Question 1d

You are a manager in the audit department of Snow & Co, a firm of Chartered Certified Accountants, and you are responsible for the audit of Margot Co. The company has a financial year ending 30 June 20X9, and you are about to start planning the audit.

Margot Co produces fruit-based food products using agricultural produce grown on its farms. Ben Duval, the audit engagement partner, met with the company’s finance director last week to discuss business developments in the year and recent financial performance.

You are provided with the following exhibits:
1. An email you have received from Ben Duval, in respect of the audit of Margot Co.

2. Notes of a meeting which Ben held recently with the finance director of Margot Co.

3. A reference document prepared by Snow & Co containing an overview of the accounting requirements applied in the agriculture sector.

4. Extracts from the latest management accounts of Margot Co and accompanying notes, including the results of preliminary analytical procedures, which have been performed by a member of the audit team.

5. An email which the audit engagement partner received from Len Larch, a production manager working at one of the company’s olive farms.

Required:
Respond to the instructions in the email from the audit engagement partner. (46 marks)

Note: The split of the mark allocation is shown in the partner’s email (Exhibit 1).

Professional marks will be awarded for the presentation and logical flow of the briefing notes and the clarity of the explanations provided. (4 marks)

Exhibit 1 – Email from Ben Duval

To: Audit manager

From: Ben Duval, Audit engagement partner for Margot Co

Subject: Audit planning for Margot Co

Hello
I have provided you with some information in the form of a number of exhibits which you should use to help you with planning the audit of Margot Co for the financial year ending 30 June 20X9.

Using the information provided, I require you to prepare briefing notes for my own use, in which you:

In Exhibit 5, I have provided you with an email I received from Len Larch, one of the company’s production managers.

In respect of this, in your briefing notes you should also:

(d) Discuss the audit implications of the email from Len Larch, recommending any further action to be taken by our firm. (10 marks)

Thank you.

Exhibit 5 – Email sent from Len Larch, employee of Margot Co, to Ben Duval, audit engagement partner

To: Ben Duval
From: Len Larch
Subject: Business practices

Hello Ben
I obtained your contact details from your firm’s website, I hope you don’t mind me approaching you directly. I am emailing to voice some concerns over recent business practices at Margot Co.

In my role as production manager in one of the company’s factories, I inspect samples of the fruit which comes into the factory from the company’s farms, and speak to the farmers on a regular basis. Recently, several farmers told me that they have been instructed to use certain chemicals to spray the fruit trees, which should increase the fruit yield.

However, some of these chemicals are prohibited for use in this country because they can be toxic to humans.

While talking to one of my friends who is a production manager from another factory, it transpired that he had also become suspicious that banned chemicals are being used in the farms. He raised the issue with one of the company directors, who allegedly gave him $10,000 and asked him not to discuss it with anyone. My friend said that I should ask for the same sum of money, but I felt uncomfortable and thought I should tell someone from outside the company about what is going on.

Please do not mention my name if you decide to investigate this further.
Thank you, Len.

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