AAF8
Syllabus B. Planning And Risk Assessment B6. Audit planning and documentation

Bd/Be/B6f. Difference between Interim and Final audit 4 / 7

Question 16de - Specimen

Milla Cola Co (Milla) manufactures fizzy drinks such as cola and lemonade as well as other soft drinks and its year end is 30 September 20X5. You are an audit manager of Totti & Co and are currently planning the audit of Milla. You attended the planning meeting with the audit engagement partner and finance director last week and the minutes from the meeting are shown below. You are reviewing these as part of the process of preparing the audit strategy document.

Minutes of planning meeting for Milla
Milla’s trading results have been strong this year and the company is forecasting revenue of $85 million, which is an increase from the previous year. The company has invested significantly in the cola and fizzy drinks production process at the factory. This resulted in expenditure of $5 million on updating, repairing and replacing a significant amount of the machinery used in the production process.

As the level of production has increased, the company has expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Milla and some are rented from third parties. There will be inventory counts taking place at all 15 of these sites at the year end.

A new accounting general ledger has been introduced at the beginning of the year, with the old and new systems being run in parallel for a period of two months. In addition, Milla has incurred expenditure of $4·5 million on developing a new brand of fizzy soft drinks. The company started this process in July 20X4 and is close to launching their new product into the market place.

As a result of the increase in revenue, Milla has recently recruited a new credit controller to chase outstanding receivables. The finance director thinks it is not necessary to continue to maintain an allowance for receivables and so has released the opening allowance of $1·5 million.

The finance director stated that there was a problem in April in the mixing of raw materials within the production process which resulted in a large batch of cola products tasting different. A number of these products were sold; however, due to complaints by customers about the flavour, no further sales of these goods have been made. No adjustment has been made to the valuation of the damaged inventory, which will still be held at cost of $1 million at the year end.

As in previous years, the management of Milla is due to be paid a significant annual bonus based on the value of year-end total assets.

The finance director has requested that the deadline for the 20X6 audit be shortened by a month and has asked the audit engagement partner to consider if this will be possible. The partner has suggested that in order to meet this new tighter deadline the firm may carry out both an interim and final audit for the audit of Milla to 30 September 20X6.

Required:
(d) Explain the difference between an interim and a final audit. (3 marks)

(e) Explain the procedures which are likely to be performed during an interim audit of Milla and the impact which it would have on the final audit. (4 marks)

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MC Question 6 - Specimen

Auditors usually carry out their audit work at different stages known as the interim audit and the final audit.

Which of the following statements, if any, is/are correct?
1 Carrying out tests of control on the company’s sales day books would normally be undertaken during an interim audit.

2 Review of aged receivables ledger to identify balances requiring write down or allowance would normally be undertaken during a final audit.

A. Neither 1 nor 2
B. Both 1 and 2
C. 1 only
D. 2 only

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Question 1b -

Trombone Co (Trombone) operates a chain of hotels across the country. Trombone employs in excess of 250 permanent employees and its year end is 31 August 2014. You are the audit supervisor of Viola & Co and are currently reviewing the documentation of Trombone’s payroll system, detailed below, in preparation for the interim audit.

Trombone’s payroll system

Permanent employees work a standard number of hours per week as specified in their employment contract. However, when the hotels are busy, staff can be requested by management to work additional shifts as overtime. This can either be paid on a monthly basis or taken as days off.

Employees record any overtime worked and days taken off on weekly overtime sheets which are sent to the payroll department. The standard hours per employee are automatically set up in the system and the overtime sheets are entered by clerks into the payroll package, which automatically calculates the gross and net pay along with relevant deductions. These calculations are not checked at all. Wages are increased by the rate of inflation each year and the clerks are responsible for updating the standing data in the payroll system.

Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any overtime worked in the previous month. If employees choose to be paid for overtime, authorisation is required by department heads of any overtime in excess of 30% of standard hours. If employees choose instead to take days off, the payroll clerks should check back to the ‘overtime worked’ report; however, this report is not always checked.

The ‘overtime worked’ report, which details any overtime recorded by employees, is run by the payroll department weekly and emailed to department heads for authorisation. The payroll department asks department heads to only report if there are any errors recorded. Department heads are required to arrange for overtime sheets to be authorised by an alternative responsible official if they are away on annual leave; however, there are instances where this arrangement has not occurred.

The payroll package produces a list of payments per employee; this links into the bank system to produce a list of automatic payments. The finance director reviews the total list of bank transfers and compares this to the total amount to be paid per the payroll records; if any issues arise then the automatic bank transfer can be manually changed by the finance director.

Required

Explain the difference between an interim and a final audit. (5 marks)

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