Section B:

Question 16

It is 1 July 20x5. You are an audit supervisor with Flinda & a) Using the table below, describe the five components of an
Co, and you are working on the audit of Granston Co, which entity’s system of internal control.
sells electronic kitchen appliances from 40 stores across Note: You do not need to refer to the scenario to answer this requirement
the country. You are reviewing documentation provided by [5 Marks]
the finance director of Granstan Co, including extracts of Component Detailed description
the company’s system of internal control, in advance of the Control environment The control environment includes
interim audit for the year ending 30 September 20x5. the governance and management
Although the website, payroll and inventory are stand- functions and the attitudes,
alone, the sales and purchases modules are fully integrated awareness, and actions of those
into the computerized accounting system. charged with governance and
management concerning the entity’s
Sales system of internal control and its
Granstan Co has both business and retail customers. importance in the entity. The control
Business customers can apply for a credit account through environment sets the tone of an
Granstan Co’s central credit control department. After organisation, influencing the control
performing necessary checks, the credit control consciousness of its people and
department sets credit limit which is authorised and then provides the overall foundation for
regularly reviewed by the finance director. As well as the operation of other components.
purchasing in store, business customers can purchase Entity’s risk assessment The entity’s risk assessment process
goods via the company’s website and collect them from process is an iterative process for
their nearest store or have them delivered. As part of the identifying and analysing risks to
invoicing process, a member of the finance team matches achieve the entity’s objectives and
the details on the online order with the goods dispatched forms the basis for determining the
note (GDN) before the sales invoice is raised based on risks to be managed.
these documents. Entity’s process to Monitoring of controls is a continual
monitor the system of process to assess the effectiveness
Each store charges the same price for goods but customers internal control of internal control performance over
who are on the mailing receive weekly emails with discount time. It involves assessing the
offers. To claim the discount, customers show this email at effectiveness of controls and taking
the cash till (cash registers) and have the discount barcode necessary remedial actions on a
within the email scanned. The system then deducts the timely basis.
discount from the price. Information system and The information system relevant to
communication the preparation of the financial
Granstan Co’s monthly management accounts analyse statements consists of the activities,
revenue by store, product and type of customer. Percentage policies and records designed and
movements in each of the categories are reported, with established to initiate, record,
comparison to the previous month and the previous year. process and report entity
On a monthly basis, the sales director reviews this transactions and to maintain
information, investigates any unexpected movements and accountability for the related assets,
completes a report which is presented at the next board liabilities and equity.
meeting. Control activities Control activities are controls that
are designed to ensure proper
Purchases application of policies in all the
Granstan Co has a central purchasing department. A components of the entity’s system of
monthly exception report of any changes made to the internal control and include both
supplier master file data is automatically generated printed direct and indirect controls.
and then filed.
b) In respect of the SALES system of Granstan Co;
When goods are ordered, a purchase order is generated
(i)Identify and explain THREE DIRECT CONTROL which are the
within the purchasing ordering module, authorised by the
auditor may seek to place reliance on; and
relevant individual and sent to the supplier. The purchasing
(ii) Describe a TEST OF CONTROL the auditor should perform
and finance departments as well as the stores are able to
to assess if each of these direct controls is operating
access the ordering module to view orders.
effectively
Note: The marks will be split equally between each part
Goods are delivered directly to the relevant store where a
[6 Marks]
store employee checks the quantity supplied to the
supplier’s delivery note and purchase order. On completion Direct Control Test of Control
of the checks, an electronic goods received note (GRN) is A credit check is performed by Inspect the documentation in
produced. Only the store and the finance department have the credit control department the credit application files for
access rights to view the completed GRNs within the on all new customers applying a sample of customers to
module. for a credit account, after confirm that appropriate
which a credit limit is set by credit checks have been
the finance director which is performed before giving
Due to staff shortages in the finance department, supplier regularly reviewed. credit.
statement reconciliations are no longer performed.
The credit check helps to Enquire of the receivables
Payroll ensure that credit is only clerks who can set credit
Granstan Co has separate human resources (HR) and granted to customers who are limits and whether these
payroll departments. The HR department is responsible for likely to pay so that receivables limits are reviewed.
setting up employee records for new employees. As part of are more likely to be
this process, an authorised joiner form, including all recoverable.
relevant details, is sent to the payroll department so that A member of the finance team For a sample of orders
new employees can be added to the payroll. However, when matches the details on the received by the finance
temporary employees are required at short notice, joiner online order with the goods department, review for
forms are not completed. Instead, the relevant store dispatched note (GDN) before evidence that the order was
manager notifies the payroll department by email on the raising sales invoices based on matched to the GDN and
day the new employee starts work. these documents. agree the sales invoice details
to these documents.
All permanent employees are paid on a monthly basis by This will help to ensure that
bank transfer. The payroll for each store is passed to the customers are invoiced for all
store manager for review and approval two days before goods dispatched to them and
payment date. The store manager is required to report that revenue is complete and
back to the payroll department only if any errors are accurate.
identified. Temporary employees are paid in cash and pay Customers must show the Attempt to manually input a
packets are prepared and distributed by the payroll promotional email at the cash discount or amend the
department. When employees collect their pay packets, till and have the discount discount amount calculated by
they are only required to state their name. They then count barcode scanned to access the system to ensure that the
the cash in the pay package and sign for it. special discounts. discount level cannot be
manipulated.
This ensures that discounts are
only given to authorised
customers and can only be
used once, which reduces the
risk of misstatement of revenue
through fraud.
A monthly analysis of revenue For a sample of the monthly
is reviewed by the sales revenue analysis, obtain
director, with any unexpected copies of the source
movements investigated. A information. Consider the
report containing this analysis thresholds for sales director
is presented at the next board investigation and investigate if
meeting. there is any evidence of a
review being performed where
Investigation of unusual applicable.
movements in revenue means
that misstatements due to For a sample of board
fraud or error will be identified meetings, review the agenda
promptly. and minutes for evidence of
the report being presented to
the board and discussed
appropriately.

c) Identify and explain FIVE DEFICIECIES in Granstan Co’s

PURCHASE and PAYROLL system and provide a control
recommendation to address each of these deficiencies.
[10 Marks]
Control Deficiency Control Recommendation
A monthly exception report of The monthly exception report
changes made to the supplier of changes should be reviewed
master file data is produced by a responsible official on a
but not reviewed. regular basis and any unusual
or unexpected changes
This increases the risk of fraud investigated. This review
as members of the purchasing should be evidenced.
department could add
fictitious suppliers and then
place fraudulent orders
without detection, causing loss
for the company. Any errors in
the changes made to the
master file data would also not
be identified promptly.
Goods are delivered directly to Goods should be inspected for
a store where an employee both quantity and quality on
checks the quantity of goods receipt. When producing the
received but not the quality. If goods received note (GRN),
defective goods are accepted, the store employee should
it will be more difficult to input their initials as evidence
dispute paying for them. of the checks undertaken.

If defective goods are sold on

to customers, it will damage
customer goodwill.
The purchasing department The purchasing department
does not have access rights to should be given access rights
view completed GRNs, only the to view GRNs. On notification
stores and the finance of a completed GRN, the
department have access rights. purchasing department should
agree the details on the GRN
This means that the to the order and then change
purchasing department is the order status to fulfilled.
unable to monitor whether
goods ordered have been The purchasing department
received. This could result in should undertake a regular
stock outs and a loss of sales. review of unfulfilled purchase
orders and follow up those
which are outstanding.
Supplier statement On a monthly basis, supplier
reconciliations are no longer statement reconciliations
performed. should be undertaken with all
reconciling items fully
Failing to undertake these investigated. The supplier
reconciliations increases the statement reconciliations
risk of errors in the individual should be reviewed by a
supplier accounts not being responsible official who should
identified promptly which evidence this review by way of
would result in misstatement signature.
of payables and could lead to
suppliers being under or
overpaid
Joiner forms are not completed A joiner form should be
when temporary employees completed and authorised by
are required at short notice. HR for all new employees.
Instead, the temporary
employees are added to payroll If it is not possible for the HR
following email notification department to complete the
from the relevant store joiner forms due to time
manager. pressures, the store manager
should complete the joiner
The store managers may not form, and a member of the HR
carry out all the required team should review and
procedures for new joiners, or authorise the details prior to it
record all the necessary being sent to payroll. Payroll
information, as they do not should then sign the form as
complete the joiner form. This being actioned.
could result in temporary
employees not being set up in
the payroll system correctly.
This would result in incorrect
or incomplete payroll records.
Store managers review and Store managers should be
approve the payroll report required to report back to the
before the payment dates but payroll department whether or
are only required to report not errors are found. They
back to the payroll department should sign the payroll as
if errors are found. evidence that it has been
checked.
The payroll department may
interpret a lack of response as The payroll department should
indicating that there are no follow up on any non-replies
errors when in fact the store prior to processing the payroll.
manager has failed to check,
or a negative response has
gone missing. This could lead
to errors not being identified
resulting in misstated payroll
costs.
When employees collect their Employees should be required
pay packets, they state their to show photo identification
name but are not required to before collecting their wages.
show identification. The payroll department should
note down relevant details of
Employees may falsely assume the identification provided.
the identity of another
employee in order to access
their wages. This would result
in fraud and may increase
payroll costs if the company
has to pay twice.

d) Describe the substantive procedures the auditor should

perform to obtain sufficient and appropriate audit evidence in
relation to revenue.[5 Marks]
 Cast a breakdown of revenue and agree to the general ledger,
trial balance and draft financial statements to confirm revenue
is completely recorded.
 Select a sample of daily sales reports and agree to the sales
account in the general ledger.
 Compare total revenue and monthly revenue to prior year and
budget to identify any significant differences/movements.
Discuss any unusual fluctuations with management.
 Compare the final gross profit margin to the prior year and
discuss any unusual fluctuations with management.
 Compare revenue analysed by product/store/type of customer
for each month to prior year and budget and discuss any
unusual fluctuations with management.
 Perform a proof in total calculation for revenue by taking the
prior year revenue and increasing it for any changes in store
numbers or significant changes in product lines or other known
factors (eg. unit price increase). This expectation should be
compared to actual revenue and any significant fluctuations
should be investigated.
 Select a sample of business customer orders placed through
the website and agree goods dispatched notes (GDNs) to sales
invoices and through to inclusion in the detailed sales listing to
ensure completeness of revenue.
 Select a sample of sales in the detailed sales listing and trace to
sales invoices and GDNs to confirm occurrence.
 Select a sample of sales invoices for business customers and
agree the sales prices back to the price list or customer master
data information to ensure the accuracy of sales invoices.
 For a sample of sales invoices, recalculate invoice totals
including any discounts and sales tax to confirm the accuracy of
sales invoices amounts.
 Select a sample of credit notes raised for business customers,
trace through to the original invoice and ensure the invoice has
been correctly removed from sales.
 Select a sample of GDNs both pre and post year-end and follow
these through to sales invoices in the correct accounting period
to ensure cut-off has been correctly applied.

Granstan Co is intending a stock market listing in the next e) Describe TWO corporate governance deficiencies faced by
year and therefore wants to take steps to ensure the Granstan Co and provide a recommendation to ensure
company will be compliant with governance principles compliance with corporate governance principles.
when it lists. There are suggestions that as the chief [4 Marks]
executive officer (CEO), Ned Seppa, is due to retire shortly, Corporate governance Recommendation
he should become Chair of the board and an alternative Deficiency
CEO be appointed. The current chief executive An individual who is fully
officer (CEO) is planning to independent of Granstan Co
The Company is actively recruiting independent non- become the Chair of the board. should be appointed to the role
executive directors (NEDs) whose remuneration will of Chair when the current
include a bonus based on the company profits. To ensure As a former executive director Chair retires.
that remuneration is sufficient to attract and retain both within the last five years, Ned
NEDs and executive directors, the CEO will perform Seppa will have been
market comparison analysis and decide the remuneration previously employed by the
of all directors. company and so will not be
independent on appointment
as recommended by corporate
governance principles.

A lack of independence may

result in the Chair not bringing
the necessary level of objective
judgement to the role.
Non-executive directors NEDs should be paid an
(NEDs) will be paid a bonus annual fee for their services
based on the company’s and should not receive any
profits. increment based on the
company’s performance. The
Remuneration based on the annual fee should be based on
performance of the company, the time commitment and
particularly short-term responsibilities required for
performance targets, could the role.
result in NEDs making
decisions to maximise their
bonus rather than in the best
interests of the business or
shareholders, affecting their
objectivity and independence.
Remuneration for all directors, There should be a fair and
executive and non-executive, is transparent policy in place for
to be set by the CEO. setting remuneration levels.
The NEDs should set the
Directors should not set their remuneration of the executive
own remuneration as this may directors by means of a
result in excessive levels of remuneration committee (RC)
pay being set and could lead to made up of independent NEDs.
favouritism or bribes. When setting remuneration
levels, the RC should consider
factors such as workforce
remuneration.

The board set the

remuneration for the NEDs

Total Marks [30

Marks]

Question 17
It is July 20x5. Your firm, Yang & Co, has recently been ISA 300 Planning an Audit of Financial Statements provides guidance to
appointed as auditor to Mastas Co and you are assist auditors in planning an audit of financial statements and explains
planning the audit for your new client for the year the benefits of doing so.
ending 31 August 20x5. The audit manager has (a) Explain the benefits of audit planning.
attended a planning meeting with the finance director Note: You do not need to refer to scenario to answer this requirement
and has provided you with the following notes of the [4 Marks]
meeting; Benefits of planning:
 Helping the auditor to devote appropriate attention to important
Planning meeting notes areas of the audit.
Mastas Co operates a chain of 50 music stores around  Helping the auditor identify and resolve potential problems on a
the country selling musical instruments and offering timely basis.
weekly lessons. When booking lessons, customers are  Helping the auditor properly organise and manage the audit
required to pay for ten lessons in advance. engagement so that it is performed in an effective and efficient
manner.
Mastas Co sells a wide range of instruments. Because  Assisting in the selection of engagement team members with
of the number of stores and high number of different appropriate levels of capabilities and competence to respond to
inventory lines, the inventory counts will not be able to anticipated risks, and the proper assignment of work to them.
be competed in one day. As a result, the inventory  Facilitating the direction and supervision of engagement team
count is spread over 29, 30, and 31 August 20x5, and members and the review of their work.
adjustments will be made for goods received and  Assisting, where applicable, in coordination of work done by experts.
dispatched between the date of the inventory is
counted and the year end. Yang & Co is able to attend (b) Describe EIGHT audit risks and explain the auditor’s response to
sufficient inventory counts for the purpose of the each risk in planning the audit of Mastas Co.
audit. [16 Marks]
Audit risk Auditor’s response
The company has been expanding steadily and during
This is the first year Yang & Co Allocate additional time in the
the year has spent $2.4m on refurbishing its stores. All
has audited Mastas Co. audit timetable to enable the audit
of this expenditure has been recognised as property,
team to research the client, its
plant and equipment. The c0mpany is also planning to
There will be a lack of business and its systems.
add rehearsal space to the 20 largest stores and, in
knowledge regarding the
order to finance this, in April 20x5, the company
company’s accounting policies Ensure a comprehensive planning
obtained an $8m interest bearing loan which is
and transactions which could meeting is held with all members
repayable in quarterly instalments in arrears, over five
years. lead to a misinterpretation of of the audit team to enable this
audit evidence or the information to be shared and
To raise awareness of the company’s existing products performance of inappropriate allocate more experienced staff
and new rehearsal spaces, Mastas Co launched a radio procedures. This would lead to than usual to the audit.
advertising campaign in May 20x5. The directors have an increase in detection risk.
indicated that, at year-end, advertising costs $0.8m There is also less assurance over Increase audit procedures over
relating to this campaign will be recognised as a opening balances as Yang & Co opening balances.
current asset because they believe that these did not perform the audit last
advertisements will help to boost revenue for at least year.
the next 12 months. The final advertisements will be Customers pay for ten music Discuss with the finance director
aired on the radio before the year-end. lessons in advance. how revenue is recognised to
confirm it is in accordance with
Mastas Co has an internal audit department which Mastas Co may recognise the IFRS 15 Revenue from Contracts
undertakes control testing across the stores. Each full amount received as revenue with Customers.
store is visited at least once every year. The audit rather than treating the payment
manager has discussed with the finance director that as a contract liability (deferred For a sample of lesson bookings
the external audit team may rely on the controls income) until the lessons are within ten weeks of the year end,
testing which is undertaken by internal audit. Internal delivered. For lessons booked review journal entries and confirm
audit investigations during the year have highlighted near the year end, this would that the correct amount is
an increasing number of differences in several stores result in revenue being recognised as a contract liability
when reconciling cash till (cash registers) records to overstated and current liabilities (deferred income) until the lessons
actual cash in the tills. The directors have decided not being understated. take place.
to investigate these differences on the basis that they The inventory count is to be Attend the inventory counts and
have only involved small amounts. spread over 29, 30, 31 August observe procedures to confirm that
and adjustments made for goods goods received during the count
Mastas Co financial accountant retired suddenly in received and dispatched are appropriately segregated and
November 20x4 due to ill health. As a result, the between the date the inventory included in the count records, and
finance department was understaffed until a is counted and the year end. that goods to be dispatched during
replacement was recruited in March 20x5. the count have been appropriately
There is an increased risk segregated so that they are
In June 20x5, Mastas Co received notification that the relating to completeness and excluded from the count records.
music licensing authority is investigating complaints existence of inventory if goods
that many of the music teachers had breached received and dispatched
copyright regulations by photocopying printed music between the count and the year
for use in their lessons. The directors have informed end are not recorded correctly.
you that they do not intend to provide for or disclose This would result in a
any potential fines as they believe they have the misstatement of year-end
required permissions and that Mastas Co has no legal inventory.
liability. During the year, the company Obtain a schedule of costs which
has spent $2·4m on refurbishing have been recognised within PPE
its stores. This expenditure has as part of the refurbishment
all been recognised within programme. Review supporting
property, plant and equipment documentation, such as invoices,
(PPE). to confirm that they are capital
expenditure.
There is a risk that some repairs
and maintenance expenses may
have been recognised as assets
in contravention of IAS 16
Property, Plant and Equipment
which would mean that PPE is
overstated, and expenses are
understated.
The company obtained an $8m Review the loan agreement and
interest-bearing bank loan which the company’s calculations to
is repayable over five years in confirm that the loan liability is
quarterly instalments. correctly split between non-current
and current liabilities. Review the
This loan must be correctly disclosures for this loan in detail to
allocated between non-current ensure compliance with the
and current liabilities and financial reporting framework.
properly disclosed. Failure to
classify the loan correctly could Recalculate the interest accrual
result in misstatement of current and agree the amount to the
and non-current liabilities. analysis of expenses and the
accruals schedule
In addition, the company may
fail to accrue for the interest,
resulting in finance costs and
accruals being understated.
Mastas Co is planning to include Review supporting documentation
a current asset of $0·8m which for the advertisements to confirm
relates to advertising costs that all were aired before 31
incurred and adverts aired August 20X5. Request that
before the year end. management removes the current
asset and records the amount as
The costs should be recognised an expense in the statement of
in operating expenses in the profit or loss. If the adjustment is
current year financial made, review the journal entry to
statements as all of the adverts confirm that it has been correctly
will be aired in the year ending posted.
31 August 20X5. If these costs
are not expensed, current assets
and profits will be overstated
and expenses understated.
The external audit team may The external audit team should
place reliance on the controls meet with the internal audit team,
testing work undertaken by the read their reports and review their
internal audit department. files relating to store visits to
ascertain the nature of the work
If reliance is placed on undertaken.
irrelevant or poorly performed
testing, then the external audit Before using the work of internal
team may form an incorrect audit, the audit team should
conclusion on the strength of evaluate the internal audit work
Mastas Co’s internal controls. which they plan to use in order to
This could result in them determine its adequacy for the
performing insufficient levels of purposes of the external audit
substantive testing, increasing engagement. In addition, the team
detection risk. will need to reperform some of the
testing carried out by internal
audit in order to assess its
adequacy.
Internal audit investigations Extended substantive procedures
have highlighted an increasing over the cash and bank balance
number of differences between should be carried out. The audit
cash till (cash register) records team must apply professional
and cash in several stores. The scepticism throughout this testing,
directors have decided not to recognising that a fraud may have
investigate these differences arisen as a result of the
because they only involve small differences.
amounts.

There is a risk that these

differences are the result of
fraud, and several small
differences could be material
when aggregated. In addition,
an increase in control risk arises
when internal auditors detect a
problem, but it is ignored by
management and TCWG.
The company’s financial
Make enquiries as to who
accountant retired due to ill performed the controls normally
health in November 20X4, and performed by the financial
the finance department was accountant during the period when
understaffed until a new
the role was vacant. If the results
financial accountant was
of the tests of control indicate
recruited in March 20X5. higher control risk, perform
increased levels of substantive
The lack of supervision and procedures for the period when
understaffing during the period there was no financial accountant.
when there is no financial
accountant will lead to increased
control risk and a higher chance
of error or fraud occurring.
The music licensing authority is Review correspondence with the
investigating complaints that licensing authority. Review
many of the music teachers have correspondence with the
breached copyright regulations. company’s lawyers or, with the
However, the directors do not directors’ permission, contact
intend to provide or disclose any them to ask their opinion on
potential fines as they believe whether Mastas Co has any legal
that they have the required responsibility and, if so, the likely
permissions and that there is no amount of the fines which would
legal liability. be imposed.

If it is probable that fines are

payable by Mastas Co, failure to
recognise a provision will result
in understatement of expenses
and provisions. If there is more
than a remote possibility that
fines will be payable, failure to
disclose will result in incomplete
disclosure in the financial
statements.

Total Marks [20 Marks]

Question 18

It is July 20x5. You are audit manager of Teen & Co and (a) Describe the substantive procedures the auditor should perform to
you are charge of the final audits for two existing obtain sufficient and appropriate evidence in relation to Montana Co’s
clients which are due to commence shortly. income
Note: You should assume that the charity adopts IFRS Accounting Standards.
Montana Co is a not-for-profit charitable organisation [5Marks]
which raises funds for mental research with a financial  Obtain a schedule of all Montana Co’s income and cast to confirm
year end of 31 March 20x5. completeness and accuracy of the balance and agree to the trial
balance and financial statements.
Oklahoma Co Manufactures aircraft components and  Compare the individual categories of income of charity event ticket
has a financial year end of 31 July 20x5. The forecast sales, merchandise sales and donations against prior years and
profit before tax for the year is $12.3m. investigate any significant differences by discussing with
management.
The following matters have been brought to your  Compare the average value or number of donations received to prior
attention: year and investigate any significant differences.
 For monthly donations, trace a sample of donations from the sign-up
Montana Co documentation to the bank statements, bank ledger account and
income listing to ensure that they are recorded completely and
Income accurately.
Montana Co generates income in a number of ways and  For a sample of new donors in the year, agree the monthly sum and
the draft financial statements for the year ended 31 start date from their completed sign-up forms and trace to the
March 20x5 show revenue of $0.8m. The company monthly donations received account and agree to the bank ledger
receives monthly donations from its many supporters, account and bank statements.
and these are paid by bank transfer to the charity.  For the two charity events held in the year, perform a proof-in-total
calculation of the number of tickets sold, approximately 12,500,
In addition, Montana Co raises significant income via multiplied by the ticket price of $40. Compare this to the income
two charity events which are held every year in April recorded and discuss any significant differences with management.
and December. Tickets, which are $40 each, are sold  Select a sample of advance ticket sales made online relating to the
via charity website during the four months leading up April 20X5 event, confirm that the transaction has been excluded
to each event. These events in April and December from current year income and follow through to inclusion in
20x4 were attended by 6,500 and 6,000 people contract liabilities.
respectively. Attendees at the events can purchase  Agree the journal entry to transfer the prior year contract liabilities
charity branded merchandise such as T-Shirts at one of relating to the April 20X4 event to current year income and agree
the three stalls, paying by cash or credit card. During prior year contract liabilities to last year’s financial statements.
the audit planning, completeness and cut-off of income  For merchandise sales, obtain a breakdown of the income received
was flagged as a key risk. for each of the three stalls and agree a sample to supporting
documentation, such as sale receipts.

Oklahoma Co (b) Describe the audit procedures the auditor should perform as part
of the audit of Oklahoma Co BEFORE and DURING the inventory
Inventory count. [6 Marks]
Oklahoma Co is forecasting a draft year-end inventory Before the count
balance of $0.2m. The company undertakes continuous  Review the prior year audit file to identify whether any significant
production, and a year-end inventory count will be inventory issues arose last year.
carried out on 31 July 20x5 at the company’s factory  Discuss with management whether any significant changes have
and warehouse. No movements of inventory will be occurred this year with regards to inventory items or locations or if
allowed on the day of the count. the company has experienced any significant control issues.
 Obtain a copy of the proposed inventory count instructions, review
It is expected that there will be significant work in them to identify any control deficiencies and if any are noted,
progress (WIP) at the year end. WIP comprises partly discuss them with management prior to the count.
manufactured components. A senior member of your  Prior to attending the inventory count, discuss with management
team is responsible for the audit of WIP and will be how the percentage completions are attributed to the WIP, for
attending the inventory count as well as final audit. example, whether this is based on aircraft components passing
Oklahoma values WIP by applying the estimated certain stages in the production process.
percentage completion to the standard cost of
completed component. During the count
 Observe the counting teams of Oklahoma Co to confirm whether the
inventory count instructions are being followed correctly.
 Select a sample of inventory and perform test counts from inventory
sheets to physical inventory and from physical inventory to
inventory sheets.
 Observe the count 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
count, to confirm that all movements have ceased.
 Obtain a photocopy 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 Oklahoma Co’s staff in
assessing the level of WIP and consider the reasonableness of the
assumptions used.

(c) Describe the substantive procedures the auditor should perform

during the final audit to obtain sufficient and appropriate audit
evidence in relation to the VALUATION of Oklahoma Co’s WORK IN
PROGRESS. [4 Marks]
 Discuss with management the basis of the WIP valuation, assess
how the percentage of completions have been set and assess the
reasonableness of management’s approach.
 Discuss with management the basis of the standard costs applied to
the percentage completion of WIP and how often these are reviewed
and updated.
 Review the level of variances between standard and actual costs and
discuss any significant variances with management.
 Obtain a breakdown of the standard costs and agree a sample of
these costs to recent purchase invoices, labour costs to time sheets
or wage records and whether overheads allocated are of a
production nature to assess their reasonableness.
 Agree a sample of WIP assessed during the count to the WIP
schedule, confirm that the percentage completion is correct and as
recorded at the count.
 Recalculate the WIP amount using the stage of completion.
 Select a sample of items included in WIP at the year end, agree
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.
During the testing of Oklahoma Co’s work in progress, (d) Discuss the issue and describe the impact on the auditor’s report, if
the audit team has identified that the company had any, should the issue remain unresolved.
applied an incorrect percentage completion when [5 Marks]
determining the value of a number of completed An incorrect percentage of completion has been applied to standard
components. Audit testing has confirmed that the work cost when determining the value of a number of partly completed
in progress balance is overstated by $0.7m. The components, resulting in work in progress and profit being overstated
directors of Oklahoma do not consider it necessary to by $0·7m.
amend the financial statements.
The error of $0·7m represents 5·7% of profit before tax (0·7m/12·3m)
and 6·9% of inventory (0·7m/10·2m) and hence is a material matter.

If no adjustment to work in progress is made, the audit opinion will be

modified due to a material misstatement. As inventory is overstated
and the error is material but not pervasive, a qualified opinion will be
necessary.

A basis for qualified opinion section will be needed after the qualified
opinion paragraph and will explain the material misstatement in
relation to the overstated work in progress and the effect on the
financial statements. The opinion paragraph will state that ‘except for’
the matters described in the basis for qualified opinion section, the
financial statements present fairly (give a true and fair view) in all
material respects.

Total Marks [20

Marks]