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1.1:

- Avalon has not been an importer of exporter of goods. Therefore, overseas transactions are suspicious and not in the
ordinary course of business.

- There is potential Money laundering going on as purchase invoice is 75% of the value of the sales invoice, which suggests a
mismatch between the sales price and amount paid.

- I should inform our firms MLRO.

- The MLRO would decide whether to report to the NCA.
- Not informing the MLRO would be an offence in itself if suspected money laundering goes unreported.
- I should maintain confidentiality
- I should not inform the client as this would be tipping them off, which is an offence.
- I should conduct further substantive procedures into the overseas transactiosn and investigate costs, and sales further to
acertain whether there are more instances of potential money laundering.

1.2

Here, an audit client is refusing to pay a material balance to another audit client, and our firm has been asked to intervene.

The firm should not intervene with the matter, as this matter is between the two clients.

The firm should remind the client of the auditors responsibilities and the managements responsibilities. The firm should
emphasise the importance of an auditor to remain neutral.

Cushway are refusing to pay as they believe the goods supplied are inferior. The audit firm should advise the client that
involvement in persuading a client to pay presents an advocacy threat and a management threat. There is also a threat to
professional behaviour as the auditor should not be involved in this matter.

1.3:

A) Consequences:

- There is a risk the firm will not be paid.

- The firm may have to write off the receivable if it has turned bad.
- Customers may forget to pay the balance
- Customers will not be happy with the firm as they have forgot to invoice them, which can cause issues in their own cash flow
projections.

Reccomendations:
- Ensure invoices are sent promptly after work is completed, or in relevant installments when work is completed.

- Document when invoices are sent, and when they are due to be sent.

- Follow up recievables if they have not been paid within the relevant time period.

- Segregate duties: One team should send the invoice and the other team should be responsibile for collecting/processing
payment.

B)
Consequences:
- The 150,000 could be a material balance, thus affecting the fair representation of the financial statements.
- More money could be paid out for overtime than worked.
- Workers could take advantage of the deficiency and wrongfully put more hours on their timesheet.
- This can create further cash flow problems down the line.
-

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Reccomendations:
- Ensure overtime hours are documented and signed off by a line manager.
- Keep a record of overtime. Investigate any anomolies of excessive overtime which could potentially be fraudulent.
- Line managers or a senior person should review overtime at the end of each month.
- Implement forecasts for overtime and budgets for overtime. Compare actual overtime to budgeted. Investigate any
discrepencies.
-

1.4:
Auditors have strong relationships with clients:
- Inherent self interest threat due to fees and possible non-audit work.
- Auditors may not be willing to press matters to management in case they get removed from the audit.

Auditors have been criticised for protecting themselves from liability due to negligence. There is an arguement Audit firms
should be further held to account for the losses of shareholders as a result of large corporate collapses.

1.5:
Internal controls the charity should have:

- Cash count at the end of each day. This should be documented.

- At the end of the month, a senior person should reconcile the cash documented to the cash banked.
- One team should be responsibile for collecting cash, and another team responsible for banking cash. This should be
documented.
- If the cash count does not reconcile, investigate further.
- Maintain records of the person(s) responsible for collecting and banking the cash, as they should be investigated if amounts
do not match.
- Cash donated in tins should be reguarly removed and stored safely throughout the day.
- Postal receipts should be documented
- Postal recipts should be logged when they come in, and matched to the count at the end of the month to ensure they have
been logged correctly.
- Daily cash counts should be recorded and signed off. There should be at least two people counting the cash.

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2.1:

21010:

SRC006972: There is a receivable for 95000 for website development. This is a material balance and a round number, which
causes suspicion.

There are a series of receivables that have been debited which are approaching materiality.
Account Code Amount
SIN018324 3275
SIN018460 600
SIN018532 4195
SIN018561 4500
SIN018579 900
SIN018861 4200
SIN019195 2133
Total 19803

21020:
SRC006973 relates to an overseas receivable of 100,000. This is a number which is above the materiality threshold and is
round, causing suspicion.

B)

26500
This account has risen by 305% to 98,822, which is significantly high in one year.

NOM059203: The desciption is TFR which has no meaning to the audit firm. This is also for a large balance of 11,258 despite
being below materiality.

NOM059282: Loan from Director to A Quincey. A Quincey likely refers to the exectutive director. As this is a transaction related
to a director, it is suspicious by nature and must be subject to further investigation. The figure is also round at 20,000.
Strangley, it has been credited to Car Loan 1.

NOM061298: Relates to A Quincey's tax, but has been credited to Car Loan 1. This is unusual and for 10,915, which is a
significant amount.

26520
This account has risen 132% in one year to 66,108, which is significant.

NOM059717: Relates to "HMRC GM Tax". This suggests George Morris, Execuitve Director, is paying his car tax by deducting it
as an expense from the company, which is not allowed. This appears to similar to Alan Quincey.

NOM161999 - Another transaction relating to HMRC. This is suspicious for reasons outlined above.

26530
This account has risen by 138% to 111,385.

NOM059603: Loan from director for 20,000 which is round and suspicious. All transactions relating to directors should be
investigated due to its nature.

NOM059710: Amount of 6307 relating to HMRC so suspected tax. Likely this amount should not be allowable as a deduction.

NOM060221: Penalty of £235. As it has been credited to the Car Loan account, it appears this relates to a fine received by J
Holmes, which is not allowable as an expense.

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NOM060599: Account description is TFR which has no current meaning to the audit firm. Figure is 250 and it is strange it has
been credited to the Car Loan account.

NOM061845: Again a journal entry related to tax of 1624. Suspicious for reasons outlined above.

NOM061964: £5,200 relating to J Holmes Aug 17 salary, but paid in July 2018. This is strange and could be a sign of potential
fraud or money laundering.

NOM062411: Again a payment to J Holmes relating to his September 2017 salary paid in August 2018. This is strange for
reasons outlined above.

2.2)

-Enquire with management the reasons for payments relating to HMRC. Is this a business expense or a personal expense?
-Confirm amendements have been made to the financial statements if these payments are personal expenses.
- Enquire what the description TFR means with management.
- Enquire why J Holmes salary has been paid in 2018 when it relates to 2017.
- Request management to amend the fine that has been expensed.
- Request a repayment schedule for the loan given to the directors. Verify any payments due have been made.

2.3:

a) Internal auditors do not have to be qualified chartered accountants by the ICAEW as they provide an internal function to the
firm. However, completing the ICAEW exams and relevant work experience would support reliance on the internal audit
function and generate some level of comfort. As Susan is not qualified and has failed exams, it is assumed she is not
technically competent in detecting misstatement and tightening the firms controls.

Susan is also the sole internal auditor. No one appears to check her work. As she is not a qualified accountant, it is likely she
will face great difficulty in her work and the risk of her making errors is greatly increased. Therefore, our audit firm cannot
take her findings are true or valid.

In addition, Susan reports to John Holme who is a major shareholder in the company. John has incentive to manage earnings
upwards and may exert pressure or influence on Susan to inapprorpiately manipulate findings. As Susan is not an ICAEW
chartered accountant, we cannot assume she will comply with the ethical standards the ICAEW sets.

By Susan being the sole internal auditor and reporting to the finance director, we cannot assume she is truly independent.

B)
Procedures:
- Review Susans's finding. Retest the control and evaluate the appropriateness of her findings and recommendations. This will
suggest whether Susan is thoroughly testing the accounts and appropriately making reccomendations.
- Recalculate some of susan's findings based on the information the audit firm has. Check her assertions are correct.
- Calculate receivable days. Compare this to the 60 day credit limit. Enquire with management of any breaches
- Recalculate the agreed invoice amount to the signed contract price.
- Review correspondance between Susan and the Head of Project Management. Obtain evidence of the discount issues by the
Head of Project Management
- Verify the documented discount has been applied to the customer, and no further discounts have been given.
- Obtain an aged receivable report.
- Discuss with management whether they still expect to recieve payment. Write off the amount if they believe they will not

2.4:

Leila
Leila should disclose the discussions with the audit firm and her intention to pursue negotiations.
Leila should maintain confidentiality.

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Audit Firm:
The audit firm should remove Leila from the engagement to reduce the self-interest threat Leila faces.
Her work should be reviewed by another senior member to ensure it is accurate and appropriate.
Under FRC standards, the audit firm cannot continue on the audit for a minimum period of 2 years. This is because Leila will
become a Financial Director, and there are no possible safeguards to mitigate the self-review and familiarity threat.
The audit firm should consult the ethics partner to determine further ways to mitigate the self-review threat.

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3.1:

The audit firm should consider their knowledge and competence of the firm and the enviornment they operate in:

Typical industry standards

Typical industry margins and the way the industry operates
Laws and regulations in the industry

The audit firm should consider whether they have the technical competence to complete an audit of the company based on its
size, complexity and the industry it operates in.

The audit firm should further consider:

- Whether it has enough resources to deliver a quality audit.
- Whether the firm is truly independent from the client (I.e, safeguards in place if employees have moved to the client;
Whether the audit firm are involved in non-audit services)
- Whether the firm has previously engaged in Money laundering
- The risk the client presents to the audit firm:

Risk the auditors will not detect material mistatement

- Why the outgoing auditors were not reappointed.

- The terms of the engagement:

Is the fee sufficient to provide a quality audit?

Are management aware of their responsibilities vs Auditors responsibilities
Are management aware they will have the right to unrestricted access to their books?

The client:
- Clients integrity: Have they been involved in fraud, bribery or money laundering in the past.
- How much can we rely on their internal controls? Subtantive testing may be necessary as it took the firm a while to discover
a fraud.
- What procedures will we need to design to minimise detection risk?
- How experienced should our staff be? Should we mainly have audit senior's on the team rather than juniors due to the risk
and complexity?
- What is the integrity of management like? Has this been called into question in the past?
- Are there any adverse media articles related to the company? This can potentially damage the reputation of the audit firm if
they are associated with a client that has reports of wrongdoing.
- What is the potential risk to the audit firms reputation if it takes on a risky client?

Procedures:
- Obtain the ID of management and run a background check on their individual backgrounds. Note and consider any adverse
findings.
- Review recent news articles about the firm and consider the risk of the clients. This will also support the audit plan if an
appointment is accepted as media articles could support the direction of further procedures.
- Contact the outgoing auditors:

Request access to previous working papers/opening balances. This will support the verification of opening balanes:
Enquire whether there is any reason the audit firm should not accept the appointment.
Consider any reasons given.
Request cooperation from the outgoing auditors.
Maintain confidentiality.

3.2(a)

£35,000 / £35,000,000 (Revenue) = 0.1%

£35,000 / £2,000,000 (PBT) = 1.75%

£35,000 / £20,000,000 (Total Assets) = 0.175%

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The £35,000 diverted for fradulent reasons is not material to the financial statements. The auditor is required to design
procedures to detect material mistatement due to fraud or error. Therefore, the diversion of funds may not have been
detected as they have not surpassed the materiality thresholds.

Further to this, auditors frequently use samples. They do not test every single transaciton as this would be inefficient and time
consuming. Coincidentally, the samples tested did not include the fradulent transactions.

This is similar for substantive procedures, where not every transaction is tested. However, this would be a good basis to plan
the new audit for the new firm, where the new auditor tests more transactions made by directors.

b)

When the director diverts funds away from the company and expenses them, the profit of the company falls. Therefore,
retained earnings, Profit and Equity are misstated. In addition, the purchases figure is misstated as inventories were never
purchased due to the fraud.

For our audit work, we should consider the opening balances and conduct tests/procedures to ensure their accuracy. This can
include recalcuating opening balanaces based on new information, and reviewing the working papers/previous auditors
methodology.

It also supports the audit plan, as discussed in Part A. Line items usually involved in fraud/money laundering (Such as revenue,
expenses, inventories) should be subject to substantive testing to reduce detection risk.

For the auditors report, an umodified opinion should be given as the financial statements are free from material misstatement.
However, an Emphasis of matter should be included beneath the basis for opinion paragraph which alerts users to the fraud
and managements disclosure. As a result, the audit report should be modified.

3.3:
Full investigation of the branch in question:
- Obtain transaction history from all directors.
- Consider whether transactions have been made to suppliers/parties not on the supplier list or unfamiliar to the company.
- A review of the directors transactions who commited the fraud.
- The revenue of the branch and where it is coming from. Is this coming from actual customers?
- Comparison of Actual vs Budgeted. Investigate any discrepancies and discuss the reasons why with management.

Assets:
Management have an incentive to overstate assets due to performance bonuses. Inventory and PPE should be carefully looked
at. Inventory is also likely to have been involved in the fraud as the director debited the purchase to a ficticious supplier.

Supplier lists:
Confirm the list of suppliers with the company. Investigate to ensure they are not ficticious.

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A)

Actions for Par:

- Consider materiality and decide whether the loss of a significant customer represents material mistatement via disclosure.
- Discuss whether the firm is a going concern after the loss of the customer. This will support the basis for preparing accounts
on a going concern basis or a break up basis.
- Request a copy of updated cash flow forecasts from the management. Ensure the loss of the customer is reflected in the
updated forecasts.
- Assess whether the firm can pay its debts when they fall due with the loss of the customer.
- Obtain a written representation that the cash flow forecast is feasible and forecasted to the best knowledge of
management.
- Review board minutes to assess mangements plans regarding the loss of the customers.
- Enquire with management their plans to address the loss. Compare to the inspection of board minutes.

Fairway:
- Consider materiality of the loss as this would affect the audit opinion and report if found to be a material balance.
- Enquire why the machines were not sold to the customer who comissioned them.
- If the reason is due to poor quality, consider the risk of future orders being cancelled and the impact this would have on the
financial statements.
- Consider the value of inventory and whether an impairment should be made. Consider the impact of this to the financial
statements as this could be a material balance.
- Review correspondance between the customer and the firm. Any breakdown in relations could have an adverse impact on
future cash flows generated from the customer.
- Inspect board minutes to understand managements plans regarding the cancelled sale.

B) Implications for audit report:

Par Ltd:

Here, the customers has sent a letter informing the client that they will not renew their contract after the date of the financial
statements. This is therefore a subsequent event and relates to ISA 560 Subsequent Events:

Providing the auditor has obtained sufficient appropriate evidence that the financial statements are free from material
misstatement at 31st March, the auditor should issue an unmodified audit opinion as the numbers reflect a fair representation
of events occuring throughout the period.

However, new information has come to light which can significantly affect a user's decision when using the financial
statements. Therefore, the auditor's report should be modified.

The audit firm should evaluate the reliance Par has on Tee. If this is found to be significant, the auditors should discuss with
management whether there is a material uncertainty to going concern. This is because there could be a significant threat Par
will not be able to continue operating if it has lost its main customer.

In respect of a material uncertainty to going concern, the auditor should:

- Enquire whether management expect to be a going concern for the next twelve months.
- If they believe there is a material uncertainty related to going concern, this should be disclosed.
- If the directors refuse to disclose, a modified audit opinion and modified audit report should be given, with a paragraph
"Material uncertainty related to going concern" included and draws the attention of the user to this.
- If disclosure is made, the auditor should issue an umodified opinion but a modified audit report. The auditor should still
include "Material uncertainty related to going concern" paragraph and draw the users attention to the disclosure.

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If there is no material uncertainty related to going concern, Management should still disclose this. The auditor should issue an
unmodified audit opinion but a modified audit report, with an "Emphasis of matter" paragraph inserted under the basis for
opinion paragraph. Here, the audior should emphasise a significant customer has formally decided not to renew the contract
with Par.

As Tee represents 60% of the firms revenue, this is material and therefore should be disclosed. Any refusal to disclose would
constitute a material mistatement regarding disclosure and warrant a modified audit opinion and report.

Fairway:

700000 / 19800000 = 3.53% of total assets. This is material.

700000 / 2,500,000 = 28% of PBT. This is material.

The loss on the machine is 50,000

50,000 / 2,500,000 = 2%. This is material.

The audit firm should ask the client to amend their financial statements to record the loss of the machine.
If the directors refuse, a modified audit opinion should be given and a modified audit report should be given.
As the misstatement is isolated, a "Qualified Except For" opinion should be given. If pervasive, an adverse opinion should be
given, but this does not seem pervasive.
The auditors report should include an Emphasis of Matter paragraph underneath the basis of opinion, drawing the users
attention to the misstatement.

If disclosure has been made and the financial statements are adjusted, the auditor should issue an unmodified audit opinion
but a modified audit report. This should again include an Emphasis of matter paragraph underneath the basis for opinion. This
is because the financial statements still represent a true and fair view if the disclosure and adjustments have been made.