Question 2 (25 marks) White Group manufactures a special fertilizer, FS1, that are used locally for production of sugarcane. The production of FS1 requires two types of chemicals, CS1 and CS2, which are supplied by two subsidiaries, Blue Co. and Green Co., respectively. Each of the subsidiaries is wholly owned by White Co, the parent company of the Group. Your auditing firm, Plain Associates, is responsible for audit of White Group's financial statements as well as the audit of Blue Co. The audit of Green Co is preformed by another audit firm, Blank & Co. The draft financial statements of the Group for the year ended 30 June 2018 is in the completion stage showing profit before tax $ 8.25m and total assets of $143m. Blue Co. supplies the main chemical in the production of FS1 which leads to a large volume of intra-group transactions. During the interim audit carried out at Blue Co., tests of controls were performed, and it is confirmed that the internal control systems over intra-group transactions were not effective. The intra-group transactions are not separately identified in the Group's accounting system and the reconciliations of amounts owed between the parent and the subsidiary. The group audit manager is of opinion that the intra-group transactions are normally net off on consolidation and will not impact on the Group. Blue Co. has invested significant capital of innovative equipment after the acquisition by the Group. The controls over capital expenditure effected by Blue Co. were tested to be effective and the group audit manager assumed that controls are effective across the Group. Green Co. was acquired on 31 March 2018. It was decided that Green Co. would only be consolidated for three months and the post-acquisition profit of $ 165,000 for that period was included in White Group financial statements. Plain Associates considered that this amount was not material in the Group financial statements and therefore its audit strategy would be to carry out analytical procedures as the only audit procedures. On that basis, it was considered not important to include any documentation in relation to either Green Co. or its audit firm Blank $ Co. in the Group working papers. You are an audit manager of the Plain Associates and you have been assigned the responsibilities to perform a quality control review on White Group as one of its clients. Required: (a) Critically comment on the quality control and ethical issues raised in the performance of the White Group audit. [13 marks] (b) Recommend any further audit procedures to be taken by Plain Associates prior to finalizing the audit report of White Group. [12 marks] Page 3 of 5
