CASE XCo Pte Ltd (XCo or the Company) is a leading retailer of mobile gadgets and accessories. The Company operates a chain of 50 outlets throughout Singapore offering an extensive range of innovative products for many popular brands and their latest models of mobile devices. XCo also designs and manufactures a number of mobile accessories for certain popular brand of mobile devices. You are an audit manager in Aries LLP. You have been assigned to manage the annual audit of XCos financial statement for the year ended 31 December 2018. The minutes of your audit planning meeting with XCos Finance Director included the following two developments in 2018.

Voucher promotion of Skyway mobile devices and related accessories The global trade tension and adverse news affecting key operating systems and popular applications used within Skyway mobile devices were expected to result in a gradual decline in demand for Skyway brand of products and accessories. In anticipation of the slowdown in demand, XCo launched a promotion commencing 1 November 2018 to sell off and clear its inventory of the affected products. The promotion is exclusive to Skyway related products and will end when the affected products have been sold. One voucher worth $50 is issued for every $200 worth of purchase of Skyway mobile devices and accessories. Each voucher is valid for 12 months from the date of issue and can be used with no minimum amount for the next purchase. XCo uses an off-the-shelf customer management system to manage the issuance and redemption of vouchers across all its outlets. At the end of each month, the accounting manager reconciles the number of vouchers issued to total sales recorded for Skyway products for each outlet that month. She calculates the amount attributable to the vouchers issued and prepares the journal entries to defer the revenue relating to these vouchers. The Finance Director reviews the work done to ensure that it is in accordance with SFRS(I) 15 Contracts with Customers (paragraph B39-43). He then approves and authorises the journal entries for posting by signing off on the reconciliation. Discontinued production of Skyway-related accessories XCo decided to discontinue manufacturing of mobile accessories related to Skyway devices with effect from 1 December 2018. Two of the three affected machines could be reconfigured to produce accessories for other brands at negligible costs. There was no alternative use for the third machine. It was decommissioned and kept at a separate production floor pending disposal. In the meantime, the Board of Directors approved the disposal plan including appointment of an agent to facilitate the sale. The carrying value of the third machine was $120,000 as at 31 December 2018. It was reclassified to Non-current Assets Held for Sale in the statement of financial position as at 31 December 2018. On 20 January 2019, the machine was sold to a non-related party for $90,000 cash.

Question 1 Demonstrate one (1) impact on the financial statements of XCo for the year ended 31 December 2018 in relation to the transactions and/or account balances in: (a) The revenue process arising from the issuance of the free vouchers. (b) The asset management processes arising from the discontinued production of Skywayrelated accessories.

Question 2 For each impact demonstrated in Question 1, analyse and evaluate one (1) financial statement assertion (excluding classification) at the highest risk of misstatement.

Question 3 For each assertion evaluated in Question 2: (a) Analyse one (1) internal control XCo has implemented to address the risk. (b) Relate one (1) relevant test of control Aries should perform. (c) Explain one (1) substantive procedure to be performed. (d) Describe one (1) audit exception that may be identified by performing that substantive procedure.