You are the manager responsible for the audit of Thurman Co, a manufacturing company which supplies stainless steel components to a wide range of industries. The companys financial year ended on 31 July 2016 and you are reviewing the audit work which has been completed on a number of material balances and transactions: assets held for sale, capital expenditure and payroll expenses. 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.

(a) Assets held for sale

Due to the planned disposal of one of Thurman Cos factory sites, the property and associated assets have been classified as held for sale in the financial statements. A manual journal has been posted by the finance director to reclassify the assets as current assets and to adjust the value of the assets for impairment and reversal of depreciation charged from the date at which the assets met the criteria to be classified as held for sale. The finance director asked the audit senior to check the journal before it was posted on the basis of there being no one with the relevant knowledge to do this at Thurman Co.

The planned disposal was discussed with management. A brief note has been put into the audit working papers stating that in managements opinion the accounting treatment to classify the factory as held for sale is correct. The manual journal has been arithmetically checked by a different member of the audit team, and the amounts agreed back to the non-current asset register. (9 marks)

(b) Capital expenditure

When auditing the companys capital expenditure, the audit team selected a material transaction to test and found that key internal controls over capital expenditure were not operating effectively. Authorisation had not been obtained for an order placed for several vehicles, and appropriate segregation of duties over initiating and processing the transaction was not maintained. The audit team noted details of the internal control deficiencies and updated the systems notes on the permanent audit file to reflect the deficiencies. The audit work completed on this order was to agree the purchase of the vehicles to purchase invoices and to the cash book and bank statement. The rest of the audit work on capital expenditure was completed in accordance with the audit programme. (7 marks)

(c) Payroll expenses

The payroll function is outsourced to Jackson Co, a service organisation which processes all of Thurman Cos salary expenses. The payroll expenses recognised in the financial statements have been traced back to year-end reports issued by Jackson Co. The audit team has had no direct contact with Jackson Co as the year-end reports were sent to Thurman Cos finance director who then passed them to the audit team. Thurman Co employs a few casual workers who are paid in cash at the end of each month and are not entered into the payroll system. The audit team has agreed the cash payment made back to the petty cash records and the amounts involved are considered immaterial. (9 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) Explain the matters which should be included in a report in accordance with ISA 265 Communicating Deficiencies in Internal Controls to Those Charged with Governance and Management.

Note: The split of the mark allocation is shown against each of the matters above. (25 marks)