Question 3 You are the audit manager of Alpha Ltd, a construction company, which constructs building throughout Mauritius. The Company's financial year ends on 30 September 2017 and you are reviewing the audit work which has been completed on a number of material balances and transactions: Revenue recognition and cost of sales, non-current assets held for sale and capital expenditure. A summary of the work which has been performed is given below and in each case the description of the audit work indicates the full extent of the audit procedures carried out by the audit team. (i) Revenue recognition and cost of sales The audit team selected a sample of the invoices and vouched and noted that there has been some misstatement, where Tax Deduction at Source (TDS) retained by clients have not been accounted and same was not reported to the tax consultants. The revenue has been recognized when invoices were raised. The cut-off was performed and same was well recorded. The cost of sales was recognized based on the purchases of materials and other costs incurred on a particular project as at year end. The audit team found that for the purchases of materials and other costs, the internal controls were not operating effectively. [14 marks] Non-current assets held for sale (ii) The Company has earmarked a property to be sold during the year end 30 September 2017. This has not been classified as Non-Current asset held for sale. Your team has provided the relevant journal entries to be posted by the Accountant, so that it reflects the International Accounting Standards. But same was declined by the Finance manager as he stated that the transaction has not been completed thus it should be a non current asset in the books. Page 4 of 6 Advanced Auditing - ACF3003 (5) (iii) Capital expenditure [8 marks] When auditing the company's capital expenditure, the audit team found that acquisition of material equipments on site was not approved by the Board, as the equipment costs Rs 75m and the total asset of the company was Rs 600m, as at 30 September 2017. The audit team also noted that there have been some vehicles not on site, which as per log book should have been on site, upon query to the site manager, the later stated that these vehicles have been transferred to other site for use one month ago. Otherwise all other assets were as per records and well recorded on the Fixed Asset Register. [8 marks] Required: In respect of each of the three matters described above: (i) Comment on the sufficiency and appropriateness of the audit evidence obtained: (ii) Recommend further audit procedures to be performed by the audit team; and (iii) Which items you will consider to include in the Management Letter. [Total: 30 marks] Question 3 You are the audit manager of Alpha Ltd, a construction company, which constructs building throughout Mauritius. The Company's financial year ends on 30 September 2017 and you are reviewing the audit work which has been completed on a number of material balances and transactions: Revenue recognition and cost of sales, non-current assets held for sale and capital expenditure. A summary of the work which has been performed is given below and in each case the description of the audit work indicates the full extent of the audit procedures carried out by the audit team. (i) Revenue recognition and cost of sales The audit team selected a sample of the invoices and vouched and noted that there has been some misstatement, where Tax Deduction at Source (TDS) retained by clients have not been accounted and same was not reported to the tax consultants. The revenue has been recognized when invoices were raised. The cut-off was performed and same was well recorded. The cost of sales was recognized based on the purchases of materials and other costs incurred on a particular project as at year end. The audit team found that for the purchases of materials and other costs, the internal controls were not operating effectively. [14 marks] Non-current assets held for sale (ii) The Company has earmarked a property to be sold during the year end 30 September 2017. This has not been classified as Non-Current asset held for sale. Your team has provided the relevant journal entries to be posted by the Accountant, so that it reflects the International Accounting Standards. But same was declined by the Finance manager as he stated that the transaction has not been completed thus it should be a non current asset in the books. Page 4 of 6 Advanced Auditing - ACF3003 (5) (iii) Capital expenditure [8 marks] When auditing the company's capital expenditure, the audit team found that acquisition of material equipments on site was not approved by the Board, as the equipment costs Rs 75m and the total asset of the company was Rs 600m, as at 30 September 2017. The audit team also noted that there have been some vehicles not on site, which as per log book should have been on site, upon query to the site manager, the later stated that these vehicles have been transferred to other site for use one month ago. Otherwise all other assets were as per records and well recorded on the Fixed Asset Register. [8 marks] Required: In respect of each of the three matters described above: (i) Comment on the sufficiency and appropriateness of the audit evidence obtained: (ii) Recommend further audit procedures to be performed by the audit team; and (iii) Which items you will consider to include in the Management Letter. [Total: 30 marks]