Scenario The year is 2021. You work for BDC & Co as an audit team leader, and you're in charge of organizing the final audit of a new client, BonaSikuta Co, for the fiscal year ending September 30, 2021. BonaSikuta Co specializes in bespoke motorcycle design and production. The audit manager recently met with the financial director of BonaSikuta Co and has sent you the following notes: Meeting notes for planning BonaSikuta Co has a profit before tax of P25 million (P19.6 million in 2020) and total assets of P52 million (P47m in 2020). Because the directors are paid a bonus based on a percentage of profit before tax, the finance director has stated that the directors are quite pleased with the expected performance for the year. BonaSikuta Co is producing 200 customized motorcycles. All of the motorcycles are built to the specifications of the customers. Customers pay a 25% deposit when they sign the contract, with the balance due when the motorcycles are finished and delivered to them. In terms of the motorcycles being made, the balance of work in progress (WIP) at 30 June 2021 is P14 million. On September 30, 2021, the workshop will conduct a WIP count and appraisal. The audit team has been scheduled to attend the count for 5 hours out of the projected 16 hours needed to finish the count. BonaSikuta provides a 2-year warranty to its clients at no additional cost, ensuring that the motorcycles will perform as promised. For the current year, a warranty provision of 2% of revenue has been computed. The warranty in the prior year was based on 6% of revenue. Despite no major differences in production procedures or the quantity of claims during the year, the finance director made this move. BonaSikuta Company has spent P16 million on research and development of a new type of ecologically friendly manufacturing material. To date, P3.4 million has been written off to the profit and loss account. The remaining P1.2 million was written off as an intangible asset. No amortisation has been recognised to date as the material has not yet been brought into use. The company agreed to spend P14.4 million on new machinery in June 2021. It paid P10 million when the contract was signed to secure the machinery, which was supposed to arrive in July 2021. The delivery has been delayed due to a supplier issue, and it will now be delivered in October 2021. BonaSikuta Co issued a rights issue to existing shareholders at a price of P50.75 per P50 share to fund research and development costs and machinery purchases. The payroll function of BonaSikuta Co is outsourced to Belina Co, an external service organization in charge of all aspects of payroll processing and record keeping. The directors of BonaSikuta Co. accurately declared their salary details in the anticipated financial statements in accordance with IFRS standards, but local legislation in the country where BonaSikuta is situated requires more detailed disclosure. The board of directors has declared that they find this burdensome and will supply the further information.

Required:

ISA 300 Planning and Audit of Financial Statements provides guidance to assist auditors in planning an audit

a. Explain the benefits of audit planning.

b. Describe Eight audit risks and explain the auditors response to each risk in planning the audit of BonaSikuta Co.

c. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to BonaSikuta Cos directors bonuses.