ACCA AAA ^INT Syllabus A. Regulatory Environment - Money Laundering Basics - Past Papers ^{1 / 11}

(b) You are the manager responsible for the audit of York Co, a chain of health and leisure clubs owned and managed by entrepreneur Phil Smith. The audit for the year ended 30 November 2015 is nearing completion and the draft financial statements recognise total assets of $27 million and profit before tax of $2·2 million. The audit senior has left the following file notes for your consideration during your review of the audit working papers:

(i) Cash transfers
During a review of the cash book, a receipt of $350,000 was identified which was accompanied by the description ‘BD’. Bank statements showed that the following day a nearly identical amount was transferred into a bank account held in a foreign country. When I asked the financial controller about this, she requested that I speak to Mr Smith, as he has sole responsibility for cash management. According to Mr Smith, an old friend of his, Brian Davies, has loaned the money to the company to fund further expansion and the money has been invested until it is needed. Documentary evidence concerning the transaction has been requested from Mr Smith but has not yet been received. (7 marks)

(ii) Legal dispute
At the year end York Co reversed a provision relating to an ongoing legal dispute with an ex-employee who was claiming $150,000 for unfair dismissal. This amount was provided in full in the financial statements for the year ended 30 November 2014 but has now been reversed because Mr Smith believes it is now likely that York Co will successfully defend the legal case. Mr Smith has not been available to discuss this matter and no additional documentary evidence has been made available since the end of the previous year’s audit. The audit report was unmodified in the previous year. (6 marks)

Required:
Evaluate the implications for the completion of the audit, recommending any further actions which should be taken by your audit firm.

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

June 2012 Q3a i

You are a manager in Lark & Co, responsible for the audit of Heron Co, an owner-managed business which operates a chain of bars and restaurants.

This is your firm’s first year auditing the client and the audit for the year ended 31 March 2012 is underway. The audit senior sends a note for your attention:

‘When I was auditing revenue I noticed something strange. Heron Co’s revenue, which is almost entirely cash-based, is recognised at $5·5 million in the draft financial statements. However, the accounting system shows that till receipts for cash paid by customers amount to only $3·5 million.

This seemed odd, so I questioned Ava Gull, the financial controller about this. She said that Jack Heron, the company’s owner, deals with cash receipts and posts through journals dealing with cash and revenue. Ava asked Jack the reason for these journals but he refused to give an explanation.

‘While auditing cash, I noticed a payment of $2 million made by electronic transfer from the company’s bank account to an overseas financial institution. The bank statement showed that the transfer was authorised by Jack Heron, but no other documentation regarding the transfer was available.

‘Alarmed by the size of this transaction, and the lack of evidence to support it, I questioned Jack Heron, asking him about the source of cash receipts and the reason for electronic transfer. He would not give any answers and became quite aggressive.’

Required:

(i) Discuss the implications of the circumstances described in the audit senior’s note; and (6 marks)