(a) Inventory (Valuation) of Vego Dog

• Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2.4m to
inventory records.
• Agree the quantity of Vego Dog products shown as held at the year end to the year-end inventory
count records.
• Request a breakdown of the cost calculation of each unit of this product and discuss with
management how the standard cost was derived.
• Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost is
$2.4m.
• For a sample of finished goods items, obtain standard cost cards and agree:
– raw material costs to recent purchase invoices;
– labour costs to time sheets or wage records;
– overheads allocated to invoices and that they are of a production nature.
• Compare sales prices over time to establish if the price has been reduced because of falling
demand to determine whether an allowance is required.
• Compare actual sales units per month to budgeted sales per month from before and after the year
end to establish how much lower actual sales are than expected and discuss with management.
• Select a sample of items included in inventory of Vego Dog and review post year-end sales invoices
to ascertain if net realizable value (NRV) is above cost or if an adjustment is required.
(b) Receivable due from Ellah Co
• Review correspondence with Ellah Co to establish if there was a discussion about payment
difficulties and whether Ellah Co intends to fully settle the outstanding amount.
• Review the age of the outstanding debt with Ellah Co and discuss the circumstances with the credit
controller to establish if it has exceeded the agreed credit terms and consider if an allowance is
required.
• Review post year-end receipts from Ellah Co to establish how much of the debt was recovered by
the audit completion date and to assess how much of the year-end balance remains outstanding.
• Inspect board minutes to identify whether there are any significant concerns in relation to payments
by Ellah Co.
• Discuss with management of Purrfect Co why no allowance has been made in respect of this debt
and assess the justification.
(c) Contamination – legal claims
• Review customer correspondence to establish the details of the claims and the amounts being
claimed.
• Review correspondence with Purrfect Co’s lawyers or, with the client’s permission, contact the
lawyers to establish the likely outcome of the customer claims made to date.
• Discuss with the lawyers the likelihood and amount of potential future claims.
• Inspect board minutes to establish details of the circumstances of the contamination and to ascertain
management’s view as to the likelihood that the existing claims will be successful and the
extent of possible future claims.
• Compare levels of returns and claims to date against sales volumes of the product to assess the
potential level of future claims.
• Review post-year end payments for damage settlements and compare with any amounts provided at
the year end to assess the reasonableness of the provision.
• Obtain written representations from management that there have been no other contamination
incidents and no other product liability claims of which management are aware and for which
provision may be required.
• Review the draft financial statements to establish that the legal claims have been appropriately
provided for or disclosed in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent
Assets.
(d) Issue and impact on auditor’s report
According to IAS 37, the possibility of additional claims should be disclosed as a contingent liability as
it is possible but not probable and quantifiable.
As the claims may be significant, this issue represents a matter which is fundamental to users’
understanding of the financial statements. The impact on the auditor’s report depends on whether this
matter is deemed to be adequately disclosed in the financial statements.
Adequate disclosure
If Purrfect Co adequately discloses the issue, then an unmodified audit opinion should be given but
the auditor’s report should include an emphasis of matter paragraph. This would draw attention to
the disclosure in the financial statements by cross-referencing the user to the note in the financial
statements which discloses the possible claims, emphasising that the audit opinion is unmodified.
Inadequate disclosure
If there is no disclosure in the financial statements or the disclosure is considered to be inadequate,
then this indicates that the financial statements are materially misstated. As this lack of adequate
disclosure is likely to be material but not pervasive, then a qualified opinion will be given. A basis for
qualified opinion paragraph will be added to the auditor’s report discussing the matter and the
opinion paragraph will be modified to state that ‘except for’ the failure to adequately disclose the
matter, the financial statements give a true and fair view.

a) Trade payables and accruals

(1) Ask management about the action they have taken to establish the value of the misstatement of
trade payables. If they have ascertained the value of the error assess the materiality of it and the
impact of it remaining uncorrected.
(2) (3) (4) (5) (6) Enquire whether any correcting journal entry has been calculated and whether it has
been processed in relation to the misstatement.
For a sample of purchase invoices received between 25 March and the end of 31 March 20X6, verify
that they are included within accruals or as part of trade payables via a journal adjustment.
Reconcile supplier statements to purchase ledger balances, and investigate any reconciling items.
Calculate and compare the trade payables payment period with prior years. Significant differences
should be investigated.
Compare trade payables and accruals against the previous year and expectations. Investigate any
significant differences and corroborate any explanations for differences to supporting
evidence.
(7) Review the cash book payments and bank statements in the period immediately after the year end
for evidence of payments relating to current year liabilities. Ensure any found are included in
accruals, trade payables or the trade payables journal.
(8) For a sample of payable balances, perform a trade payables circularisation. Any non-replies
should be followed up and reconciling items between the balance confirmed and the trade payables
balance should be investigated.
(9) For a sample of goods received notes before the year end and after the year end, ensure the
related invoices have been recorded in the period to which they relate.
Note: Only six valid procedures were needed.
(b) Receivables
(1) For those receivables who don't respond, the team should arrange to send a follow-up
circularisation if agreed by the client.
(2) For non-responses to the follow-up, and after obtaining client consent, the audit senior should
telephone the customer and request the customer responds in writing to the circularisation request.
(3) Where all follow-ups are unsuccessful, alternative procedures must be carried out to confirm
receivables, such as reviewing after-date cash receipts for year-end receivables.
(4) Where responses highlight differences, these should be investigated to establish if any amounts
are disputed or require adjustment.
(5) Where it is found that differences are in relation to disputed invoices, they should be discussed
with management and the need for an allowance or write-off assessed.
(6) For timing differences identified on responses or otherwise (eg cash in transit), these should be
agreed to post year end cash receipts in the cash book and bank statement.
(7) For those responses highlighting an unresolved difference, the receivables ledger should be
reviewed for unusual entries that could suggest errors made when posting transactions.
Note: Only five valid procedures were needed.
(c) Reorganisation
(1) Verify the announcement to shareholders was actually made in late March by inspecting
documentary evidence of the announcement.
(2) Board minutes should also be reviewed to confirm that the decision to reorganise the business
was taken pre year end.
(3) Obtain an analysis of the reorganisation provision and confirm that only expenditure attributable to
the restructuring is included.
(4) Cast the breakdown of the reorganisation provision to ensure it has been correctly calculated.
(5) Review the expenditure and confirm retraining costs are not included.
(6) Agree costs included within the provision to supporting documentation to confirm the
appropriateness and accuracy of items included.
(7) Review the related disclosures in the financial statements to assess whether they comply with the
requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(8) Obtain a written representation confirming management discussions in relation to the
announcement of the reorganisation.
Note: Only four valid procedures were needed.
(d) Written representations
Written representations are necessary information that the auditor requires in connection with the
audit of the entity's financial statements. Accordingly, similar to responses to inquiries, written
representations are audit evidence.
The auditor needs to obtain written representations from management and, where appropriate, those
charged with governance that they believe they have fulfilled their responsibility for the
preparation of the financial statements and for the completeness of the information provided to the
auditor.
Written representations are needed to support other audit evidence relevant to the financial
statements or specific assertions in the financial statements, if determined necessary by the auditor or
required by other ISAs. This may be necessary for judgemental areas where the auditor has to rely on
management explanations.
Written representations can be used to confirm that management have communicated to the auditor
all deficiencies in internal controls of which management are aware.
Written representations are normally in the form of a letter, written by the company's management
and addressed to the auditor. The letter is usually requested from management but can also be
requested from the chief operating officer or chief financial officer. Throughout the fieldwork, the audit
team will note any areas where representations may be required.
During the final review stage, the auditors will produce the written representations which the directors
will review and then produce it on their letterhead. It will be signed by the directors and dated as
at the date the auditor's report is signed, but not after.

(a) Inventory valuation

• Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to the WIP
schedule, agreeing the percentage completion to that recorded at the inventory count.
• For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and agree raw
material costs to recent purchase invoices, labour costs to time sheets or payroll records and confirm overheads
allocated are of a
production related nature.
• Examine post year-end credit notes to determine whether there have been returns which could signify that a
write down is required.
• Select a sample of year-end finished goods and compare cost with post year-end sales invoices to ascertain if
net realisable value (NRV) is above cost or if an adjustment is required.
• Discuss the basis of WIP valuation with management and assess its reasonableness.
• Select a sample of items included in WIP at the year end and ascertain the final unit cost price by verifying
costs to be incurred to completion to relevant supporting documentation. Compare to the unit sales price included
in sales invoices post
year-end to assess NRV
• Review aged inventory reports and identify any slow moving goods, discuss with management why these items
have not been written down or if an allowance is required.
• For the defective batch of product Crocus, review board minutes and discuss with management their plans for
selling these goods, and why they believe these goods have a NRV of $90,000.
• If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
• Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw material cost,
labour cost and any overheads attributed to the cost.
• Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and discuss with
management if this adjustment has been made. If so, follow through the write down to confirm.
(b) Research and development
• Obtain and cast a schedule of intangible assets, agree the closing balances to the general ledger, trial balance
and draft financial statements.
• Discuss with the finance director the rationale for the four-year useful life and consider its reasonableness.
• Recalculate the amortisation charge for a sample of intangible assets which have commenced production and
confirm that it is in line with the amortisation policy of straight line over four years and that amortisation only
commenced from the
point of production.
• For the three new computing software projects, discuss with management the details of each project along with
the stage of development and whether it has been capitalised or expensed.
• For those expensed as research, agree the costs incurred to invoices and supporting documentation and to
inclusion in profit or loss.
• For those capitalised as development, agree costs incurred to invoices.
• Confirm technically feasible and intention to complete the project by discussion with development managers or
review of feasibility reports.
• Review market research reports to confirm Hyacinth Co has the ability to sell the product once complete and
probable future economic benefits will arise.
• Review the costs, projected revenue and cash flow budgets for the each of the three projects to confirm
Hyacinth Co has adequate resources to complete the development stage and that probable future economic
benefits exist. Agree the
budgets to supporting documentation.
• Review the disclosures for intangible assets in the draft financial statements to verify that they are in
accordance with IAS 38 Intangible Assets.
(c) Sales tax liability
• Agree the year-end sales tax liability in the trial balance to the tax return/reconciliation submitted to the tax
authority and cast the return/reconciliation.
• Agree the quarterly sales tax charged equates to 15% of the last quarter's sales as per the sales day book.
• Recalculate the sales tax incurred as per the reconciliation is equal to 15% of the final quarter's purchases and
expenses as per the purchase day book.
• Recalculate the amount payable to the tax authority as being sales tax charged less sales tax incurred.
• Compare the year-end sales tax liability to the prior year balance or budget and investigate any significant
differences.
• Agree the subsequent payment to the post year-end cash book and bank statements to confirm completeness
and that it has been paid in line with the terms of the tax authority.
• Review any current and post year-end correspondence with the tax authority to assess whether there are any
additional outstanding payments due. If so, confirm they are included in the year-end liability.
• Review any disclosures made of the sales tax liability to ensure that it is shown as a current liability and assess
whether disclosures are in compliance with accounting standards and legislation.
(d) Subsequent event
A flood has occurred at the off-site warehouse and property, plant and equipment and inventory valued at $0.7
million have been damaged and now have no scrap value. The directors do not believe they are likely to be able
to claim on the
company's insurance for the damaged assets. This event occurred after the reporting period and is not an event
which provides evidence of a condition at the year end and so this is a non-adjusting event.
The damaged assets of $0.7 million are material as they represent 10.9% ($0.7m/$6.4m) of profit before tax and
3.0% ($0.7m/$23.2m) of total assets. As a material non-adjusting event, the assets do not need to be written
down to zero in this
financial year. However, the directors should consider including a disclosure note detailing the flood and the
value of assets impacted.
The following audit procedures should be applied to form a conclusion on any amendment:
• Obtain a schedule showing the damaged property, plant and equipment and agree the carrying amount to the
non-current assets register to confirm the total value of affected assets.
• Obtain a schedule of the water damaged inventory, visit the off-site warehouse and physically inspect the
impacted inventory. Confirm the quantity of goods present in the warehouse to the schedule; agree the original
cost to pre year-end
production costs.
• Review the condition of other PPE and inventory to confirm all damaged assets identified.
• Review the damaged property, plant and equipment and inventory and discuss with management the basis for
the zero scrap value assessment.
• Discuss with management why they do not believe that they are able to claim on their insurance; if a claim were
to be made, then only uninsured losses would require disclosure, and this may be an immaterial amount.
• Discuss with management whether they will disclose the effect of the flood, as a non-adjusting event, in the
year-end financial statements.
(a) Substantive procedures for Vega Vista Co’s income
• Obtain a schedule of all Vega Vista Co’s income and cast to confirm completeness and accuracy of the balance
and agree to the trial balance.
• Compare the individual categories of income of festival ticket sales, sundry sales and donations against prior
years and investigate any significant differences.
• For the annual festival, construct a proof-in-total calculation of the number of tickets sold, approximately 15,000,
multiplied by the ticket price of $35. Compare this to the income recorded and discuss any significant differences
with
management.
• For tickets sold on the day of the festival reconcile from ticket stubs the number of tickets sold multiplied by $35
and agree these sales to cash banked in the bank statement.
• Discuss with management their procedures for ensuring advance ticket sales for the
• September 20X5 festival are excluded from income and instead recognised as deferred income in the
statement of financial position.
• Select a sample of advance ticket sales made online, agree that the transaction has been excluded from current
year income and follow through to inclusion in deferred income.
• Agree journal entry to transfer prior year deferred income relating to the 20X4 festival to current year income to
the ledger and agree figures to prior year financial statements.
• For sundry sales, obtain a breakdown of the income received per stall and agree to supporting documentation
provided by each stall holder. Recalculate the fixed percentage received is as per the agreement/contract made
with Vega Vista Co.
• Compare sundry sales per stall holder to prior year sales data and investigate any significant differences.
• For monthly donations, trace a sample of donations from sign up documentation to the bank statements, cash
book and income listing to ensure that they are recorded completely and accurately.
• For a sample of new donors in the year, agree the monthly sum and start date from their completed forms and
trace to the monthly donations received account and agree to the cash book and bank statements.
(b) Substantive procedures for Canopus Co’s restructuring provision
• Cast the breakdown of the restructuring provision to ensure it is correctly calculated and agree the total to the
trial balance.
• Review the board minutes where the decision to restructure the production process was taken and confirm the
decision was made in March 20X5.
• Review the announcement to shareholders and employees in late March, to confirm that this was announced
before the year end.
• Obtain a breakdown of the restructuring provision and confirm that only direct expenditure relating to the
restructuring is included.
• Review the expenditure to confirm that there are no retraining costs of existing staff included.
• For the costs included within the provision, including acquisitions of plant and machinery, agree to supporting
documentation, such as purchase invoices, to confirm validity and value of items included.
• Review post year end payments/invoices relating to the expenditure and compare the actual costs incurred to
the amounts provided to assess whether the amount of the provision is reasonable.
• Obtain a written representation confirming management discussions in relation to the announcement of the
restructuring and to confirm the completeness of the provision.
• Review the adequacy of the disclosures of the restructuring provision in the financial statements and assess
whether these are in accordance with IAS® 37 Provisions, Contingent Liabilities and Contingent Assets.
(c) Substantive procedures for Canopus Co’s bank loans
• Obtain a schedule of opening and closing loans detailing any changes during the year. Cast the schedule to
confirm its accuracy and agree the closing balances to the trial balance and draft financial statements.
• For the new loan taken out in the year, review the loan agreement to confirm the amount borrowed, the
repayment terms and the interest rate applicable.
• For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan agreement to the
cash book and bank statements.
• For loans repaid, agree the final settlement amount per bank correspondence to payments out during the year
in the cash book and bank statements.
• Agree the quarterly repayment of the new loan of $150,000 paid on 31 March 20X5 to the cash book and bank
statement.
• Recalculate the split of the loan repayment made on 31 March 20X5 between interest and principal, recalculate
interest and agree to inclusion in statement of profit or loss, and outstanding loan balance reduced by principal
amount repaid.
• Review the bank correspondence and loan agreements for confirmation of any early settlement charges
incurred on the loans repaid. Agree that these were charged to the statement of profit or loss as a finance
charge.
• Obtain direct confirmation at the year-end from the loan provider of the outstanding balances and any security
provided. Agree confirmed amounts to the loans schedule.
• Review all loan agreements for details of covenants and recalculate all covenants to identify any potential or
actual breaches.
• Review the disclosure of non-current liabilities in the draft financial statements, including any security provided
and assess whether these are in accordance with accounting standards and local legislation. Additionally,
confirm that the split of
current and non-current loans in the financial statements is correct.
(d) Impact on Auditor's report
The restructuring provision of $2.1 million includes $270,000 of costs which do not meet the criteria for inclusion
as per IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Hence by including this amount the
provision and expenses for
this year are overstated and profits understated.
The error is material as it represents 2.3% of total equity and liabilities/ total assets (0.27m/11.6m) and hence the
finance director should adjust the financial statements by removing this cost from the provision and instead
expensing it to profit or
loss as it is incurred. The argument that the provision is judgemental and has been deemed reasonable by the
board is not valid. IAS 37 has strict criteria for what can and cannot be included within a restructuring provision.
For example, training
costs for existing staff must be specifically excluded.
If the finance director refuses to amend this error the audit opinion will be modified due to a material
misstatement. As management has not complied with IAS 37 and the error is material but not pervasive, a
qualified opinion would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph and would explain the
material misstatement in relation to the incorrect treatment of the restructuring provision and the effect on the
financial statements. The
opinion paragraph would be qualified ‘except for’.

(a) Vehicles additions and disposals

• Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note for property, plant
and equipment. Agree the cost of the vehicles given in part-exchange to the disclosure note to confirm that they
have been removed
from cost carried forward.
• For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice, ensuring that
the recorded cost includes the cash amount paid plus the trade-in allowance for the old vehicle. Confirm that the
invoice is made
out to Encore Co.
• Physically inspect a sample of additions, confirming that the registration number of the vehicle agrees to that on
the non-current assets register.
• Review the non-current assets register to confirm that the 20 old vehicles were removed and that the 20 new
vehicles were included.
• Recalculate the loss on disposal of $1.1m ($1.8 − ($4.6m − $3.9m) and agree to the trial balance and statement
of profit or loss.
• Agree the cash payment of $3.9m to the cash book and bank statement.
• Recalculate the depreciation expense, confirming that the depreciation expense was based on the old vehicles
until 1 February and on the cost of the new vehicles after that date.
• Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been removed from
accumulated depreciation carried forward.
• In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the carrying amount
of other vehicles may be overstated.
• Discuss with management Encore Co's history of vehicle replacement to establish if vehicles are being used for
the entire period of their estimated useful life.
• Discuss with management why trade-in allowances were so much lower than the carrying amounts of the
vehicles to provide further evidence as to whether depreciation policies are reasonable.
• Review the notes to the financial statements to ensure that disclosure of the additions and disposals is in
accordance with IAS 16 Property, Plant and Equipment .
(b) Valuation of trade receivables
• Review the aged receivables listing to identify slow moving or old balances. Discuss the status of these
balances with the credit controller to assess whether the customers are likely to pay or if an allowance for
receivables is required.
• Review whether there are any after-date cash receipts for slow moving/old receivable balances.
• Review correspondence with customers in order to identify any balances which are in dispute or unlikely to be
paid and discuss with management whether any allowance is required.
• Review board minutes to identify whether there are any significant concerns in relation to outstanding
receivables balances and assess whether the allowance is reasonable.
• Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any potentially
irrecoverable balances to assess if the allowance is adequate.
• Review the payment history for evidence of slow paying by any customers who were granted credit in the period
when there was no credit controller and who may not, therefore, have been properly scrutinised.
• Discuss with the finance director the rationale for maintaining the allowance at the same level in light of the
increase in the receivables collection period and the absence of a credit controller.
• Inspect post year-end sales returns/credit notes and consider whether an additional allowance against
receivables is required.
(c) Potential breach of regulations
• Review correspondence with the transport authority to establish details of the complaint and the number of
times the breach has allegedly occurred.
• Enquire of the directors why they are unwilling to provide or make disclosure, whether they accept that any
breaches took place but believe that the effect is immaterial or whether they dispute their occurrence.
• Review Encore Co's policies and procedures to record driving hours and rest periods and compare to the
regulations to determine the likelihood that breaches have occurred and how frequently.
• Review correspondence with the transport authority to establish if there have been discussions about other
instances of potential non-compliance.
• Review correspondence with Encore Co's legal advisers or, with the client's permission, contact the lawyers to
establish their assessment of the likelihood of the breach being proven and any fines that would be payable.
• Review the board minutes to ascertain management's view as to the likelihood of payment to the transport
authority.
• Obtain a written representation to the effect that the directors are not aware of any other breaches of laws or
regulations that would require a provision or disclosure in the financial statements.
• Inspect the post year-end cash book and bank statements to identify whether any fines have been paid.
(d) Auditor's report
The breaches in regulations and the initial investigation into the breaches occurred before the year end. The
announcement by the authorities that they are taking legal action provides further evidence regarding these
conditions which existed at
the year-end date therefore IAS 10 Events after the Reporting Period would classify this as an adjusting
subsequent event. As it seems probable that the fine will be payable, a provision must be included rather than
merely the disclosure. Failure to
make such a provision will cause profits to be overstated and provisions to be understated.
The potential fine of $850,000 (17 × $50,000) is 16% ($850k/$5.3m) of profit before tax and 2.1%
($850k/$40.1m) of total assets. It is therefore material.
If the directors refuse to make a provision, then Velo & Co should issue a modified opinion on the grounds that
there is a material misstatement of profit and liabilities. As this is material but not pervasive a qualified opinion
would be appropriate.
A basis for qualified opinion paragraph would be included after the opinion paragraph. This would explain the
material misstatement in relation to the non-recognition of the provision and the effect on the financial
statements. The opinion
paragraph would be qualified 'except for'.

(a) Trade payables and accruals

• Compare the total trade payables and list of accruals against prior year and investigate any significant
differences.
• Select a sample of post year-end payments from the cash book; if they relate to the current year, follow through
to the purchase ledger or accruals listing to ensure they are recorded in the correct period.
• Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any
reconciling items.
• Select a sample of payable balances and perform a trade payables' circularisation, follow up any non-replies
and any reconciling items between the balance confirmed and the trade payables' balance.
• Review after date invoices and credit notes to ensure no further items need to be accrued.
• Enquire of management their process for identifying goods received but not invoiced or logged in the purchase
ledger and ensure that it is reasonable to ensure completeness of payables.
(b) Audit software procedures using computer assisted audit techniques (CAATs)
• The audit team can use audit software to calculate payables payment period for the year-to-date to compare
against the prior year to identify whether the payables payment period has changed in line with trading levels and
expectations. If the payables payment period has decreased, this may be an indication that payables are
understated.
• Audit software can be used to cast the payables and accruals listings to confirm the completeness and
accuracy of trade payables and accruals.
• Audit software can be used to select a representative sample of items for further testing of payables balances.
• Audit software can be utilised to recalculate the accruals for goods received not invoiced at the year end.
• CAATs can be used to undertake cut-off testing by assessing whether the dates of the last GRNs recorded
relate to pre year end; and that any with a date of 1 July 20X5 onwards were excluded from trade payables.
(c) Substantive procedures for bank balances
• Obtain a bank confirmation letter from Airsoft Co's bankers for all of its bank accounts.
• Agree all accounts listed on the bank confirmation letter to Airsoft Co's bank reconciliations and the trial balance
to ensure completeness of bank balances.
• For all bank accounts, obtain Airsoft Co's bank account reconciliation and cast to ensure arithmetical accuracy.
• Agree the balance per the bank reconciliation to an original year-end bank statement and to the bank
confirmation letter.
• Agree the reconciliations balance per the cash book to the year-end cash book.
• Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank statement and also to
the paying-in-book pre year end.
• Trace all unpresented cheques through to a pre year-end cash book and post year-end statement. For any
unusual amounts or significant delays, obtain explanations from management.
• Examine any old unpresented cheques to assess if they need to be written back into the purchase ledger as
they are no longer valid to be presented.
• Review the cash book and bank statements for any unusual items or large transfers around the year end, as
this could be evidence of window dressing.
• Examine the bank confirmation letter for details of any security provided by Airsoft Co or any legal right of set-
off as this may require disclosure.
• Review the financial statements to ensure that the disclosure of bank balances is complete and accurate.
(d) Substantive procedures for directors' remuneration
• Obtain a schedule of the directors' remuneration, split by salary and bonus paid in December and cast the
schedule to ensure accuracy.
• Agree a sample of the individual monthly salary payments and the bonus payment in December to the payroll
records.
• Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.
• Review the board minutes to identify whether any additional payments relating to this year have been agreed
for any directors.
• Agree the amounts paid per director to board minutes to ensure the sums included are genuine.
• Obtain a written representation from management confirming the completeness of directors' remuneration
including the bonus.
• Review the disclosures made regarding the directors' remuneration and assess whether these are in
compliance with local legislation.
(e) Key audit matters
Key audit matters (KAM) are those matters which, in the auditor's professional judgement, were of most
significance in the audit of the financial statements of the current period. Key audit matters are selected from
matters communicated with
those charged with governance.
The purpose of including key audit matters in the auditor's report is to help users in understanding the entity, and
to provide a basis for the users to discuss with management and those charged with governance about matters
relating to the
entity and the financial statements. A key part of the definition is that these are the most significant matters.
Identifying the most significant matters involves using the auditor's professional judgement.
ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report suggests that in determining key
audit matters the auditor should take the following into account:
• Areas of higher assessed risk of material misstatement, or significant risks.
• Significant auditor judgements relating to areas in the financial statements which involved significant
management judgement.
• The effect on the audit of significant events or transactions which occurred during the period.
The description of each KAM in the Key Audit Matters section of the auditor's report should include a reference to
the related disclosures in the financial statements and covers why the matter was considered to be one of most
significance in the
audit and therefore determined to be a KAM; and how the matter was addressed in the audit.

a) Substantive procedures for research and development

• Obtain and cast a schedule of intangible assets, detailing opening balances, amounts capitalised in the current
year, amortisation and closing balances.
• Agree the closing balances to the general ledger, trial balance and draft financial statements.
• Discuss with the finance director the rationale for the three-year useful life and consider its reasonableness.
• Recalculate the amortisation charge for a sample of intangible assets which have commenced production and
confirm it is in line with the amortisation policy of straight line over three years and that amortisation only
commenced from the
point of production.
• For the nine new projects, discuss with management the details of each project along with the stage of
development and whether it has been capitalised or expensed.
• For those expensed as research, agree the costs incurred to invoices and supporting documentation and to
inclusion in profit or loss.
• For those capitalised as development, agree costs incurred to invoices and confirm technically feasible by
discussion with development managers or review of feasibility reports.
• Review market research reports to confirm Gooseberry Co has the ability to sell the product once complete and
probable future economic benefits will arise.
• Review the disclosures for intangible assets in the draft financial statements to verify that they are in
accordance with IAS 38 Intangible Assets.
(b) Substantive procedures for depreciation
• Discuss with management the rationale for the changes to property, plant and equipment (PPE) depreciation
rates, useful lives, residual values and depreciation methods and ascertain how these changes were arrived at.
• Confirm the reasonableness of these changes, by comparing the revised depreciation rates, useful lives and
methods applied to PPE to industry averages and knowledge of the business.
• Review the capital expenditure budgets for the next few years to assess whether the revised asset lives
correspond with the planned period until replacement of the relevant asset categories.
• Review the non-current asset register to assess if the revised depreciation rates have been applied.
• Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to assess the
reasonableness of the revised depreciation rates.
• Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current assets register
is correct and ensure that new depreciation rates have been appropriately applied.
• Obtain a breakdown of depreciation by asset categories, compare to prior year; where significant changes have
occurred, discuss with management and assess whether this change is reasonable.
• For asset categories where there have been a minimal number of additions and disposals, perform a proof in
total calculation for the depreciation charged on PPE, discuss with management if significant fluctuations arise.
• Review the disclosure of the depreciation charges and policies in the draft financial statements and ensure it is
in line with IAS 16 Property, Plant and Equipment .
(c) Substantive procedures for directors' bonuses
• Obtain a schedule of the directors' bonus paid in February 20X8 and cast the schedule to ensure accuracy and
agree amount disclosed in the financial statements.
• Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end liability.
• Agree the individual bonus payments to the payroll records.
• Recalculate the bonus payments and agree the criteria, including the exclusion of intangible assets, to
supporting documentation and the percentage rates to be paid to the directors' service contracts.
• Confirm the amount of each bonus paid post year end by agreeing to the cash book and bank statements.
• Agree the amounts paid per director to board minutes to ensure the sums included in the current year financial
statements are fully accrued and disclosed.
• Review the board minutes to identify whether any additional payments relating to this year have been agreed
for any directors.
• Obtain a written representation from management confirming the completeness of directors' remuneration
including the bonus.
• Review the disclosures made regarding the bonus paid to directors and assess whether these are in
compliance with local legislation.
(d) Impact on auditor's report
One of the new health and beauty products Gooseberry Co has developed in the year does not meet the
recognition criteria under IAS 38 Intangible Assets for capitalisation but has been included within intangible
assets. This is contrary to IAS 38,
as if the criteria are not met, then this project is research expenditure and should be expensed to the statement
of profit or loss rather than capitalised.
The error is material as it represents 6.9% of profit before tax (0.44m/6.4m) and 1.2% of net assets
(0.44m/37.2m) and hence management should adjust the financial statements by removing this amount from
intangible assets and charging it to the
statement of profit or loss instead. IAS 38 requires costs to date to be expensed; if the project meets the
recognition criteria in 20X9, then only from that point can any new costs incurred be capitalised. Any costs
already expensed cannot be
written back to assets.
If management refuses to amend this error, then the auditor's opinion will need to be modified. As management
has not complied with IAS 38 and the error is material but not pervasive, then a qualified opinion would be
necessary.
A basis for qualified opinion paragraph would be needed after the opinion paragraph and would explain the
material misstatement in relation to the incorrect treatment of research and development and the effect on the
financial statements. The
opinion paragraph would be qualified 'except for'.

(a) Exceptions in the receivables circularisation

The following steps should be undertaken in regard to the exceptions arising in the positive receivables
circularisation:
Albacore Co
• For the non-response from Albacore Co, with the client's permission, the team should arrange to send a follow-
up circularisation.
• If Albacore Co does not respond to the follow up, then with the client's permission, the auditor should telephone
the customer and ask whether they are able to respond in writing to the circularisation request.
• If there is still no response, then the auditor should undertake alternative procedures to confirm the balance
owing from Albacore Co. Such as detailed testing of the balance by agreeing to sales invoices and goods
dispatched notes (GDN).
Flounder Co
• For the response from Flounder Co, with a difference of $5,850 the auditor should identify any disputed
amounts, and identify whether these relate to timing differences or whether there are possible errors in the
records of Trigger.
• If the difference is due to timing, such as cash in transit, this should be agreed to post year-end cash receipts in
the cash book.
• If the difference relates to goods in transit, then this should be agreed to a pre year-end GDN.
Menhaden Co
• The reason for the credit balance with Menhaden should be discussed with the credit controller of finance
department to understand how a credit balance has arisen.
• Review the payables ledger to identify if Menhaden is a supplier as well as a customer; if so, a purchase invoice
may have been posted in error to the receivables rather than payables ledger.
• If the difference is due to credit notes, this should be agreed to pre year-end credit notes dispatched around the
year-end date.
• The receivables ledger should be reviewed to identify any possible mis-postings as this could be a reason for
the difference with Menhaden Co.
(b) Substantive procedures for allowance for trade receivables
• Discuss with the finance director the rationale for not providing against receivables and consider the
reasonableness of the allowance.
• Obtain a breakdown of the opening allowance of $125,000 and consider if the receivables provided for in the
prior year have been fully recovered as a result of the additional credit control procedures or if they have now
been fully written off.
• Inspect the aged trade receivables ledger to identify any slow moving or old receivable balances and discuss
the status of these balances with the credit controllers to assess whether they are likely to be received.
• Review whether there are any after any after-date cash receipts for identified slow moving/old receivables
balances.
• Review customer correspondence to identify any balances which are in dispute or are unlikely to be paid and
confirm if these have been considered when determining the allowance.
• Inspect board minutes to identify whether there are any significant concerns in relation to payments by
customers and assess if these have been considered when determining the allowance.
• Recalculate the potential level of trade receivables which are not recoverable and compare to allowance and
discuss differences with management.
(c) Going concern indicators
Marlin Co has paid some of its suppliers considerably later than usual and only after many reminders; hence
some of them have withdrawn credit terms meaning the company must pay cash on delivery. This suggests that
the company was
struggling to meet their liability as they fell due and will also put significant additional pressure on the company's
cash flow, because the company will have to pay for goods on delivery but is likely to have to wait for cash from
its receivables due
to credit terms.
Marlin Co's main supplier who provides over 60% of the company's specialist equipment has just stopped
trading. If the equipment is highly specialised, there is a risk that Marlin Co may not be able to obtain these
products from other suppliers
which would impact on the company's ability to trade. More likely, there are other suppliers available but they
may be more expensive or may not offer favourable credit terms which will increase the outflows of Marlin Co
and worsen the cash flow
position.
Marlin Co's overdraft has grown significantly during the year and is for renewal within the next month. If the bank
does not renew the overdraft and the company is unable to obtain alternative finance, then it may not be able to
continue to meet
its liabilities as they fall due, especially if suppliers continue to demand cash on delivery, and the company may
not be able to continue to trade.
In order to conserve cash, Marlin Co has decided not to pay a final dividend for the year ended 30 April 20X5.
This may result in shareholders losing faith in the company and they may attempt to sell their shares; in addition,
they are highly
unlikely to invest further equity and Marlin Co may need to raise finance to repay their overdraft.
(d) Going concern procedures
• Obtain the company's cash flow forecast and review the cash in and outflows. Assess the assumptions for
reasonableness and discuss the findings with management to understand if the company will have sufficient cash
flows.
• Perform a sensitivity analysis on the cash flows to understand the margin of safety the company has in terms of
its net cash in/outflow.
• Evaluate management's plans for future actions, including their contingency plans in relation to ongoing
financing and plans for generating revenue, and consider the feasibility of these plans.
• Review the company's post year-end sales and order book to assess if the levels of trade are likely to increase
and if the revenue figures in the cash flow forecast are reasonable.
• Review any agreements with the bank to determine whether any covenants have been breached, especially in
relation to the overdraft.
• Review any bank correspondence to assess the likelihood of the bank renewing the overdraft facility.
• Review post year-end correspondence with suppliers to identify if any have threatened legal action or any
others have refused to supply goods.
• Inspect any contracts or correspondence with suppliers to confirm supply of the company's specialist
equipment. If no new supplier has been confirmed, discuss with management their plans to ensure the company
can continue to meet
customer demand.
• Enquire of the lawyers of Marlin Co as to the existence of any litigation.
• Perform audit tests in relation to subsequent events to identify any items which might indicate or mitigate the
risk of going concern not being appropriate.
• Review the post year-end board minutes to identify any other issues which might indicate fur the company.
• Review post year-end management accounts to assess if in line with cash flow forecast.
• Consider whether any additional disclosures as required by IAS 1 Presentation of Financial Statements in
relation to material uncertainties over going concern should be made in the financial statements.
• Consider whether the going concern basis is appropriate for the preparation of the financial statements.
• Obtain a written representation confirming the directors' view that Marlin Co is a going concern.

(a) Land and buildings

• Obtain a schedule of all land and buildings, cast and agree to the trial balance and financial statements.
• Consider the competence and capability of the valuer, by assessing through enquiry their qualification,
membership of a professional body and experience in valuing these types of assets.
• Review the assumptions and method adopted by the valuer in undertaking the revaluation to confirm the
reasonableness and compliance with principles of IAS 16.
• Agree the schedule of revalued land and buildings to the valuation statement provided by the valuer and to the
non-current assets register.
• Agree all land and buildings on the non-current assets register to the valuation report to ensure completeness of
the land and buildings valued to ensure all assets in the same category have been revalued in line with IAS 16.
• Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation surplus.
• Recalculate the depreciation charge for the year and confirm that for assets revalued at July 20X4, the
depreciation was based on cost before the revaluation and based on the valuation after on a pro rata basis.
• For a sample of land and buildings from the non-current assets register, physically verify to confirm existence.
• For a sample of land and buildings trace back to the non-current assets register and general ledger to confirm
completeness.
• Review the financial statements disclosures relating to land and buildings to ensure they comply with IAS 16.
(b) Exceptions in the trade receivables circularisation
Nile Co
• For the non-response from Nile Co, with the client’s permission, the team should arrange to send a follow-up
confirmation request.
• If Nile Co does not respond to the follow up, then with the client’s permission, the auditor should telephone the
customer and ask whether they are able to respond in writing to the confirmation request.
• If there is still no response, then the auditor should undertake alternative procedures to confirm the balance
owing from Nile Co. These would include detailed testing of the balance by a review of after date cash receipts
and agreeing to sales
invoices and goods dispatched notes (GDN).
Congo Co
• For the response from Congo Co the auditor should investigate the difference of $14,132, and identify whether
this relates to timing differences or whether there are possible errors in the records of Danube Co.
• If the difference is due to timing, such as cash in transit, details of the difference should be agreed to post year-
end cash receipts in the cash book.
• If the difference relates to goods in transit, then details should be agreed to a pre year-end GDN.
• The receivables ledger should be reviewed to identify any possible mis-postings as this could be a reason for
the difference with Congo Co.
(c) Provision and receivable arising from the sale of defective goods
• Review the correspondence with Kalama Kids Co and establish the details of the claim to assess whether a
present obligation as a result of a past event has occurred.
• Review correspondence with Thames Co, the supplier of the hoverboards, to assess whether they accept
liability for the defect.
• Review correspondence with Danube Co’s legal advisers or, with the client’s permission, contact the legal
advisers to obtain their view as to the probability of either the legal claim from the customer and the request for
reimbursement from the
supplier being successful as well as any likely amounts to be paid or received.
• Discuss with management/enquire of the legal adviser as to whether any other customers of Danube Co have
experienced problems with sales of hoverboards and therefore the likelihood of any potential future claims.
• Review board minutes to establish whether the directors believe that either claim will be successful or not.
• Review the post year-end cash book to assess whether any payments have been made to the customer or cash
received from the supplier and compare with the amounts recognised in the financial statements.
• Discuss with management why they have included a receivable for the claim against the supplier as this is
possibly a contingent asset and should only be recognised as an asset if the receipt of cash is virtually certain.
Consider the
reasonableness of the proposed treatment.
• Obtain a written representation confirming management’s view that the lawsuit by Kalama Kids Co is likely to be
successful and the claim against Thames Co is virtually certain and hence a provision and a receivable are
required to be
included.
• Review the adequacy of the disclosures of the lawsuit and supplier claim in the draft financial statements to
ensure they are in accordance with IAS 37.
(d) Key audit matters
(i) Factors to consider
As Danube Co is listed, a Key Audit Matters (KAM) section will be required in the auditor’s report. The audit
partner would have considered whether the matter was communicated to those charged with governance as
KAM are selected from
matters communicated with those charged with governance. The audit partner would also have considered
whether the issue relating to the claims was an area of higher assessed risk of material misstatement or a
significant risk and as it is an
accounting estimate the level of judgement involved. The audit partner will have also considered whether, in their
professional judgement, the matters regarding the claim and counter-claim were of most significance in the audit
of Danube Co’s
financial statements for the year ended 31 March 20X5 therefore requiring significant auditor attention.
(ii) Contents of KAM section
The KAM section of the auditor’s report should provide a description of the issue. It should detail why this issue
was considered to be an area of most significance in the audit and therefore determined to be a KAM. It would
include a reference to
the audit risk of completeness of the provision and recognition of the receivable and the level of judgement
required in making this assessment. It should also explain how the matter was addressed in the audit and the
auditor should provide a
brief overview of the audit procedures adopted as well as making a reference to any related disclosures.
(a) Substantive procedures for revenue
• Cast a breakdown of revenue and agree to the general ledger, trial balance and draft financial statements.
• Compare the overall level of revenue against prior year/budget and investigate any significant fluctuations.
• Obtain a breakdown of sales analysed by month and compare this to the prior year/month. Investigate any
significant fluctuations.
• Obtain a schedule of sales for the year disaggregated into the main product categories/by type of customer by
month and compare this to the prior year breakdown. Discuss any unusual movements with management.
• Perform a proof in total calculation for revenue by taking the prior year revenue and increasing it for the three
new product lines launched in February 20X5 and the price rise in line with inflation from September 20X4 and
other known factors.
This expectation should be compared to actual revenue and any significant fluctuations should be investigated.
• Calculate the gross profit margin for Spinach Co for the year, compare this to the prior year and investigate any
significant fluctuations.
• Select a sample of sales invoices for wholesale customers and agree the sales prices back to the price list or
customer master data information, noting whether the price was pre or post the price increase, to confirm the
accuracy of invoices.
• For a sample of invoices, recalculate invoice totals including any discounts and sales tax.
• Select a sample of credit notes raised, trace through to the original invoice and ensure the invoice has been
correctly removed from sales.
• Select a sample of dispatch notes and agree these to sales invoices through to inclusion in the sales day book
and revenue accounts in the general ledger to confirm completeness of revenue.
• Select a sample of dispatch notes both pre and post year end and follow these through to sales invoices in the
correct accounting period to ensure that cut-off has been correctly applied.
• Select a sample of website sales made in the final week prior to the year end and where goods were dispatched
post year end, confirm that the sale proceeds received are recorded as deferred income (contract liability) rather
than as revenue.
(b) Inventory count procedures
Before the count
• Review the prior year audit files to identify whether there were any particular warehouses where significant
inventory issues arose last year.
• Discuss with management whether any of the warehouses this year are new, whether any significant changes
have occurred this year with regards to inventory items or if any warehouses have experienced significant control
issues.
• Decide which of the six warehouses the audit team members will attend, basing this on materiality and risk of
each site.
• Obtain a copy of the proposed inventory count instructions, review them to identify any control deficiencies and,
if any are noted, discuss them with management prior to the counts.
• Discuss with management whether third-party inventory is stored in any of the other warehouses and what the
procedures are for ensuring that third-party inventory is omitted from the counts.
During the count
• Observe the counting teams of Spinach Co to confirm whether the inventory count instructions are being
followed correctly.
• Select samples of inventory and perform test counts from inventory sheets to physical inventory and from
physical inventory to inventory sheets.
• Observe the counts in order to confirm that the procedures for identifying and segregating damaged goods are
operating correctly and inspect inventory for evidence of any damaged or slow-moving items.
• Observe the procedures for movements of inventory during the counts, in order to confirm that all movements
have ceased.
• Discuss with the internal audit supervisors how any raw materials quantities have been estimated. Where
possible, reperform the procedures adopted by the supervisors.
• Obtain a copy of the completed sequentially numbered inventory sheets for follow up testing at the final audit.
• Obtain copies of the last goods received notes (GRNs) and goods dispatched notes (GDNs) for 31 July and
request copies of GRNs and GDNs raised on 1 August in order to perform cut-off procedures as at the year end.
• Observe the procedures carried out by Spinach Co’s staff in identifying third-party inventories are operating
correctly and review the completed inventory count sheets to confirm no third-party inventory is included.
(c) Substantive procedures for issue of share capital
• Review board minutes to confirm the number of additional shares issued in May 20X5 and the issue price.
• Agree the issue of shares is permitted from a review of any statutory constitution agreements in place.
• Review legal documentation, correspondence or share issue prospectus to confirm the details of the share
issue.
• Agree the issue of new shares to the share register.
• Inspect the cash book and bank statements for evidence of the amount of cash received from the share issue.
• Where the sum received is less than $4.3m, confirm the difference is treated as share capital called up but not
paid in the financial statements.
• Recalculate the split of proceeds between the nominal value of shares and premium on issue and agree
correctly recorded within share capital and share premium account (other components of equity).
• Review the disclosure of the share issue in the draft financial statements and ensure it is in line with relevant
accounting standards and local legislation.
(d) Auditor’s report
(i) Factors to consider
As Spinach Co is listed, a key audit matters (KAM) section will be required in the auditor’s report. The audit
partner would have considered whether the matter was communicated to those charged with governance as
KAM are selected from
matters communicated to those charged with governance. The audit partner would have also considered the
level of risk in relation to the valuation of inventory and, as determining the net realisable value is an accounting
estimate, the level of
judgement involved. The audit partner would have also considered whether, in their professional judgement, the
matters regarding the valuation of inventory were of most significance in the audit of Spinach Co’s financial
statements for the
year ended 31 July 20X5.
(ii) Contents of KAM
The KAM section of the auditor’s report should include a reference to the audit risk in relation to the valuation of
inventory and the level of judgement required in making this assessment. It should detail why this issue was
considered to be an
area of significance in the audit and therefore determined to be a KAM. It should also explain how the matter was
addressed in the audit and the auditor should provide a brief overview of the audit procedures adopted as well as
detailing that
a review was undertaken of any related disclosures.