40.2 12 marker

Question 1

Sednass Ltd (Sednass)
Your firm is the external auditor of Sednass for the year ended 30 June 20X6. Sednass maintains a
perpetual inventory system and uses this to calculate the value of inventory for inclusion in its yearend financial statements. In July 20X6, a computer virus corrupted the data held on the inventory
system resulting in the loss of records relating to the value of inventory at 30 June 20X6. Sednass’
antivirus software was out of date and no recent back up of data were stored because the IT manager
responsible for this process had been on extended leave. The directors have included an estimate
for inventory of £1.8 million in the financial statements but your firm has been unable to corroborate
this value.
The draft financial statements show that Sednass’ profit before tax is £16.2 million.

Answer 1

Sednass
Anti-virus software is out of date and back-up data has not been stored. The IT manager’s
responsibilities were not covered during extended leave.

Consequences
Loss of data will result in additional costs to recover data. Systems may become corrupted
and the business may not be able to operate. With no means to recover data to a previous
position there will be a delay in the resumption of business. This results in a negative
impact on profit/revenue and cash flows/going concern status.

Recommendations
Anti-virus software and back-ups must be maintained at all times. Back-ups should be
stored off site.
Responsibility should be assigned to more than one individual. There should be clear,
documented procedures, circulated to employees, for covering periods of absence.

Question 2

Gustdis Ltd (Gustdis)
Your firm is the external auditor of Gustdis. The financial statements include a note relating to a
significant uncertainty over going concern. The uncertainty has arisen because a major customer has
threatened to terminate its contract early due to Gustdis failing to comply with service levels required
by the contract. Contracted service levels are not regularly monitored by Gustdis. Your firm has
concluded that the note included in the financial statements is appropriate and adequate.

Answer 2

Contracted service levels are not monitored.

Consequences
Breaches of service levels required by the contract are more likely to occur. Employees
cannot focus on meeting the service levels required if they do not know which contracts
are at risk of breach.
Loss of customer goodwill may result in termination of contracts, financial penalties or
customers refusing to pay. Customers may sue Gustdis. This would result in a negative
impact on revenue/profits and cash flows/going concern status.

Recommendations
Regular reviews of service levels should be performed by collecting data on performance
against service levels required by the contract.
Performance against service levels should be regularly reported to senior management
who should review the report for areas where service levels are ‘at risk’.
Employees’ objectives or job descriptions should include meeting contractual service
levels.
Regular meetings should be held with key customers to review performance as well as
regularly reviewing customer correspondence for potential issues.

Question 3

Raef Ltd (Raef)
Your firm has been engaged to perform an independent review and to report on the financial
statements of Raef for the year ended 30 June 20X6. Raef is not required to have an external audit
under the Companies Act 2006 but Raef’s bank has requested the review. Your firm identified
payments made in July 20X6, totalling £120,000, which related to goods received in May 20X6.
Invoices relating to these goods were posted to the payables ledger in July 20X6. Raef does not
reconcile supplier statements and did not identify the invoices until after the year end. The directors
of Raef have refused to include an accrual in the financial statements in respect of these invoices.
The draft financial statements show that Raef’s profit before tax is £70,000.

Answer 3

Consequences

Payments may be late or missed resulting in the loss of prompt payment discounts. A loss
of supplier goodwill could result in Raef’s account being put on hold by the supplier. This
may mean Raef is unable to operate due to insufficient supplies or stock outs. Invoices
may be paid twice.
There could be a negative impact on revenue/profit and cash flows and there may be
misstatements in the financial statements due to unrecorded liabilities.

Recommendations
Supplier statement reconciliations should be performed on a regular basis by individual(s)
not responsible for recording purchases/ payments. Any discrepancies identified should
be investigated and resolved.
Senior management should review and sign off reconciliations.

Question 4

General points

Answer 4

Training of employees in relevant procedures.
Disciplinary action for employees failing to follow procedures.
Monitoring of compliance with procedures.