QUESTION 3

You are an audit senior working at Sceptic LLP (Sceptic), an accountancy firm with offices nationwide providing audit and a range of non-audit services. It is now August 2021, you are an audit senior and have been assigned the following work:

Part (a)

You are tasked with reviewing a couple of clients for re-acceptance:

• - Alma Scott has been an audit partner at Sceptic for 10 years and has been the partner responsible for the existing audit client Rex Plc, a listed client, for the past 5 years.
• - The directors of Tric Limited (Tric), an audit client of Sceptic, would like to grow the business and have identified a couple of companies they are interested in acquiring. The directors have asked whether Sceptic could carry out due diligence on both potential acquisitions to help them assess which one is the better investment. Either acquisition would require a new bank loan and the directors have asked whether Sceptic could review forecasts requested by the bank and attend a meeting in support of their loan application.
• Required: Explain the professional and ethical matters to consider when deciding whether to accept Rex Plc and Tric Ltd as clients and whether any safeguards can be applied.
• (10 marks) [Word limit 250 words + 10%]

QUESTION 3 CONTINUED:-

Part (b)

Your firm was appointed as the new external auditors for Brac Plc (Brac), a listed manufacturing business on 1 February 2021. Below are some figures taken from the draft results for Brac for the year ending 30 June 2021:

RevenueProfit before tax

Property, plant and equipment ReceivablesTotal assets

Net assets

2021 2020 m m 101 95 2.2 1.5

35 32

12 10 53 48 11 9

Different stages of the manufacturing process take place across three sites where Brac Plc own the land and buildings.During the year the directors have invested in renovating one of the sites at a cost of 350,000, this includes the cost of rewiring and installation of a new air ventilation system and some maintenance. In addition, new machinery has been purchased costing 1.2m and staff trained at a cost of 40,000. All of these costs have been capitalised as part of property, plant and equipment.

The current accounting policy is to measure all property, plant and equipment at historical cost less depreciation (except for land which is not depreciated). The directors would like to change policy this year for the renovated site and revalue the land and building to its fair value.

One of Bracs customers Hardy Ltd owes Brac 510,000, of which 270,000 is more than 90 days old. The directors have stated Hardy Ltd are currently experiencing some cash flow problems but are longstanding customers and there is no doubt they will pay in due course.

Required: Identify and explain the audit risks for Sceptic LLP when planning the audit for Brac Plc.

(18 marks) [Word limit 400 words + 10%]

Part (c)

Below is an extract from the scenario in part (B):The directors have stated Hardy Ltd are currently experiencing some cash flow problems but are longstanding customers and there is no doubt they will pay in due course.

Required: Evaluate the reliability of the directors statement as audit evidence to corroborate the customers receivable balance and describe further evidence the auditors may seek to find.