Question 4 Your firm is the external auditor of Billywig Ltd (Billywig) for the year ended 31 January 20X8. The audit fieldwork has been completed. The engagement partner, Percy Rowling, is performing a review of the audit files and Billywig's draft annual report, including its financial statements Billywig is a pest control company, eliminating pests, such as rodents and insects, from buildings, Billywig has large contracts with government bodies around Malaysia, It has had a difficult year because cuts in government spending have resulted in a reduction in contract prices. A weak currency has also resulted in increased costs of the pesticides purchased from overseas suppliers. Percy made the following observations during his review (1) The financial statements show that the gross profit margin increased from 20% in the year ended 31 January 20X7 to 32% in the year ended 31 January 20X8. (2) The audit documentation in relation to plant and equipment' notes an error in the calculation of depreciation on some items in the sample tested. The audit junior who performed the test extrapolated the error across the population of plant and equipment. This resulted in an overall expected error of RM52.985. Materiality for the audit was set at RM82,000. The audit junior concluded the error was not material (3) The audit work on subsequent events included a review of the minutes of Billywig's board meetings held since 31 January 20X8. The audit senior carrying out the review highlighted that in the February 20X8 board minutes there was discussion about a formal complaint from one of Billywig's largest customers. The customer claimed that Billywig had failed to meet its contractual obligations. (4) The audit team performed a data analytics routine on journal entries. This highlighted that 18 journals were processed outside of normal office hours. (5) The audit documentation in relation to trade payables notes that Billywig did not perform any supplier statement reconciliations during the year. (6) The directors' report, included in the draft annual report states that "Billywig's net profit has remained stable despite difficult trading conditions. However, the financial statements show that net profit fell by 12% Requirements a) State, with reasons, the additional steps Percy Rowling should take in respect of each of his observations listed as (1) to (6) above before concluding his review of the Billywig audit (18 marks) b) in respect of observation (5), outline the possible consequences of the internal control deficiency and provide recommendations to remedy the deficiency (4 marks) c) In respect of observation (6), state, with reasons, the possible implications for the auditors report. You should describe any modifications to the auditor's report that you consider necessary. (3 marks) (Total marks Question 4 = 25 marks) for