3 Generally up to 1½ marks for each issue and implication/action identified. Also, up to 1 mark for each matter identified for communication to management/TCWG.

(i) Controls testing on payables
– Deficiency in internal control, risk of unauthorised purchases
– Inadequate audit procedures, need to increase sample size and extend audit testing to assess extent and significance of deficiency
– Controls based audit approach may be inappropriate, consider more substantive approach

Management/TCWG:
– Include control weaknesses as point in the report to management
– Potentially significant difficulty encountered during the audit resulting in unexpected effort required to obtain sufficient appropriate audit evidence
– Potential significant deficiency in internal controls
– Hence may represent significant audit finding which should be communicated to TCWG

Maximum marks 4

(ii) Petty cash fraud
– Amount clearly immaterial to financial statements
– Personal taxi fares represent fraudulent transaction by petty cashier
– Auditor and management respective responsibilities re prevention and detection of fraud
– Independence threat given relationship of audit assistant with petty cashier, lack of professional integrity on part of audit assistant
– Familiarity threat given close relationship between audit team member and petty cashier
– Review firm’s procedures for assigning staff to audit teams and for reporting personal relationships with staff
– Audit partner has responsibility per ISA 220 to monitor ethical requirements throughout audit process

Management/TCWG:
– Illegal act represents non-compliance with legislation and may be further indication of weak control environment
– Threat to auditor independence represents possible non-compliance with ethical code and ISA 260
– Despite the amounts involved being immaterial, the potential non-compliance should be reported to management with recommendation that all petty cash transactions should be adequately reviewed and authorised

Maximum marks 6

(iii) Cut-off testing on revenues
– Amount identified immaterial to revenue (with supporting calculation)
– Non-compliance with IFRS 15, revenue recognised at inappropriate point, i.e. before control has passed to customer
– Overstatement of revenues, receivables and profits
– Inadequate audit procedures, error should be extrapolated and/or cut-off testing should be extended to identify any further errors
– Auditor should also review last year’s cut-off procedures to investigate whether any compensating error in prior year

Management/TCWG:
– All misstatements communicated to management and request they are corrected
– Non-compliance with IFRS Standards/GAAP
– Inappropriate accounting policy is example of significant finding from audit and should be communicated to TCWG per ISA 260

Maximum marks 6

(iv) Tax advice
– Self-review threat as tax calculation forms basis of tax payable and tax charge in financial statements
– Risk is increased by listed status of client
– Auditor should not prepare financial statements of listed client
– Hence not acceptable here for auditor to calculate tax payable for Davis Co

Management/TCWG:
– Lack of appropriate skill and knowledge of client’s financial staff
– Implications for recruitment and/or training procedures at client

Maximum marks 4