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SECTION A- This ONE question is compulsory and MUST be attempted

(a) It is 1 July 20X5. You are a manager in the audit department of Charlie & Co, a firm of Chartered Certified Accountants. You are assigned to the audit of Elijah Co which has a financial year ending 30 September 20X5. Elijah Co manages timber plantations, its core business being the management of timber plantations and the production and sale of a range of timber products. It is not currently a listed entity.

The following exhibits, available on the left-hand side of the screen, provide information relevant to the question:

  1. Partner’s email – an email which you have received from Emmet Green, the audit engagement partner.
  2. Background information – information relevant to audit planning.
  3. Notes from meeting – summary of business developments discussed at a recent meeting between the chief finance officer (CFO) and the audit engagement partner.
  4. Key performance indicators – a summary of financial and non-financial information
  5. Notes from phone call – a summary of issues raised by the CFO during a discussion with the audit engagement partner.

This information should be used to answer the question requirement within your chosen response option(s).

Exhibit 1: Partner’s Email

To: Audit manager

From: Emmet Green, Audit engagement partner

Subject: Audit planning for Elijah Co

Date: 1 July 20X5


I have provided you with some information which you should use to help you in planning the audit of  Elijah Co for the financial year ending 30 September 20X5.

As you know, Elijah Co is a new audit client of  our firm. I hope you are looking forward to working on  this  interesting  new  client  which  is  the  first  timber  company  we  have  secured  as  an  audit  client. You should also be aware that the management team is planning for Elijah Co to achieve a stock market listing within the next two years.

I require you to prepare briefing notes for my own use, in which you:

(a)Evaluate the business risks to be considered in planning the audit of  Elijah Co.(10 marks)

(b)Evaluate the audit risks to be considered in planning the audit of  Elijah Co.(20 marks)

Note: In relation to the company’s timber plantation asset (referred to in Exhibit 4) you are only required to consider audit risks relating to changes in fair value. Any other relevant audit risks relating to the timber plantation asset will be dealt with separately, later in the planning stage of  the audit.

(c)Design the audit procedures to be performed in relation to the change in fair value of  the timber plantation asset caused by the recent storms. Your procedures should include those relating to the evaluation of  the expert appointed by management and the work they have performed.(6 marks)

(d)Using Exhibit 5, explain the ethical issues and other audit planning implications which arise in relation to the phone call from the company’s chief  finance officer, Mark Holt.(10 marks)

Thank you

Exhibit 2: Background Information

Elijah Co owns and manages several large timber plantations. Approximately 5% of  the trees are harvested each year. The company immediately processes the timber which is harvested from felled trees in its own sawmills (a facility where trees are processed into logs and other timber products). The processed timber, which is mainly logs and planks of  wood, is then sold to a range of   customers  including  construction  companies  and  furniture  manufacturers.  Approximately  30% of  the timber is exported.

Your  firm  was  appointed  as  auditor  to  Elijah  Co  in  March  20X5  following  the  resignation  of   the  previous  auditor,  Bear  Associates.  As  part  of   your  firm’s  client  acceptance  procedures,  communication was received from Bear Associates indicating that their reason for resignation was due to the retirement of  the partner responsible for the audit and that they had no issues to bring to your attention regarding the audit.

Elijah Co has a small internal audit department with two staff  who report to the company’s CFO, as the company does not have an audit committee.

Exhibit 3: Notes From Meeting

Meeting date: 10 June 20X5

Attendees:  Emmet Green, audit engagement partner

                   Mark Holt, chief finance officer (CFO)

Accounting policies

Mark Holt confirms that Elijah Co applies the requirements of  IAS® 41 Agriculture as follows:

  • Standing timber, which  means  trees  which  are  growing  in  the  timber  plantation  prior  tobeing felled, are biological assets, measured at fair value less costs to sell. The change infair value less costs to sell is included in profit or loss for the period in which it arises.
  • Felled trees are  agricultural  produce  which  are  measured  at  fair  value  less  costs  to  sellat the point of  harvest. Immediately after felling, trees are processed, so that the value offelled trees awaiting processing is minimal at any point in time.
  • Processed timber such as logs are measured in accordance with IAS 2 Inventories.

A technical expert from the audit firm has confirmed that the accounting policies outlined above appear appropriate in the context of  Elijah Co’s activities.

International expansion

Elijah  Co’s  operations  are  currently  all  based  in  its  home  jurisdiction.  However,  the  board  has  recently approved the acquisition of  several large areas of  tropical rainforest in Swellview, a remote developing country. The expansion will allow the company to process new types of  timber for which  there  is  significant  demand  from  luxury  furniture  manufacturers.  The  acquisition  of   the  areas of  the rainforest will cost $25 million and the purchase is due to take place in August 20X5. The cost of  $25 million is equivalent to the fair value of  the rainforest. Swellview uses the same currency as Elijah Co so the expansion is not creating any foreign exchange risk exposure to the company.

The purchase is being funded through a share issue to existing and new shareholders, who are mainly family members of  the Elijah family, who established the company 20 years ago. A share issue was the only option for funding the international expansion as the company is at the limit of  its bank borrowing agreement.

An international development agency has agreed to provide a grant of  $20 million to assist Elijah Co in its Swellview expansion, on condition that the expansion represents sustainable and ethical business practice.

The grant is provided specifically for training the local workforce and building accommodation for the workforce in a town near to the rainforest.The grant is due to be received in September 20X5 and relevant expenditure will commence in November 20X5. Mark Holt is planning to recognise half  of  the amount received as income in this year’s financial statements, on the basis that it “will cover some of  management’s expenses in planning the international expansion”.

Gold Standard

The company is proud to have recently been awarded an industry ‘Gold Standard’ accreditation for its sustainable timber management. To achieve the Gold Standard, which denotes the highest possible level of  sustainable timber management and ethical business practice, the company must adhere to a number of  strict standards. This includes maintaining the biodiversity of  the timber plantation, ensuring that rare species of  tree are not harvested, and that animal habitats within  the  timber  plantation  are  preserved.  To  maintain  the  Gold  Standard  accreditation,  one  condition is that at least 80% of  timber sold must be harvested according to the strict standards set by industry regulators. The Gold Standard applies to all of  the company’s activities, including the Swellview expansion.

Contract with Hart Co

The company’s revenue has increased this year, largely due to it signing a significant contract with a new customer, Hart Co. The contract was signed on the basis of  Elijah Co receiving the Gold Standard accreditation for its timber.

Legal case

A group of  employees has recently commenced legal action against the company, claiming that breaches  of   health  and  safety  guidelines  regularly  take  place.  The  company  has  made  some  redundancies this year, which has put pressure on the remaining staff  to work harder in order to maintain productivity; the employees are alleging that this has caused an increase in the number of  accidents at work, some of  which have resulted in fatalities. The company’s management and legal advisors believe that the legal claim, which amounts to $19 million, is unjustified and will not be successful. Mark Holt does not intend to recognise a provision for the claim or make any disclosure in the financial statements in relation to this issue as it is at such an early stage in the legal proceedings.

Use of expert – change in fair value due to recent storms

In  the  last  month,  several  storms  caused  damage  to  some  areas  of   timber  plantation.  An  independent expert has been appointment by management to determine the extent of  damage caused  and  to  quantify  any  financial  implications,  including  determination  of   the  change  in  fair  value  of   the  standing  trees  which  have  been  damaged  by  the  storm.  The  expert’s  report  indicates a large number of  trees have been completely destroyed, and many have been badly damaged. Based on the expert’s report, management has determined that a reduction in fair value of  $70·5 million should be recognised in respect of  the timber plantation asset recognised in the statement of  financial position

Exhibit 4: Key Performance Indicators

The information in the table below will be published as part of  the Annual Report, in a section titled ‘Key results for the year’, which forms part of  management’s commentary on the company’s performance. The financial information is before recognising the change in fair value of  the timber plantation caused by the recent storm, and also before accounting for the government grant.

                                                                                    Projected                   Actual                                         %

                                                                                    30 September  30 September                            change

                                                                                    20X5                           20X4

Financial key performance indicators:    $ million                     $ million

Revenue                                                                       42·5                             40·3                                                +5·5%

Operating profit                                                         22·0                            21·0                                                 +4·8%

Profit before tax                                                 6·5                               5·0                                              +30%


Social and environmental key performance indicators:

% timber harvested in line with ‘Gold Standard’       82%                             85%

Number of  employees                                                   1,300                           1,420

Total staff  days lost due to accidents at work             78                                65

You  are  also  provided  with  the  following  information  relating  to  balances  which  are  extracted  from management accounts as at 30 June 20X5:

Total assets – $550 million (20X4 – $545 million)

Timber plantation – $500 million (20X4 – $490 million) – this amount, relating to standing timber, is before accounting for any change in value caused by the recent storms referred to in Exhibit 3.

Inventory – $15·4 million (20X4 – $9·2 million) – the increased level of  inventory is explained by management as follows: “In the last two months, industrial action at the country’s ports meant no containers of  processed timber could be shipped to our export customers. The missed export sales so far amount to about $2·1 million. We continued to harvest and process timber during this time, leading to an increased level of  inventory. The industrial action is ongoing.”

Cash – $4·5 million (20X4 – $6·8 million) – cash levels are depleted this year due to inflationary pressures and demands for higher wages from our employees, which we have met.


Exhibit 5: Notes From Phone Call

Notes  from  a  phone  call  yesterday  between  Emmet  Green,  audit  engagement  partner  and  Mark Holt.

Request from Mark Holt

Elijah  Co  publishes  a  wide  range  of   non-financial  social  and  environmental  Key  Performance  Indicators  (KPIs)  as  part  of   the  Annual  Report,  including  the  three  shown  as  part  of   Exhibit  4. Mark has asked if  our firm can provide assurance on these KPIs as part of  performing the annual audit. Mark has suggested that in order to pay for this extra work, the agreed audit fee will be increased by 20%, assuming that the assurance provided on the KPIs is favourable.

News report

Mark  informed  us  that  a  news  report  has  emerged  in  Swellview,  alleging  that  Elijah  Co  paid  a  government official a sum of  $15,000 in order to secure the purchase of  tropical rainforest which is  taking  place  next  month.  Mark  wanted  to  make  us  aware  of   the  story,  which  is  spreading  quickly  on  social  media,  and  to  inform  us  that  these  incentive  payments  are  routine  business  practice  in  Swellview.  He  also  strongly  urged  us  not  to  investigate  the  payment  as  part  of   our  audit procedures, saying that the amount is insignificant. He suggested that making enquiries regarding the payment might mean more media attention is focussed on the issue, which he is keen to avoid given the company’s plans to obtain a stock market listing within the next two years.


Respond to the instructions in the email from the audit engagement partner.

Note: The split of the mark allocation is shown in Exhibit 1 – Partner’s email.

(46 marks)

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

(4 marks)

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SECTION B- BOTH questions are compulsory and MUST be attempted

1. You are an audit manager in Novato & Co, a firm of Chartered Certified Accountants. You have recently been assigned to the audit of Blaze Co for the year ended 31 December 20X8. Blaze Co is an unlisted company and has been an audit client of your firm for a number of years.

Blaze Co is a national distributor of cleaning products. The company buys the cleaning products from wholesalers and employs a team of approximately 800 sales staff around the country who sell the company’s products to both domestic households and small to medium-sized businesses. Around 75% of Blaze Co’s sales transactions are cash-based and each of the company’s sales staff prepares a cash sales report on a monthly basis. According to Blaze Co’s chief executive, Joey Tribbiani, and in order to foster ‘an entrepreneurial spirit’ amongst his staff, each staff member (including the senior management team) is encouraged to make cash sales and is paid on a commission basis to sell the company’s products to friends and family. Mr Tribbiani leads the way with this scheme and recently sold cleaning products with a value of $38,000 to a business associate of his. He has transferred these funds directly into an off-shore bank account in the company’s name on which he is the sole signatory.

Review of audit working papers

Your review of the audit working papers and an initial meeting with Mr Tribbiani have identified the following potential issues:

Following your review of the audit engagement letter and the working papers of the taxation section of the audit file, you have established that Novato & Co performed the taxation computation for Blaze Co and completed the tax returns for both the company and Mr Tribbiani personally. All of the taxation services have been invoiced to Blaze Co as part of the total fee for the audit and professional services. Mr Tribbiani’ personal tax return includes a significant number of transactions involving the purchase and sale of properties in various international locations. The taxation working papers include a detailed review of a number of off-shore bank accounts in Mr Tribbiani’ name which identified the property transactions.

During your initial meeting with Mr Tribbiani, he informed you that Blaze Co is planning to develop a new website in order to offer online sales to its customers. He has asked Novato & Co to provide assistance with the design and implementation of the website and online sales system.

As a result of your audit review visit at the client’s premises, you have learned that the audit team was invited to and subsequently attended Blaze Co’s annual office party. The client provided each member of the audit team with a free voucher worth $30 which could be redeemed at the venue during the party. The audit senior, Ian Metcalfe, who has worked on the audit for the last three years has informed you that the audit team has always been encouraged to attend the party in order to develop good client relations.


(a) (i) Discuss the policies and procedures which Novato & Co should have in place in relation to an anti-money laundering programme; and (4 marks)

(ii) Evaluate whether there are any indicators of money laundering activities by either Blaze Co or its staff. (6 marks)

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(b) Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions which should now be taken by Novato & Co.

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a. In accordance to ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements:

'When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.'


Discuss why the auditor should presume that there are risks of fraud in revenue recognition and why ISA 240 requires specific auditor responses in relation to the risks identified. (7 marks)

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b. You are the manager responsible for the audit of Zimzo Co, a chain of health and leisure clubs owned and managed by entrepreneur Alex Dunphy. The audit for the year ended 30 November 20X5 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:

  • 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 Dunphy, as he has sole responsibility for cash management. According to Mr Dunphy, an old friend of his, Luke Katt, 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 Dunphy but has not yet been received.

  • Legal dispute

At the year end Zimzo 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 20X4 but has now been reversed because Mr Dunphy believes it is now likely that Zimzo Co will successfully defend the legal case. Mr Dunphy 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 auditor's report was unmodified in the previous year. (13 marks)


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

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c. You are also responsible for the audit of Patt Co, a listed company, and you are completing the review of its interim financial statements for the six months ended 31 October 20X5. Patt Co is a car manufacturer, and historically has offered a three-year warranty on cars sold. The financial statements for the year ended 30 April 20X5 included a warranty provision of $1.5 million and recognised total assets of $27.5 million. You are aware that on 1 July 20X5, due to cost cutting measures, Patt Co stopped offering warranties on cars sold. The interim financial statements for the six months ended 31 October 20X5 do not recognise any warranty provision. Total assets are $30 million at 31 October 20X5.


Assess the matters that should be considered in forming a conclusion on Patt Co's interim financial statements, and the implications for the review report.

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