2 (a) (i) Ethical and other matters to be considered before accepting Setter Co as a client of the firm
Up to 1½ marks for each ethical or other professional issue explained:
– General requirements of ISQC 1
– Competence to perform the work – this should not be a problem
– Intimidation and self-interest threat from Vizsla Co
– Low fees potentially impair quality of work
– Pressure on fees from Setter Co indicates lack of integrity
– Self-review and management threat from performing tax planning for the company
– Safeguards should be used to reduce threats to an acceptable level, if this is not possible the tax planning should not be performed
– Providing personal tax advice not ethically wrong but may not want to accept work due to integrity issues
– Breach of employment law and taking money from pension plan indicates lack of integrity/criminal activity/poor reputation

(ii) Customer due diligence – reasons and recommended information
Up to 1½ marks for each point explained/recommended:
– Part of anti-money laundering regulations (up to 3 marks for detailed explanation of regulations)
– Identity of Gordon Potts – passport, recent utility bills or bank statements
– Identity of other shareholders including the other family members and other 10% shareholders
– Setter Co – the company certificate of incorporation, to confirm legal status, date and place of incorporation
– A Companies House search (or equivalent) on Setter Co – confirm the existence of the company, the shareholders and directors, beneficial owners
– Other companies controlled by Gordon Potts – confirm their existence and the nature of the relationship with Setter Co
– Review of the latest financial statements of Setter Co, and the other companies in which Gordon Potts has an interest should be reviewed
– Identify the source of funding, when funding is repayable and the existence of any security provided by the company or by personal guarantee of owners
– Facts surrounding the breach of employment law as reported by the newspaper
Maximum marks 16

(b) Examination procedures
Up to 1 mark for each procedure explained. In addition, ½ mark for relevant calculations, e.g. trend
analysis, up to a maximum of 2 marks:

General procedures:
– Identity of the preparer of the operating profit forecast, and assess their competence
– Understanding the procedures/controls which have been followed in the preparation of the forecast
– Confirm the consistency of accounting policies applied
– Confirm that the assumptions underpinning the forecast are in line with knowledge of the business obtained from performing the company’s audit
– Re-cast the forecast to ensure it is arithmetically correct

Specific procedures:
– Ask management to prepare a more detailed profit forecast in an appropriate format and to provide forecast statement of financial position and statement of cash flows
– Recalculate the gross profit margins and compare with gross profit margins from audited financial statements
– Obtain a break down showing the components of cost of sales and other expenses; perform analytical review and discuss results
– Assess whether there are any missing categories of expenditure
– For revenue, consider whether the forecast appears overly optimistic – allow credit for calculation of appropriate trends from the forecast
– Compare revenue forecast with revenue from prior years’ audited financial statements. Investigate any unusual trends through discussion with management
– Review any marketing plans and discuss with an appropriate senior member of staff, for example, the sales director
– Review design costs, discuss with management and assess if such an increase in revenue can be achieved with such a small increase in design costs
– Confirm costs to appropriate supporting documentation, e.g. staff costs to human resources projected costs, marketing costs to advertising budgets
– Obtain and review the cash flow forecast prepared for the same period as the operating profit forecast
– Discuss with management the rationale for using 30% of revenue as a basis for determining the amount of other expenses
Maximum marks 9