Question 5 Case study (8 marks)

Tom is the engagement partner on the audit of Charity Enterprises, a listed company selling mowers and appliances. CEO is Rob Sanders.

Charity Enterprises has a small internal audit team that was established after the business had suffered from accusations of 'channel stuffing' five years ago. The internal audit team reports directly to the audit committee, which has three directors. Two of the committee members including the chair Ben Ronald has been the senior executives at Sander's private company 10 years ago.

One of the material items noted by Tom for discussion and clarification with the chair of the audit committee Ben Ronald on 17 July was the major addition being made to the company warehouse, justified on the basis of the need for additional storage required for inventory to support expanding sales.

Several potential accounting problems involving the expansion concerned Tom. He was worried that Charity might already be recording depreciation expense on the addition even though it was not yet in operation. Ben assumed that the company's method of accounting was correct but suggested that Tom discusses this matter with the financial controller.

Tom's final concern in auditing the warehouse expansion involved Charity's method of separating repair expenses from capitalized costs. Improper capitalization of expenses was an issue in several recent accounting scandals, and this issue was discussed during the fraud brainstorming session by the audit team.

Tom has discussed his concerns in a formal meeting with the members of the audit committee on 15 July.

Required

1. Explain what audit procedures that Tom should take to the audit of Charity Enterprises' statement of financial position accounts.
2. Tom has considered control testing is not required. Do you agree? Explain.
3. Design audit testing for the company's warehouse. You should describe and explain the audit steps (processes) that would be appropriate to address the objectives and present/disclose the warehouse addition properly (true & fair) on the financial report of Charity.

Provide supporting ASA(s) or other references