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Question 1

Assume the date is 1 March 2023.

1. Your firm has recently been invited to tender for the provision of external audit services
to Gallee Ltd (Gallee) for the year ending 31 December 2023 as the previous external
auditor resigned. Gallee’s directors have not disclosed why the previous auditor
resigned and have stated that it is unnecessary for your firm to contact the previous
auditor.

State the legal, professional and ethical issues arising for your firm and the steps your
firm should take to address each of these issues. (3 marks)

2. You are the audit senior responsible for the final audit of Pendle Ltd (Pendle) for the
year ended 31 December 2022. You are reviewing the work performed by the assistant
auditor on accruals. The audit working paper identifies the two largest accruals
balances as follows:

2022 (draft) 2021 (audited)

£ £
Rent 123,800 123,800
Gas and electricity 62,500 62,500

The audit working paper concludes that because balances are the same as the prior
year, no further work is to be performed.

During the year ended 31 December 2022, Pendle rented an additional warehouse
costing £900,000 pa payable quarterly in arrears. The first payment was made as due
on 1 November 2022. The company’s gas and electricity expense in the statement of
profit or loss has increased by 25% during the year.

Explain the purpose of a review of audit working papers. Explain why the accruals
balances require further audit work and the actions you should now take. (5 marks)

3. You are the audit senior for the audit of Ellel plc for the year ended 31 December 2022.
During a planning meeting, the finance director informed you that a company bonus
scheme was approved in May 2022. A bonus of 15% of salary will be payable to
directors if profit before tax increases by 10% in the year ended 31 December 2022.
The audited profit before tax for the year ended 31 December 2021 was £18,720,000
and draft profit before tax for the year ended 31 December 2022 is £20,600,000.

Explain, with reasons, how the audit strategy will change as a result of you becoming
aware of the bonus scheme. (4 marks)

4. In June 2022, your firm was appointed as the external auditor of Rathway Ltd
(Rathway). For the year ended 31 December 2022, Rathway exceeded the audit
exemption threshold and is required to have a statutory audit for the first time.

Historically, Rathway manufactured bespoke furniture for high-end clients operating

bars, restaurants and nightclubs. Bespoke furniture is designed and built to specific
client requirements using luxury materials. In November 2021, the company started
manufacturing bespoke furniture for customers working from home. In March 2022,
 Rathway also started selling ready-made office furniture for commercial customers.
Revenue grew steadily between 4% and 5% pa over the period 2019-2021, and it has
increased by 13% for the year ended 31 December 2022.

State, with reasons, the limitations of using analytical procedures to audit Rathway’s
revenue for the year ended 31 December 2022. (3 marks)

5. During the audit of Hambleton Ltd (Hambleton), two deficiencies in internal controls over
non-current assets were noted as follows:

(1) The individual order limits for which a manager can authorise purchases of non-
current assets were exceeded on multiple occasions during the year.

(2) In some instances, the invoices were authorised for payment by the same
manager who authorised the purchase.

Identify possible consequences of the above internal control deficiencies for inclusion in
the report to those charged with governance of Hambleton and provide
recommendations to address them. (5 marks)

Total: 20 marks
Question 2

Assume the date is 1 March 2023.

Bateri plc (Bateri), a UK listed company, manufactures and supplies chargers for electric
vehicles. Bateri’s previous auditors did not seek reappointment after completing the external
audit for the year ended 31 December 2021. You are the audit senior responsible for the final
audit of the financial statements of Bateri for the year ended 31 December 2022. Your firm
was appointed as the external auditor in August 2022. Bateri is your firm’s only listed client.

The engagement partner identified the following two areas as significant risks for the audit:

(1) Trade receivables

(2) Inventories

Client information

Bateri has contracts with large energy companies which offer charging points at their service
stations across Europe and Asia. Each contract states the number of chargers to be supplied
by Bateri and the price agreed for each charger, denominated in the energy company’s local
currency. Credit terms are 30 days.

Chargers are manufactured at one of Bateri’s eight manufacturing facilities located across the
UK, mainland Europe and Asia. The internal components within all chargers are assembled
to a standard specification and cost. The external design of the charger is bespoke to each
energy company’s specification and ranges from 9% to 15% of the total cost of each charger.
The price for each contract is calculated manually based upon the technical and external
design specification and the number of chargers to be supplied.

Financial statement extracts

The following information has been extracted from the draft financial statements of Bateri for
the year ended 31 December 2022:

Statement of profit or loss for the year ended 31 December (extract)

2022 2021
(draft) (audited)
£'000 £'000
Revenue 267,821 253,766
Cost of sales (242,914) (230,166)
Gross profit 24,907 23,600
Profit before tax 13,631 12,878

Statement of financial position as at 31 December (extract)

2022 2021
(draft) (audited)
£'000 £'000
 Current assets
Inventories 40,152 31,601
Trade receivables 27,369 20,440

Notes from the audit manager

The audit manager has provided you with the following notes:

• Bateri’s credit controller left in October 2022. Aiza Abbas, the financial controller and
an ICAEW Chartered Accountant, has taken on their duties until a new credit controller
can be recruited. In November 2022, Aiza discovered a number of sales invoices
which had been posted as soon as the customer orders were placed in October 2022.
The average time to design, manufacture and despatch customer orders is six
months.

• One overseas customer, Elektrische GmbH (EG), is refusing to pay an invoice for £3
million. EG claims that chargers supplied by Bateri take significantly longer to charge
electric vehicles than advertised in Bateri’s product brochure.

• Inventories at each manufacturing facility are counted once per year, normally at the
year end. However, due to taking on the additional credit control duties, Aiza forgot to
instruct the heads of each of the manufacturing facilities to complete an inventory
count. Only four of the eight manufacturing facilities therefore carried out an inventory
count at the year end.

• During 2022, Bateri experienced quality problems with components purchased from a
major supplier. In June 2022, Bateri switched to a new supplier which charges higher
prices for the components.

• A new cost accounting system which records the cost of components, labour and
production overheads was introduced in April 2022. Cost data was transferred to the
new system and the old system ceased to be used immediately after this. The
inventory system is fully integrated with the cost accounting system. Costs have not
been updated in the new cost accounting system since it was introduced.

Reliance on controls

During the audit for the year ended 31 December 2021, the previous auditors relied on the
controls over the inventory system and the cost accounting system. Aiza has requested that
your firm also rely on those controls this year rather than undertaking detailed testing as she
believes this will ensure the audit is conducted efficiently.

Climate-related disclosures

You recently met with Aiza. She explained that as a listed company, Bateri will be required to
prepare climate-related financial disclosures for the first time for the year ending 31
December 2023. Bateri’s board of directors would like your firm to prepare Bateri’s risk
management strategy disclosures along with the metrics and targets which will be reported in
the annual report and accounts for the year ending 31 December 2023.
No-one in your firm has experience of preparing climate-related financial disclosures. Aiza
explained that the engagement partner had said that your firm would be willing to undertake
the engagement because Bateri’s finance director and the engagement partner are close
friends.

Requirements

1. In respect of the audit of Bateri for the year ended 31 December 2022, state, with
reasons:

(a) The matters your firm should have considered and procedures it should have
performed prior to accepting appointment as external auditor of Bateri.

(b) Why reliance on the inventory system and cost accounting system controls, as
requested by Aiza, is unlikely to be appropriate.
(10 marks)

2. Justify why items (1) and (2) have been identified as significant risks for the audit. For
each significant risk, describe the procedures that should be included in the audit plan
to address it.

Present your answer using the following subheadings:

• Trade receivables
• Inventories
(22 marks)

3. Identify the ethical threats associated with your firm performing the work requested in
relation to climate-related financial disclosures, stating why each is a threat. State the
actions that you and your firm should take. (8 marks)
Total: 40 marks
Question 3

Assume the date is 1 March 2023.

Associated Customers Services Ltd (ACS) is a software development company which

develops and sells ‘chatbots’ which provide automated tailored responses to online customer
queries. ACS sells the chatbots as ‘software as a service’ to retail clients which use online
helpdesks to respond to customer queries.

You are the audit senior planning the audit of ACS for the year ended 31 December 2022.
ACS’s nominal ledger is available in your firm’s data analytics software. Materiality has been
set at £579,000.

The audit manager has asked you to investigate the following relevant account codes:

Account code Account name

2060-10 Provisions liability
1660-70 Accumulated amortisation – development costs

Audit team briefing notes

In September 2022, ACS received a letter from the lawyers of a customer, Carmel Retailers
Ltd (CRL), claiming damages of £800,000. CRL claims that offensive responses were given
to customers by a faulty chatbot developed by ACS. ACS’s lawyers have reviewed the claim
and, on 31 October 2022, they advised that it is likely that £800,000 will need to be paid to
CRL. This is to cover business disruption as a result of downtime to resolve the issue and
lost revenue due to customer dissatisfaction.

On 6 November 2022, Jade Rahman, the financial accountant, created a provision for
£800,000 in respect of the claim made by CRL. Jade left ACS on 8 November 2022.

Historical development costs relating to internally-developed computer software were

capitalised by ACS because they met the criteria in IAS 38, Intangible Assets. The
development costs are being amortised on a straight-line basis over their useful life. There is
no active market for the sale of this software.

Fake blog post

Jay Healey, the audit assistant and an ICAEW Chartered Accountant, worked as a trainee
accountant at ACS one year ago, before joining your firm. Jay explained to you that during
the interim audit, Laurie Snell, the finance director, offered him an all-expenses paid trip to an
international motor race in Monaco. This was in return for creating a fake blog post on a
major industry news outlet claiming that CRL was to blame for the faulty chatbot. Jay felt
pressured to create the post using text provided by Laurie. However, Jay immediately deleted
the post before there were any views.

Requirements

1. Using the ‘Explore’ module in your firm’s data analytics software, identify any
transactions relating to accounts 2060-10 and 1660-70 which may represent a
significant risk to the audit. Explain and justify why each transaction is a significant risk.
(11 marks)
 Note: No marks will be awarded for points identified by using other modules in your
firm’s data analytics software.

2. For the provision in respect of the claim made by CRL, outline the procedures to be
included in the audit plan to obtain assurance that the balance is fairly stated in the
financial statements of ACS for the year ended 31 December 2022. (4 marks)

3. In respect of the fake blog post, explain the ethical issues arising and state the actions
you, as the audit senior, should take. (4 marks)
Total: 19 marks
Question 4

Assume the date is 1 March 2023.

You are an audit senior at Bailrigg LLP. Described below are situations which have arisen at
three unrelated audit clients of your firm. In each case, the issues relate to the audits of the
financial statements for the year ended 31 December 2022. All companies report under
IFRS® Standards.

Grizedale Ltd (Grizedale)

Grizedale is a healthcare research company that has relied upon significant government
grants to finance its business for many years. In October 2022, the directors of Grizedale
received confirmation from the grant-awarding body that an investigation had found that
Grizedale failed to comply with conditions attached to several material grants awarded during
the financial years 2021 and 2022. These grants must now be repaid in August 2023. The
directors plan to appeal the decision.

The latest board minutes note that Grizedale is unable to repay the grants without alternative
finance, which has not yet been secured. Your firm has reviewed Grizedale’s financial
forecasts and concluded that there are significant doubts over whether Grizedale can operate
for the foreseeable future without alternative finance.

The board of Grizedale proposed that the audit fee be reduced by 20% to help with cash
flow, with the first half of the fee payable upon completion of the audit. They have asked if
your firm can prepare an appeals document for submission to the grant-awarding body and
support them through the appeals process. The other half of the audit fee would be paid if the
appeal is successful.

Lonindale Ltd (Lonindale)

On 1 January 2022, Lonindale purchased specialist machinery costing £3 million. The

specialist machinery is being depreciated on a straight-line basis over 20 years. On 1
January 2022, an auditor’s expert estimated that the useful life of the specialist machinery is
five years. Lonindale’s directors have been unable to justify the difference between the
depreciation rate they have applied and the findings of the auditor’s expert. The directors do
not plan to make any adjustments in respect of this matter. The draft financial statements for
the year ended 31 December 2022 show profit before tax of £4.1 million and total assets of
£17.3 million.

Channingdale Ltd (Channingdale)

During the audit of Channingdale’s payroll system, the following was discovered.

(1) Since September 2022, changes to employee standing data were not authorised prior to
being used to calculate payroll payments.

(2) The monthly payroll exception report, containing details of changes to standing data,
new starters and leavers, showed no evidence of having been reviewed since June
2022.

Requirements
1. In respect of Grizedale, explain the ethical issues arising in relation to the audit fee
proposal and the non-audit work. State, with reasons, the actions your firm should take
to address each of these issues. (6 marks)

2. In respect of the issues described for Grizedale and Lonindale, state, with reasons, the
implications for the auditor’s reports on the financial statements for the year ended 31
December 2022. (10 marks)

3. For each of the internal control deficiencies identified for Channingdale, describe the
possible consequences of the deficiency and provide recommendations to address it,
suitable for inclusion in a report to those charged with governance. (5 marks)

Total: 21 marks