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1-1:
-Enquire with management on why gross profit margins have increased, but not operating margins
1 -ability to pay back outstanding liabilities for the year
-dip in monthly revenue for Dec 2012 and 2013 attributable to what?

1-2
-confirm whether the amount payable was repaid during the current year
2 -by tying audited amount payable to supporting documentation
-assess controls in place for VAT payment
-to ensure VAT is not incorrectly reclaimed for future audits

1-3
-substantive analytics:
-to compare current year figures and percentages to PY
3 -big data: processing large amounts of data using languages like SQL and data visualisation
-to enable testing over larger sample or entire population
-machine learning: algorithmic approach to large amounts of raw data
-to enable identification of patterns and outliers

1-4
Consequences
-Risk of human error through manual adjustment of ledger
-potential manipulation of supplier data
-difficulty tracing support for new suppliers, impede audit progress
4 Recommendations
-Implement review and authorisation process
-by having all new supplier entries authorised in writing by FC
-implement IT system
-that tracks history of supplier amendments

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Business risks
-cybersecurity attack that compromises data
-financial loss from recovering data
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-causing impediment to normal business operations
-leak of customer or other sensitive data
-could cause adverse publicity, lead to further financial loss
-potential legal penalties

1-6
-policies: what policies are in place and what are the rewards/consequences of compliance/non-compliance
-procedures/processes: controls in place for automated/manual processes
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-quality control: how is quality of the charity work achieved and maintained
-monitoring systems: how is quality and compliance monitored

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2-1
Threat
Familiarity threat arises when the auditor is predisposed to accept the POV of the client, or is insufficiently questioning of such.
This can arise from close personal relationships between the firm and the client's personnel. This is demonstrated in the
Constructa Ltd example as the relationship between the team member and Edward Hale. the FD. As a former audit manager
from the same firm, the team member's close relationship with Edward may cause them to have insufficient professional
scepticism when reviewing work performed by the client. The team member may also be unwliling to point out any
misstatements for fear that contention may affect their personal relationship with Edward.
1 Familiarity threat also arises when the audit partner has been involved with the audit of the entity concerned for significant
periods of time, e.g. in this case 10 years wiht Hannah Pearson. Per the ES, partners should be rotated out every 5 years per
client, unless significant business changes arise, at which the partner may stay on for no longer than 2 years.
Safeguards
The engagement team composition should be reconsidered, and more senior members should be assigned to ensure
thorough review of the client's work is carried out. Firm can also commission an external professional accountant to review the
work that Edward has performed. Team can also appoint an ethics partner for further assurance.
As Hannah has significantly surpassed the threshold of 5-7, she should be replaced with a new engagement partner.Her work
performed during the PY audits on Constructa should be reviewed and/or reperformed by an independant partner.

2-2
Going concern
Constructa Ltd has exceeded its overdraft limit multiple times during the year, and has only managed to pay suppliers on time
by delaying tax payments to HMRC. This shows excessive reliance on bank financing, which has been worsened by the bank
loan taken out in April 20x2. This loan comes with interest payable in arrears quarterly, and the company has set up a deferred
payments plan for their tax payments.
Hence Constructa has a significant amount of current liabilities that it must repay using either the bank loan taken out, or the
income from their restoration contracts, which may not be paid in time for their payables due dates. This is because their
customers, the insurance companies, may pay back invoices anywhere between 30 and 90 days varying by company. This
was worsened by the fact that Jason, the former operations manager, failed to issue invoices on time. While this may be
favorable from the customers point of view, it indicates sloppy work and may damage customer relationships, leading to a
further reduction in revenue.
Their bank overdraft is due to be reviewed in Septembre 20X2, and may likely be decreased or eliminated altogether given the
mutiple occasions that Constructa has exceeded it, and the fact that they have made a loss for FY12 due to a failure to restrict
fixed costs.
Procedures
The audit team should enquire with management on how they plan on financing further expansion and assess whether the
company is a going concern. If the client is deemed to be a going concern, their accounts should be prepared on the break-up
2 basis and the audit team should utilise experts as needed. If the client refuses to comply with this assessment, the firm should
consider resigning.
Work in progress
The percentage used to determine the WIP valuation may lead to certain expenses being capitalised erroneously. There may
also be issue with management's estimates of useful life, particularly as the work has not been completed.
Procedures
The audit team should assess the appropriateness of the useful life estimates. This can be done via lookback procedures, to
see whether current year estimates are in line with work-in-progress estimates from prior years. The team can also compare
these estimates to industry standard to assess whether they are reasonable. The team may reperform the client's valuation
calculations by obtaining support for direct costs and overheads, and re-calculating the percentage of attributable overheads /
direct costs.
Freehold premises
As these were valued by an external valuer and act as security for Constructa's bank loan, which it has proven to be highly
reliant upon, there is a risk that it is over-valued, particularly as the revaluation is conveniently higher than the asset's current
carrying amount.
Procedures
The team should be cautious of relying too heavily on the external valuer's work, and reperform the valuation independantly
through specialised experts or obtaining quotes from independant sources.

2-3
Issue
A conflict of interest arises when the firm is asked to act on behalf of two competing interests, in this case between Jason's
firm and Constructa, who both occupy the same market niche and are considered competitors. This presents a threat to the
firm's objectivity and confidentiality. Consequently, the firm is unable to act in the best interests of both companies.
3 Safeguards
The firm shold inform both parties that a conflict of interest exists. Should the firm accept Jason's request, an entirely different
team from a different office location should be used and physical and information barriers set-up and maintained to ensure that
sensitive information is not compromised. Independant partner reviews should be implemented for both engagements, and the
firm should seek advise from an Ethics Partner.

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3-1
Elsa's comment gives rise to both an intimidation and self-interest threat. The firm may be tempted to provide a more favorable
1 audit opinion if fees are contingent upon the outcome of the audit. The firm is also threatened with the possibility of forced
resignation if the audit outcome is not what Elsa wants to see, or if the outcome leads to the bank rejecting the loan for
Arendelle. This leads to a compromise of professional scepticism and objectivity.

3.2
a. Revenue
2 Enquire with Elsa when revenue is recognised given the 30-day credit terms. What happens if direct debit fails (eg customer
has insufficient funds)? What controls in place are there for this?

5 b. Margins

6 mos to 12 mos to *Assuming

7 Gross profit margin 0.13 0.11

8 Operating margin 0.36 0.11

The team may wish to enquire with management on the rapid increase in operating expenses. given that marketing expenses
9 have not increased significantly during the 6 months, and half of A's delivery vehicles are fully depreciated at 1.08.2014. Could
it be due to misclassification of expenses? Increase in rent from additional warehouse and costs of staff?

c. Warehouse rent
Is rent paid in arrears or in advance, and at what intervals? Ask for rental agreements to corroborate expense in cost of sales.
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d. Depreciation
Why are the assets still-in-use if they have been fully depreciated? What system controls are in place to prevent nil NBV
assets from being included in the register?
11 Ask for support on useful life estimations for the delivery vehicles. Why has significant amounts of depreciation during the year
not affected operating margin?
If half of A's vehicles are nil NBV on 1.08.20X4, why is depreciation charged for the 6mos to 31.01.20X5 exactly half of
depreciation charged in the 12mos prior?
e. Marketing expenses
12 Ask for support on the marketing campaign to be launched in April 20X5 and reconcile to break down on marketing expenses.

6 mos to 12 mos to
13 31.01.2015 31.07.2014

14 Marketing expenses 0.3015 0.3009

f. Trade receivables
Trade receivables collection period fairly short for nursing homes' 30 day credit period - enquire with management.
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6 mos to 12 mos to
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31.01.2015 31.07.2014
TR collection 5 0
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period

g. Trade payables
18 Does A Ltd. have sufficient cash on hand to fufil payment on delivery demands from the two new suppliers?

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4-1
PBT 1.3m
Total assets 8.5m
Bad debt
An allowance for bad debt for Spade will have to be made for 25,000, increasing Farley's expenses and hence decreasing
profit for the year.As sales for the year to Spade made up <1% of total revenue for Farley, Spade may or may not have
represented a material portion of Farley's total revenue. The bad debt itself is immaterial, but must still be recognised in the
P&L. The 1.5m invested in specialist P&M and 350k for raw materials that Farley had prepared for Spade may have to be
disposed of (in the case of the PPE) and rendered obsolete (for the inventory), which will lead to a further decrease in profit for
the year. The 1.5m P&M investment financed by bank loans represents 15% of total assets for the firm, which is highly
material and should be investigated further (ie figuring out how to transfer the contract to the successor company without
significant loss).
Legal provision
1
The patent attorney has deemed the likelihood of the court case succeeding as low, and that if it is pursued further, it is highly
unlikely charges would be pressed in the next 12 months. As a result, no provision needs to be recognised for the current year,
however a disclosure should be made in notes to the financial statements.
Effect on subsequent events review
Negotiations with the company due to take over the contract from Spade could come to fruition during the post year end
reporting period, and hence adjustments would need to be made for any proceeds from sale/disposal of assets. Further
developments in the litigation case may also result in post-year end adjustments, for example if new developments changed
the likelihood of the claim's success and made it probable that the competitor's claim would win. In this case, a provision,
rather than just a disclosure note, would have to be made and adjustments put through in the financial statements. This may
also impact the status of Farley Ltd regarding going concern, as the litigation along with the resulting adverse publicity would
result in a deterioration of supplier/customer relationships for Farley. Depending on the reporting deadline, the subsequent
events review period may be too short for any significant developments to take place.

4-2 Because it is possible to unlikley that the claim for damages will succeed, only a disclosure note needs to be recognised
for the current year and hence there is no material misstatement in the financial statements. If the firm wishes, it may add an
'Emphasis of Matter' paragraph highlighting the current litigation case and its potential impact on Farley, in order to highlight a
2 matter that has already been disclosed.
In the unlikely event that the claim does succeed in the next year, the damages amount of £2mil represents a highly material
portion of total assets (24%) and hence a provision would need to be made. If the directors of Farley refused to put forward the
provision adjustment, then the firm may have to issue a qualified opinion on the financial statements.

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