognise a deferred tax asset.
but this depends on hiw reliably expected to be used –

Ca TB Difference Tax 23%

0 390 -390 -89.7

DR DTA (SFP) 89.7

CR Tax expense 89.7
b) on the consolidated financial statements for the year ended 31 March 20X
redraft the extracts provided

Error factor of 10 in calc in my adjustment I made factor of 10 error Adjustments

Draft Land PPE Depn PURP Warrenty DEF tax
Profit before tax 1,830 -2,140 27.6 -500 -89.7 -872
Income tax expense (includeing deferred tax) 0 345 -115 230
Profit for the year 1,830 -642
Other comprehensive income
Gains on property revaluation 9,200 9,200
Total comprehensive income for the year 11,030 8,558

Statement of financial position at 31 March 20X9 £'000

Equity 0
Ordinary shares of 50 pence each 1,000 1,000
Share premium account 6,800 6,800
Retained earnings 1,040 345 -27.6 615 89.7 2,062
Revaluation reserve 9,200 -3450 5,750
Total equity 18,040 15,612

Deferred tax 3450 345 -27.6 615 89.7

Warrant provision

c) She requests that you then calculate the consolidated basic earnings per share.

Sub
Profit of sub at YE 200
Less PURP -120
80 8,558 8637.9

Profit/(loss) attributable to ordinary equity holders of the parent 8,638 4.31895

weighted average number of ordinary shares outstanding during the period 2000
Q3
Audit ETP PLC
YE 30 Sept X4
controls of revenue
Materaility 850,000
ETP is a listed company which supplies data storage devices

Hardware
TFA CA at YE
Stor-It' 5,000,000 Oct X1 10 years 3 years ago 3500000
Patent 1600000 Oct X1 4 years 1200000

Stor-It' sale on 1 April 20X3 4 years life recognised when the hardware is delivered

Systems
6 to 12 months to delivery
recognised on confirmation by the customer that the project is complete

Services
competitive market segment
sales of training and consultancy
recognised as the service is performed.

Hardware 25.4 18%

Systems 100.3 70%
Services 17.9 12%
143.6

1
a Explain the weaknesses and limitations in the procedures he has performed
additional analysis where you think this is required
queries you would like him to resolve when he return
financial reporting issues and related audit risks

Hardware
decline in the third quarte
nventory is becoming a problem
The point of revenue recognition will be when control of the goods passes to the customer.
We would expect that the invetory to be held at lower at cost or NRV
as declien market there may be the NRV is less and we would review the inventory measurement and review if this
need to be adjsuted
Managmenet inventory systems control will also need to be monitored and if this need to be scrapped if products are not longer in use
as inventory could be artifcually inflated at higher value and overstated
We can no see any evedience of a stock take or verifcation that the assets are held in stock and exisit
we would need to check this before determing a final inventory value and discuss this value with management

Systems
very strong in the first half of the financial yea
evenue recognition policy for systems sales in October 20X3
recognising revenue and associated costs as each project progresses.
£30 million on part-completed projects in the six months
ldentity contracts where not all elements have been delivered at the year end,
as such contracts are the ones where revenue recognition will be affected by allocation between delivered and
undelivered elements. They should agree that revenue has been recognised appropriately for these contracts. reflects
Perform analytical procedures on the pattern of revenue recognition over the year for each type of revenue and investigate unusual items
As these are long 6 -12 monht contract the 5 step process of revenue recognisation should be followed
revenue is only recognised where it is highly probable that there will not be a reversal of revenue when the uncertainty is resolved.
Further information is needed to assess whether it is highly probable that an amount at least equal to cost
will be recovered. If not, then it may be necessary to limit the amount recognised to the amount offered for uncertified work by the customer.
This is a subjective area requiring judgement and is open to creative accounting.
Therefore we should review the contracts in place that use the systems review and what is depened recognised and statifed
we should obtain information from the customers such as proof of goods and system use and the time they use it

Services
strong in the first half
overall decline in this sector of the market
competetive market but why is our service perfoming well in a decline and competitve market - we would
need to eqnuire to management as to potential reasons for this as they may be misclassiy revenue

new sales director, Jess Homes, we should question when the contract of service is deemed performed
does she have confirmation from customers or signed agreement that statifed
As per IFRS 15 revenue should only be recognised when the performance obligations in the contract have been satisfied.
In the case of the software services, this is a performance obligation satisfied over time
This is because the customer simultaneously receives and consumes the benefits provided by ETP performed by gainign access to the service
therefore not all of the 5m and fee paid up upfront shoult be recongisef in the FS and some of this should be defered to next year

Discounts of up to 20% for the company's training programme

We are not aware of how long the discounts last and if the fee is renewable each year
£5 million were received in the six months ended 31 March 20X4
This is a fee which entitles members to future purchases at a reduced rate.
It should not be recognised immediately (as ETO appears to have done) but on a basis which retlects the
timing, nature and value of the benetit, as required by IFRS 15.
up-front annual fee not refundable
We would inquire as to how long the discount last for as if period of one year o an amount represented the value
 of the ebenefit should be deferred into the next period and notall take place in this period
The deposits should be recognised in cash and included as a contract liability.
Although they are non-refundable it does not create an obligation to complete the contract.
5,000,000 received
The discounts already earned by club members on orders placed is equivalent to 5m / 0 6250000 total sales
is 6.25m assuming 20% discount 1250000 Discount

We would also need to consider whether the 20% is a real discount (ie the customer really pays 20% less
than they would have done) or whether in fact the prices are inflated before
applying it and they pay much the same as they would have done
If there is not real discount then the analysis above might change although there
would need to be very good evidence to support recording the service fee as revenue on receipt.

Gross profit
Hardware
Margin fallen fro X3 25 to 31.4 for 20X4
the sale are an issue but is inventory management becoming that much of a nissue that reducing the GPM for hardware
we would look to see how this is being measured and if any costs have changed
they might be selling at cheapier price or costs have rised massively
we are not aware of any price cuts
we are aware that inventory management is an issue with this and therefore storage costs have rised
more information is needed and would need to ask the FD about this
it is also
this alarming
is due the competitors
to cheaper have increase to 42 and ours have fallen
and more advanced
products by ETP's competito
as a result our costs have rised and competition is beating us but this could be the reason for a price cut to meet demand

Systems GPM
we wold want more information around the new government project
Revnue recognised of 3.6m at 40% complete for 6 moths and cost 4.6m loss 1m
If a loss making contract we could provide for these losses going forward
we would also want more information around older project delay v new the one and more detail around the management reasons
for the change in GPM

Services
the 20x4 GMP was 50% now rised to 63.9%
this can be down to how we recognise the revenue as prices has rised and competotr have stated round
comapred to the industy too of 40
could was held sept but invoices october 800,000
we would need to inspect why this was not invoices in Sept
Cut off issue has arrised her as sales relate to sept invocied in Oct

DSO
If the industy has average of 65 and we are all above this amount and operate we would expect that
the slow pay of invociing is maybe with us as from new sales director Jess she did not invoice until a month latter
we should inspect how the current invoicing contorls are being operated and the sales process
the customers have purchased the goods and not sold them on and we should review the credit terms that we offer
we may alos suggest debt collection
we should review who we sell our goods too and perhaps review the contract process checking the creditablity
and background checks on main customres to ensure that they can pay

2 Julie's request for advice and that identifies the ethical issues for Julie and for our firm and the actions Julie

Julie is an ICAEW trainee Chartered Accountant therefore is bound by the code of ethics set by the instutue

Jess has a self interest as she receives a bonus from the work she has done
therefore she will be included to inflate service reveue in order to activies this by 'window dressing' the revenues
this artificully makes the revenues look better than they are to actives the bonus

Julie is also intimdated by Jess and her finance manager as she is her sister
This could give rise to self-interest threat and a familiarity threat
As her objectivity is liekly to be impaired and she is less likely to cristis the work don by her sister nad jess
and she may not scrutinise the revenue figures sufficiently.

The comments from the board are connecerning as they don’t want to implement reivew proceudres due to the cost
and don’t want to be open to level of scrutiny

If Julie does not speak up about the revenue recognisation process she threat to her objectivity and intergity
as Julie should do the right thing and report and raise concerns over any wrong treatement or deliabte missleading

If revenues are articually generated there may be an AML risk and this could be reported the MLRO officer
Julie can seek advise into the ICAEW regarding the conflict of interest and the revenue that could be incorrectly stated

benefits of Interim review and report by J&K would provide.

an interium review is assurance but will not be a full audit
ISRE 2410 Review of interim financial information performed by the independent auditor of the entity
would gain benefit in the calcuation performed and review these
quaterly reporting and 6 month reporting that figures have been reviewed
giving confidnece to shareholder as listed