Corporate Governance, Audit Procedures, and Audit Report - Case Study

Corporate Governance Issues

1.a) Mango Ltd is a large UK company which manufactures scientific equipment for use in rockets, on missions to space. As part of an expansion strategy, they are planning to obtain a listing on the London Stock Exchange within the next 12 months.  Mango Ltd's CEO, Sue Peach, is concerned that the company is not in compliance with the UK corporate governance code 2018.  She has asked you to review their structure and procedures and advise on any action that should be taken prior to the listing, to ensure compliance with the code.

You discover the following:

• Mango Ltd has a Board of directors consisting of 7 executive directors, including Sue Peach and 5 non-executive directors (NEDs), including Chairman Leroy Lemon.  There is a nominations committee consisting of a majority of NEDs.
• The sales director is a NED for two other companies, both of which are listed on the FTSE 100.
• Leroy Lemon, is well respected and has been the Chair at the company for 10 years. 
• Executive directors’ pay and benefits is decided upon by a remuneration committee, which is chaired by Sue Peach and includes the Finance Director and two NEDS.
• To encourage good performance, all directors receive part of their salary through a performance-related bonus scheme.
• Chair Leroy Lemon does not have meetings with major shareholders and does not encourage shareholders to attend the AGM, in case such shareholders disagree with company strategy and performance.

Required:

Evaluate the corporate governance issues raised by the scenario above.

Your evaluation should:

• Assess any areas of non-compliance with the UK corporate governance code 2018.
• Recommend action that Mango Ltd should take, to ensure such compliance.  

b) Audit committees are a major part of good corporate governance procedures, as represented by the UK corporate governance code 2018.

Required:

Discuss the role of audit committees. But must be in full written sentences not note form

2. You are the audit senior for the external audit of Guava Ltd, which manufactures plumbing parts for supply to wholesalers and retailers.  You are reviewing the systems notes that have been documented during the planning stage of the audit, which include the following:

Inventory count notes

• Each count team of two warehouse staff will be allocated a number of warehouse bays to count between them.  They will be provided with sequentially numbered inventory sheets containing product codes and the quantities of each product, extracted from the inventory records.  If counters find any bays contain different amounts to those on the sheets, then the count total is noted on the sheet,
• All teams will hand their sheets back to the warehouse manager, who will ensure they are all returned.  She will then look through them for any count totals written on them; indicating discrepancies in the inventory records.
• There are 64 bays in the warehouse, but 16 of them are rented out to third parties.  These bays are spread throughout the warehouse.  All bays will be counted by Guava Ltd's teams, with the third party inventory noted on blank sheets, in case inventory confirmation is requested by the auditors of those third parties.
• Some of Guava Ltd's more expensive inventory items are stored in a locked bay.  All counting staff will be given the code to access this bay.
• Any inward deliveries during the day will be kept in a separate area and counted at the end of the day.  To avoid disruption to the production line, any inventory required for production or sales, will be taken as usual throughout the day.

Inventory valuation

• All inventory items are valued using the last-in-first-out (LIFO) method.  
• Some product lines have now been superseded by newer lines of products,.  Guava Ltd has not written-off these older items, as they feel previous customers may still need some of the parts as replacements.

Required:

Produce a report to the management of Guava Ltd (management letter) regarding the procedures documented above.

Report should be headed appropriately, followed by a structured report on the issues.  A short covering letter could be written instead of a report heading.

Main points outlined in table below.

Your report should:

• Identify deficiencies in the inventory procedures
• Assess the consequences of the deficiencies identified
• Recommend action to rectify the deficiencies identified
• presented in an appropriate format

3. a) For a typical manufacturing client's Turnover figure:

i) Identify and explain SIX assertions which are relevant to the audit of the Turnover figure.

• Occurrence
• Completeness
• Accuracy
• Cut-Off
• Classification
• Presentation

ii) Plan in detail one substantive procedure to test each of the assertions you identified and explained in part i) above.

iii) Plan one substantive analytical procedure. needs to use the word "compare" or "comparison"(15 marks)

b) ISA 500 Audit Evidence covers the issue of sufficient and appropriate audit evidence

Required:

Discuss the concept of "sufficient and appropriate" audit evidence. But must be in full written sentences not note form.)

ISA 500 audit evidence states that the auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

Sufficient     =    Quantity
Appropriate    =    Quality  (relevance and reliability)

4.a) Evaluate how the matters outlined below will influence the type of audit report issued.

In Each case your evaluation should consider:

• Grounds for modification (if any)
• Type of audit report to be issued
• How any modification (or lack of modification) would affect the wording and structure of the audit report 

You are an audit manager of Date & Papaya Accountants, reviewing the audit files of some clients with a year-ended 31st January 2020.  You have reviewed and are satisfied with the audit work completed, with the exception of the following matters:

• Fig Ltd: A fire destroyed the inventory count sheets for Fig Ltd, before the audit team had a chance to review them.  The audit team has been unable to verify the value or quantity of the year-end inventory by alternative means.  Draft financial statements for the year shows inventory of £2.3million and a pre-tax profit of £20.9million.  Total assets are £37.1million.  
• Lychee Ltd: During the year, Lychee Ltd had a major reorganisation.  Part of the reorganisation involved accounting records from its three branches, being centralised at head office.  During the transfer, data was accidently omitted, which resulted in payroll expenses being understated by £794,000.  Draft financial statements for the year show total payroll expenses of ££1.36million and a profit before tax of £877,000. 
• Kiwi plc:  In early April 2020, a dam burst near Kiwi plc's main factory and warehouse complex, causing severe flooding.  There was extensive damage, with initial estimates being £58million of repairs required.  The company is fully insured and the insurance company has accepted the claim.  The business has several other sites which are unaffected and so can carry on trading.  The directors have included a note in the financial statements which fully discloses the details of the flood and the damage caused.  Draft financial statements for the year show a pre-tax profit of £134million.      

b) You are audit manager for the audit of Melon Ltd.  Melon Ltd publish books and their year-end is 15th March 2020.  The audit work is nearly complete and the financial statements and the audit report are due to be signed next week.  You have just found out that a quality control check that took place on 18th March 2020, found a number of ink smudges in all the books produced in one particular batch in the first week of March.  The cost to produce this batch was £250,000.  With the ink smudges, the batch of books could be sold to discount retailers for £36,000.  The Statement of Profit or Loss for the year shows a pre-tax profit of £4.1million.

Required:

Assess your responsibilities and the action that you must take as auditor, in regard to the issue above.

Your assessment should cover:

• Whether this issue is an adjusting or non-adjusting event according to IAS 10 Events after the Reporting Period.
• The auditors' responsibility regarding issues such as this, according to ISA 560 Subsequent Events.
• The audit procedures that should be carried out in relation to this issue.