Your firm is the external auditor of Mallard plc (Mallard), a listed company. You succeeded Jack Bird as audit manager but have not previously worked on the Mallard audit. Jack was the audit manager for the previous four years until he joined Mallard as financial controller in March 2019.

Lorna Linnet is the engagement partner and has been responsible for the audit of Mallard for five years. The previous engagement partner retired from your firm five years ago and is now the chair of Mallard's audit committee and has requested that Lorna continues as engagement partner to help future audits run smoothly. He informed Lorna privately that a reorganisation of Mallard's business will be announced soon as part of a strategy to improve profitability.

You are planning the external audit for the year ending 30 June 2019 and are considering the following two key areas of audit risk:

(1) Going concern (2) Accrual for directors' bonuses.

Lorna provided you with the following financial information:

Statement of profit or loss for the year ending 30 June (extract)

2019 2018

(estimated) (audited)

$m $m

Revenue 10,825 8,577

Cost of Sales (9,115) (6,632)

Gross Profit 1,710 1,945

Profit before tax 15 310

Statement of financial position as at 30 June (extract)

2019 2018

(estimated) (audited)

$m $m

Non-current liabilities

Bank loan 1,200 1,600

Current liabilities

Accrual for directors' bonuses 25 80

Bank overdraft (facility 500 million) 475 10

Bank loan (repayable in quarterly instalments of 100 million) 400 400

Net current liabilities 1,750 153

In addition, Lorna provided you with the following information:

Mallard is a building contractor with operations throughout the UK. All work is performed under short-term fixed-price contracts for organisations such as schools and hospitals. Mallard requires an initial payment of 30% of the contract price prior to starting any work and the balance following completion of the work.

Much of the equipment used by Mallard for building works is old and unreliable. Competitors who have invested in the latest equipment benefit from improved efficiency and reduced costs and as a result they can bid for contracts at lower prices. Consequently, Mallard lowered its prices to win work. Mallard started work on several government contracts in May 2019 with very low projected profit margins.

In June 2019, Mallard was criticised in the media for poor quality workmanship and for using substandard materials in several building projects at schools which resulted in the buildings being unused. Management has dismissed the criticisms as unfounded.

The overdraft facility is due for review on 31 August 2019 and the bank requested audited financial statements by that date together with profit and cash flow forecasts for the three years ending 30 June 2022.

Mallard has negotiated individual bonus terms with each director. Bonuses are based on revenue for the part of the business that each director is responsible for. Bonuses are awarded at rates of between 0.5% and 1% of revenue. The actual rates are set out in each director's contract of employment. Bonuses in respect of each financial year are paid in three equal instalments in August, December and May of the following financial year. Mallard's finance director maintains a spreadsheet to record the bonus calculations.

The directors have not included a fair review of Mallard's business in the strategic report. The directors do not want to include this information in the strategic report because they do not wish to draw attention to the future reorganisation of the business. The Companies Act 2006 requires the strategic report to contain a fair review of Mallard's business.

Required:

Justify why going concern and the accrual for directors' bonuses have been identified as key areas of audit risk and, for each key area, describe the procedures that should be included in the audit plan to address each of those risks. You should present your answer using the following subheadings:

a) Going concern (15 marks)

b) Accrual for directors' bonuses. (10 marks)