Pilot (pre 2007)

Question 3a-e

You are a manager in Ingot & Co, a firm of Chartered Certified Accountants, with specific responsibility for the quality of audits. Ingot was appointed auditor of Argenta Co, a provider of waste management services, in July 2006. You have just visited the audit team at Argenta’s head office. The audit team is comprised of an accountant in charge (AIC), an audit senior and two trainees.

Argenta’s draft accounts for the year ended 30 June 2006 show revenue of $11•6 million (2005 – $8•1 million) and total assets of $3•6 million (2005 – $2•5 million). During your visit, a review of the audit working papers revealed the following:

(a) On the audit planning checklist, the audit senior has crossed through the analytical procedures section and written ‘not applicable – new client’. The audit planning checklist has not been signed off as having been reviewed.  (4 marks)

(b) The AIC last visited Argenta’s office when the final audit commenced two weeks ago on 1 August. The senior has since completed the audit of tangible non-current assets (including property and service equipment) which amount to $0•6 million as at 30 June 2006 (2005 – $0•6 million). The AIC spends most of his time working from Ingot’s office and is currently allocated to three other assignments as well as Argenta’s audit. (4 marks)

(c) At 30 June 2006 trade receivables amounted to $2•1 million (2005 – $0•9 million). One of the trainees has just finished sending out first requests for direct confirmation of customers’ balances as at the balance sheet date.  (4 marks)

(d) The other trainee has been assigned to the audit of the consumable supplies that comprise inventory amounting to $88,000 (2005 – $53,000). The trainee has carried out tests of controls over the perpetual inventory records and confirmed the ‘roll-back’ of a sample of current quantities to book quantities as at the year end. (3 marks)

(e) The AIC has noted the following matter for your attention. The financial statements to 30 June 2005 disclosed, as unquantifiable, a contingent liability for pending litigation. However, the AIC has seen a letter confirming that the matter was settled out of court for $0.45 million on 14 September 2005. The auditor’s report on the financial statements for the year ended 30 June 2005 was unmodified and signed on 19 September 2005. The AIC believes that Argenta’s management is not aware of the error and has not brought it to their attention. (5 marks)

Required:

Identify and comment on the implications of these findings for Ingot & Co’s quality control policies and procedures.

Note: The mark allocation is shown against each of the five issues. (20 marks)