Purrfect Co

1. Substantive Procedures – Vego Dog Inventory Valuation (4 Marks)

- Review the standard costing breakdown (materials, labour, overheads) and
assess its appropriateness.
- Perform a net realisable value (NRV) test: compare cost with estimated
selling price less cost to sell.
- Review post year-end sales or discount decisions for indications of
impairment.
- Evaluate if inventory is recorded at the lower of cost or NRV in accordance
with IAS 2.

2. Types of Receivables Circularisation (2 Marks)

a) Positive Circularisation: The customer is asked to respond whether they
agree or disagree with the balance.
b) Negative Circularisation: The customer is only asked to respond if they
disagree with the balance.

3. Substantive Procedures – Receivables from Ellah Co (4 Marks)

- Review ageing analysis and payment history of Ellah Co.
- Inspect correspondence for evidence of credit concerns or payment
disputes.
- Check post year-end cash receipts from Ellah Co.
- Assess if allowance for doubtful debts is reasonable considering store
closures and press reports.

4. Substantive Procedures – Legal Claims (5 Marks)

- Obtain legal confirmation from Purrfect Co’s external lawyers regarding
current and potential claims.
- Review correspondence with claimants and insurers.
- Inspect board minutes for discussion of the contamination issue.
- Evaluate provision made in the financial statements and assess compliance
with IAS 37.
- Recalculate amounts claimed and verify settlement/claim documentation.

5. Contingent Liability Disclosure – Impact on Auditor’s Report (5 Marks)

Issue: Lawyer advises significant additional claims may arise; disclosure is
required under IAS 37.

- If disclosure is adequate: Auditor includes an Emphasis of Matter paragraph

to highlight the disclosure.
- If disclosure is inadequate: This results in a **qualified opinion** due to
material misstatement by omission.
Auditor must ensure users are aware of the uncertainty regarding potential
financial impact.

Violet & Co
1. Audit Completion Issues (12 Marks)
• **A. Daisy Co – Corrupted Sales Ledger**
(i) Materiality: Receivables $3.4m and revenue $15.6m are material; evidence is
unavailable.
(ii) Written Representation: Not sufficient due to lack of audit evidence.
(iii) Procedures: Attempt to reconstruct receivables using cash receipts,
customer confirmations.
(iv) Impact: If unresolved, likely results in a qualified or disclaimer of opinion
due to limitation of scope.

• **B. Fuchsia Co – Going Concern Doubts**

(i) Materiality: Current year loss is $4.4m and forecast net cash outflow is
$3.2m.
(ii) Written Representation: Can support but not substitute adequate audit
evidence.
(iii) Procedures: Evaluate cash flow forecasts, assess assumptions, seek
funding confirmation, review board minutes.
(iv) Impact: If material uncertainty exists and disclosures are adequate –
Emphasis of Matter; if not – qualified or adverse opinion.

2. Written Representations – Items and Reasons (6 Marks)

Six items to include in written representations:
1. Management’s responsibility for the financial statements.
2. Completeness of transactions recorded.
3. Disclosure of related party transactions.
4. Compliance with laws and regulations.
5. Disclosure of unrecorded liabilities.
6. Confirmation of going concern assumption.

Reasons for obtaining written representations:

1. To confirm oral statements from management.
2. To support audit evidence gathered.
3. To reduce misunderstandings regarding management’s responsibilities.

3. Adjusting vs Non-Adjusting Events (2 Marks)

- Adjusting Events: Provide additional evidence of conditions that existed at
the balance sheet date (e.g. customer insolvency after year-end for an old
debt).
- Non-Adjusting Events: Relate to conditions after the reporting period (e.g.
natural disaster or share issue after year-end).
Castle Courier Co
1. Methods of Documenting Internal Controls and Their Disadvantages (3
marks)
a. Internal Control Evaluation Questionnaire (ICEQ):
A structured set of questions to assess whether controls are in place and
functioning.
Disadvantage: Over-reliance may lead to a mechanical approach, lacking
understanding of system nuances.

b. Flowcharts:
A visual map showing how processes flow and how internal controls are
embedded.
Disadvantage: Preparation is time-consuming and may not capture narrative
or control limitations in depth.

c. Internal Control Questionnaire (ICQ):

A checklist with yes/no questions about the existence and operation of
internal controls.
Disadvantage: May not identify missing controls or actual effectiveness; relies
heavily on management assertions.

2. a) Four Direct Controls & b) Tests of Control (8 marks)

Direct Control Explanation Test of Control
Key card and CCTV- Helps ensure that only Inspect CCTV review
monitored clock-in authorised staff record logs and match with the
system their time; prevents clock-in data; verify
buddy-punching. sequence checks are
documented.
Payroll system Ensures automated Reperform sample
automated calculations calculations are verified payroll calculations and
with recalculation for accuracy. check for evidence of
check supervisor’s review and
sign-off.
Password-protected Prevents unauthorised Inspect system access
payroll system updated access to payroll data. logs and verify
monthly password updates
occur monthly using a
random generator.
Monthly payroll Detects discrepancies Review reconciliation
reconciliation by between payroll and documentation, verify
finance director accounting records. any variances are
investigated and
resolved.
3. Substantive Procedures for Payroll Expense (6 marks)
1. Analytical Review:
Compare payroll expense to prior years and budget. Investigate unusual
variances.
2. Sample Recalculation:
Select employee records, recalculate gross and net pay, and match to ledger.

3. HR Reconciliation:
Match payroll records with HR files to verify only genuine employees are
paid.

4. Check Joiners and Leavers:

Review joiner/leaver forms; verify correct inclusion/exclusion in payroll
system.

5. Tax Deductions and Payments:

Verify that tax and statutory deductions are properly calculated and
remitted.

6. Cut-off Testing:
Ensure wages and related expenses are recorded in the correct period.

4. Evaluation of Management’s Claim on Internal Audit (3 marks)

Management’s Claim: Internal audit is unnecessary because external audit
already covers internal control weaknesses.

Evaluation:

- Incorrect Assumption:
External audit is not a substitute for internal audit. External auditors provide
an opinion on financial statements, not ongoing control evaluation.

- Compliance Requirements:
In some jurisdictions and under corporate governance best practices,
internal audit may be required, especially for larger or listed companies.

- Benefits of Internal Audit:

• Provides continuous review and improvement of controls.
• Helps detect fraud, inefficiencies, and operational risks.
• Enhances internal control environment, reducing external audit risk.
• Builds management confidence through early warning of issues.

Conclusion:
Internal audit adds significant value and complements the work of external
auditors. Management's claim lacks validity and overlooks the operational
benefits and assurance provided by internal audit.
Sycamore Science Co
1. Audit Risks and Auditor’s Response (16 Marks)
1. 1. Revenue Recognition – $35.6 million
Risk Explanation: Risk of overstatement due to pressure to meet loan
covenants.
Auditor’s Response: Perform substantive analytical procedures, cut-off tests,
and review of returns post year-end.

2. 2. Profit on Disposal of Surplus Plant – $210,000

Risk Explanation: Risk of improper accounting or misclassification.
Auditor’s Response: Verify disposal proceeds, inspect sale agreements and
fixed asset register adjustments.

3. 3. Change of Finance Director due to Fraud

Risk Explanation: Risk of poor controls and potential undiscovered fraud.
Auditor’s Response: Perform extended procedures on expense claims and test
control changes since new director’s appointment.

4. 4. Capitalized Development Costs – $1.8 million

Risk Explanation: Risk that not all criteria under IAS 38 are met.
Auditor’s Response: Review project documentation, assess technical
feasibility and management’s assumptions.

5. 5. Loan with Covenants – $2 million

Risk Explanation: Risk of misstatement to meet targets or omission of
disclosure.
Auditor’s Response: Review loan agreements, assess covenant compliance
and disclosures.

6. 6. Post-Year-End Sales Returns – $0.5 million

Risk Explanation: Revenue may be overstated due to significant returns after
year-end.
Auditor’s Response: Extend cut-off procedures, review credit notes and adjust
revenue if necessary.
7. 7. Outsourced Payroll Function
Risk Explanation: Risk of reliance on service provider controls.
Auditor’s Response: Obtain Type 2 SOC report, and reconcile provider’s report
with company records.

8. 8. Inventory Count Movement Issues

Risk Explanation: Risk of incomplete or inaccurate inventory valuation.
Auditor’s Response: Assess count procedures, review post-count adjustments
and reperform count tests.

2. Detection Risk and Sampling vs Non-Sampling Risk (4 Marks)

Detection Risk is the risk that the auditor’s procedures will not detect a
material misstatement.

- Sampling Risk: Occurs when the sample selected is not representative of the
population. Example: Selecting only high-value invoices and missing errors in
low-value ones.

- Non-Sampling Risk: Arises from human error or audit procedure design.

Example: Misinterpreting audit evidence or applying inappropriate
procedures.