You are responsible for performing Engagement Quality Control Reviews on selected audit clients of Crocus & Co, and you are currently performing a review on the audit of the Magnolia Group (the Group). The Group manufactures chemicals which are used in a range of industries, with one of the subsidiaries, Daisy Co, specialising in chemical engineering and developing products to be sold by the other Group companies. The Group’s products sell in over 50 countries.

A group structure is shown below, each of the subsidiaries is wholly owned by Magnolia Co, the parent company of the Group:

Crocus & Co is engaged to provide the audit of the Group financial statements and also the audit of Hyacinth Co and Magnolia Co. Geranium Co, a new subsidiary, is audited by a local firm of auditors based near the company’s head office. Daisy Co is audited by an unconnected audit firm which specialises in the audit of companies involved with chemical engineering.

The Group’s financial year ended on 31 December 2016 and the audit is in the completion stage, with the auditor’s report due to be issued in three weeks’ time. The Group’s draft consolidated financial statements recognise profit before tax of $7·5 million and total assets of $130 million.

The notes from your review of the audit working papers are shown below, summarising the issues relevant to each subsidiary.

(a) Hyacinth Co – internal controls and results of controls testing
The Group companies supply each other with various chemical products to be used in the manufacture of chemicals. Audit work performed at the interim stage at Hyacinth Co, including walk through procedures and internal control evaluations, concluded that internal controls over intra-group transactions were not effective, and this was documented in the audit file. At the final audit, tests of controls were performed to  confirm this to be the case. The tests of controls confirmed that intra-group transactions are not being separately identified in the Group’s accounting system and reconciliations of amounts owed between the subsidiaries are not performed.

The group audit manager has concluded on the audit working papers that ‘as intra-group balances are cancelled on consolidation, this issue has no impact on the Group audit and no further work is necessary’.

As part of the audit approach it was determined that extensive testing would be performed over the internal controls for capital expenditure at Hyacinth Co as it was identified during planning that the company had made significant acquisitions of plant and equipment during the year. Following controls testing the internal controls over capital expenditure were evaluated to be effective in Hyacinth Co.

The working papers conclude that ‘based on the results of controls testing at Hyacinth Co, it is reasonable to assume that controls are effective across the Group’ and substantive procedures on property, plant and equipment in each Group company have been planned and performed in response to this assessment. (9 marks)

Required:
In respect of each of the matters described above:

(ii) Recommend any further actions, including relevant audit procedures, to be taken by your firm, prior to finalising the Group auditor’s report.

Note: the split of the mark allocation is shown next to each of the issues above.