Audit Planning for the Financial Year

Details Provided

You are an audit manager in Yates & Co, a firm of chartered certified accountants responsible for the audit of Gringe Co. The audit planning for the financial year ended 30 June 20X5 is about to commence.

You have been provided with the following details:

1 An email received from the audit engagement partner.

2 Draft financial information for the year ending 30 June 20X5.

Respond as much as possible to the details in the email from the audit engagement partner.

Presentation and logical flow of the briefing notes and the clarity of the explanations provided.

Finch Co also accepts cars in part exchange. One of the company’s current promotions is that it will offer a minimum of £500 trade-in value for any car used in part exchange for the purchase of a new or second-hand car. In addition, many second-hand car customers pay cash in order to negotiate a cash discount.

The value of all new cars held across the various sites at the year end, is expected to be £2.4 million. The value of used cars held at the year-end is expected to be £600,000.

The finance director has informed you that the inventory count was conducted one week before the year-end. A reconciliation will be performed to calculate the quantity of inventory held at 30 June 20X5.

During the year Finch Co purchased a brand of replacement parts which it will now supply on all servicing and repair jobs. As part of this purchase, £700,000 was paid for the brand name “Quick Fit.” This has been capitalised as an intangible asset. No amortisation is being charged because the brand is considered to have an indefinite useful life.

Required:

(a) Evaluate the audit risks that should be considered when planning the audit of Finch Co for the year ended 30 June 20X5.

(b) Design the principal audit procedures to be used in the audit ofthe valuation of the Quick Fit brand.

QUESTION 3

Today’s date is 1 July 20X5 and you are a manager in Winterborn & Co responsible for the audit of Slate Co. The audit of the financial statements for the year ended 31 March 20X5 is nearly complete and the auditor’s report is due to be issued next week. The financial statements show a profit of £1.6 million and total assets of £9 million. The following issue has been left for your attention.

Slate Co provides freight services between seven major cities. The cities are located at significant distances from each other meaning deliveries can take several days. During the yearthere were a number of protests by independent lorry drivers who were angry about increases in fuel taxes. The protests involved blockading major roads which prevented traffic from getting through. This caused significant delays to Slate Co in reaching its customers.

Slate Co has offered all customers affected by the delays a 30% discount on invoices relating to delayed deliveries during the protests. The discount offered to all customers totaled £53,000. This is not yet recognised in the  financial statements.

One customer, Kola Co, is refusing to accept the discount and refusing to pay the full invoiced amount of £72,000 as Kola Co claims it was unable to fulfil a significant contractof its own because of the delays.

Required:

(a) Comment on the matters that should have been considered, and recommend any further audit procedures that should be performed in respect of the issue described above.

(b) You are also the audit manager for two audits which are nearing completion and the auditor’s reports are due to be signed next  week. Both clients have a year-end of 31 March 20X5. The following issues have been left for your attention. Vale Co The Chair’s report of Vale Co states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1.6% of total revenue for the year. The audit senior is satisfied that the revenue figure in the financial statements is correct. The audit senior has proposed an unmodified audit opinion as the opinion does not extend to the Chair’s report.

Procedures on the audit of Zenta Co identified a transfer of cash from Harman Co 15 April 20X5. The audit senior documented a discussion with the finance director of Zenta Co, who explained that Blush Co commenced trading on 4 April 20X5, after being set up as a wholly-owned subsidiary of Zenta Co. The audit senior has proposed an unmodified opinion because the matter does not impact on the current year’s financial statements.

Using practical examples of modified audit reports, critically appraise the audit senior’s proposals for the auditors’ reports of Vale Co and Zenta Co.