The audit of Davis Co’s financial statements for the year ended 30 November 2017 is nearing completion and the auditor’s report is due to be signed next week. Davis Co manufactures parts and components for the aviation industry.

You are conducting an engagement quality control review on the audit of Davis Co which is a listed entity and a significant new client of your firm. The draft financial statements recognise revenue of $8·7 million, assets of $15·2 million and profit before tax of $1·8 million.

You have identified the following issues as a result of your review:

(i) The planned audit approach to trade payables was to place reliance on purchasing controls and keep substantive tests to a minimum. During controls testing on trade payables, from a random statistical sample, the audit team identified three purchase orders which had not been authorised by the procurement manager. On review of the supporting documentation, the audit team concluded that the items were legitimate business purchases and therefore concluded that no additional procedures were required. (4 marks)

(ii) Following a review of petty cash transactions, the audit assistant identified that the petty cashier paid for taxi fares for personal, non-business journeys with a total value of $175. Following discussions with the audit assistant, you have ascertained that he did not report the matter further as the amount is immaterial. The audit assistant also commented that the petty cashier is his brother and that he did not want to get him into trouble. (6 marks)

(iii) Cut-off testing on revenue has identified two goods despatch notes, dated 2 December 2017, for items sent to Chinn Co, with a combined sales value of $17,880 which had been included in revenue for the year ended 30 November 2017. The client’s financial controller, David Mount, has explained that Chinn Co does not order on a regular basis from Davis Co. In the absence of a regular payment history with Chinn Co therefore, and in order to minimise the receivables collection period from this particular customer, the sales invoice is raised and sent to the customer on the same day that the sales order is received. The average time period between the receipt of an order and despatching the goods to the customer is approximately one to two weeks. The audit working papers have concluded that no further investigation is necessary. (6 marks)

(iv) The finance director, Leslie Gray, has not completed the tax computation for the year ended 30 November 2017. He has recently asked the audit assistant to calculate the company’s tax payable for the year on the basis that as a recently qualified chartered certified accountant, the audit assistant was more up to date with recent changes in tax legislation. (4 marks)

Required:
Evaluate the quality control issues and the implications for the completion of the audit including any further actions which should be taken by your audit firm. Your answer should include the matters to be communicated to management and to those charged with governance in relation to the audit of Davis Co.

Note: The split of the mark allocation is shown against each issue described above.