AAA - Progress Test

Total Marks : 25
Time : 45 mins

It is 1 July 20X5. You are a manager in Mike & Co, a firm of Chartered Certified
Accountants. You are currently working on the audits of Widdicombe Co, Hills Co and
Brooker Co. The audits are in the completion phase and you are in the process of
reviewing the audit files in preparation for the auditor’s reports to be issued in the
coming weeks. All clients have a year ended 31 March 20X5.
The following exhibits, available below, provide information relevant to the question:
1 Widdicombe Co
2 Hills Co
3 Brooker Co
This information should be used to answer the question requirements within the
response option provided.
Exhibit 1 – Widdicombe Co
Widdicombe Co provides freight services between seven major cities. The cities are
located at significant distances from each other meaning deliveries can take several
days. During the year there were a number of protests by independent lorry drivers
who were angry about increases in fuel taxes. The protests involved blockading major
roads which prevented traffic from getting through. This caused significant delays to
Widdicombe Co in reaching its customers.
Widdicombe Co has offered customers a 30% discount on invoices relating to delayed
deliveries during the protests. The discount offered to all customers totalled $53,000.
This is not recognised in the financial statements.
One customer, Moffatt Co, is refusing to accept the discount and refusing to pay the full
invoiced amount of $72,000 as Moffatt Co claims it was unable to fulfil a significant
contract of its own because of the delays. No allowance has been made in the financial
statements for this debt. The financial statements show a profit of $1.6 million and total
assets of $9 million.
Exhibit 2 − Hills Co
The Chair’s report of Hills Co states that investment property rental forms a major part
of revenue. However, a note to the financial statements shows that property rental
represents only 1.6% of total revenue for the year. The audit senior is satisfied that the
revenue figure in the financial statements is correct and following your review of the
working papers, you agree with this conclusion.
Exhibit 3 − Brooker Co
A discussion between the audit senior and the finance director of Brooker Co identified
that a wholly-owned subsidiary called Harman Co was set up and incorporated in March
20X5 and commenced trading on 1 April 20X5. Harman Co was financed by a significant
bank loan. There is no reference to Harman Co in the financial statements of Brooker
Co. The finance director has stated that Harman Co will be consolidated in the 20X6
financial statements as it didn’t commence trading until 1 April 20X5. The audit senior
has concluded that no further procedures are required in respect of Harman Co and has
proposed an unmodified opinion because the matter does not impact the current year’s
financial statements.
Required:
(a) Using the information contained in Exhibit 1, comment on the matters that
should have been considered, and recommend any further audit procedures
that should be performed in respect of the issue described.
(7 marks)
(b) Using the information contained in Exhibit 2, discuss the implications for
the auditor’s report of Hills Co assuming no further adjustments are made to
the financial statements or Chair’s report.
(5 marks)
(c) Using the information contained in Exhibit 3, comment on the matters that
should have been considered, and discuss the appropriateness of the audit
senior’s comments.
(8 marks)
Professional marks will be awarded for the demonstration of skill in analysis
and evaluation and professional scepticism and judgement in your answer.
(5 marks)
(Total: 25 marks)