Assume you are the audit manager working at Telson & Associates on the audit of Big Blue Marina Ltd (BBM) for the year ending 30 June 2019. BBM owns and operates a marina business that offers berthing services for privately owned luxury yachts. The marina houses approximately 90 boats at any one time. In addition to berthing services, BBM also offers its customers cleaning, refuelling and catering services. Invoices for such services rendered by BBM are payable within 30 days. The catering service is outsourced to a related party, 'Tastes of the Sea', who supply all food and beverages.

You reviewed the work undertaken by Jim Brown, the junior auditor, during the first interim visit, which included the two tests of controls detailed below:

1. In order to test whether authorised personnel only can access the payroll data in the accounting system, Jim attempted to access the payroll data himself using the logins of six different non-payroll staff in the accounting department. Tom was able to access and amend the payroll data successfully on three of these six login attempts. As a result, Tom concluded that the internal controls were not working, and therefore a fully substantive audit approach should be adopted for auditing the employee-related expense and provision accounts.

2. In order to test whether payments made to related parties were approved and signed off by the CFO as required, Jim selected a sample of 15 payments made to related parties and traced them back to the electronic funds transfer (EFT) form to sight the CFO's signature of approval. Nine payments out of a sample of 15 payments had been approved by the CFO in writing. The other six EFT forms did not contain the CFO's signature, but had a notation that the CFO had given verbal approval. As the six EFT forms not containing the CFO's signature were for immaterial amounts, Jim concluded that the internal controls were working satisfactorily and that analytical procedures rather than substantive tests of details could be used in auditing payments made to related parties.

As part of the final review stage of the audit, you again reviewed the audit working papers and noted the following three matters:

1. The audit working papers for vouching property, plant and equipment indicate that an invoice for a major asset acquisition during the financial year was not sighted. Jim noted that he is waiting on this documentation from management. All other items selected were vouched to supporting documentation.

2. The bank confirmation filed in the audit working papers is a photocopy sent to Telson & Associates by the financial controller at BBM. The bank sent the original to BBM directly.

3. Some of the audit working papers were not signed off and dated by the audit staff member at Telson & Associates who performed the work.

Questions:

(a) For each of the two tests of control carried out at the first interim visit, explain whether Jim has arrived at the correct conclusion. Justify your answer.

(b) Describe the impact the results of each of the tests of control would have on your other audit procedures.

(c) For each of the three matters noted during the final review stage, explain why they raise a concern about whether sufficient and appropriate evidence has been obtained.

(d) The auditor can never rely solely on tests of controls because of the inherent limitations in any system of internal control. Identify the types inherent limitations of internal control systems that may be present in Big Blue Marina Ltd.

(e) Where the auditor's assessment of risk of material misstatement does not include an expectation that controls are operating effectively, the auditor will move directly to designing and performing substantive procedures on

classes of transactions and account balances. Describe substantive analytical procedures that could be used to give evidence on the completeness of accruals and cut- off of sales revenue.