One of your colleagues at Hansen & Co, Ronda Evans, has been taken ill at short notice and you have been temporarily assigned as audit manager on Walters Co, an IT consultancy company which is listed on a second tier investment market. The final audit of Walters Co for the year ended 30 June 20X8 is approaching completion and you are in the process of reviewing the audit working papers. The draft financial statements for the year recognize profit before taxation for the year of $54·2 million and total assets of $23·1 million.
The audit supervisor, who is a part qualified chartered certified accountant, has sent you an email from which the following extract is taken:
‘It’s great to have you on board as I was beginning to worry that there would be no manager review of our working papers prior to the final audit clearance meeting next week. The audit assistant and myself have done our best to complete all of the audit work but we only saw Ronda on the first day of the audit about a month ago when I think she was already feeling unwell. We had a short briefing meeting with her at which he told us ‘if in doubt, follow last year’s working papers.’
One issue which I wanted to check with you is that Walters Co has introduced a cash-settled share-based payment scheme by granting its directors share appreciation rights (SARs) for the first time this year. This was not identified at planning as a high risk area. The SARs were granted on 1 July 20X7 at which date the client obtained a valuation of the rights which was performed by an external firm of valuers. I have filed a copy of the valuation report and I have looked up the valuers online and have found a very professional looking website which confirms that they know what they are doing. The cost of the SARs scheme based on this valuation is being appropriately recognized over the three-year vesting period and a straight line expense of $195,000 has been recognized in the statement of profit or loss on this basis. A corresponding equity reserve has also been correctly recognized on the statement of financial position. The amount also seems immaterial and I can’t see any need to propose any amendments to the financial statements in relation to either the amounts recognized or the disclosures made in the notes to the financial statements.’
Required:
Comment on the quality of the planning and performance of the audit of Walters Co discussing the quality control and other professional issues raised.