Question

You are an audit manager currently finalizing your 31 December 2013 audits. The following independent and material matters have come to your attention:
1.   The audit of the statutory records of Whale Ltd, a reporting entity, revealed the following problems:
•   Failure to update the members’ register for changes in shareholders;
•   Failure to obtain written consent from directors to act;
•   Directors’ minutes not prepared in respect of the current year;
•   Failure to hold the AGM in respect of the previous financial year.
The company made no comment in respect of either the failure to keep properly updated statutory registers or the holding of the AGM.

2.   Shark Ltd, a reporting entity, uses the last-in first-out basis in respect of valuation of closing inventory, which is one of the most significant balance sheet accounts. The difference between first-in first-out and last-in-first-out has a material effect on the closing inventory balance.

3.   ABC Ltd (ABC) is a holding company with a number of wholly owned subsidiaries. One of these, FX Ltd (FX), is a self-sustaining foreign subsidiary with manufacturing and distribution facilities throughout South-East Asia. The group accounts of ABC and its subsidiaries consist of the consolidated accounts of ABC and its subsidiaries and exclude the accounts of FX, which are attached separately.
The consolidated accounts include a note stating that the directors believe that it is misleading to consolidate FX as its operations are very different from those of the rest of the group and carried out under substantially different conditions. The note includes details of inter-company balances and transactions.

REQUIRED:
Critically discuss in relation to each of the above circumstances the audit and internal control issues to be considered and their likely impact on the audit report to be issued.

Answer 1

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