Case $\_$Audit Procedures

This scenario relates to four requirements.

It is $1$ July $20$X$5.$ You are an audit manager of Sagittarii & Co and you are in charge of two final audits which are due to commence shortly. Vega Vista $Co$ and Canopus $Co$ are both existing clients with a financial year ended $31$ March $20$X$5.$ Vega Vista Co is a not$-$for$-$profit charitable organisation which raises funds for disadvantaged families and the draft financial statements show revenue of $$0\mathrm{.}8m.$ Canopus $Co$ manufactures paint products in seven factories across the country and the draft financial statements show total equity and liabilities of $$11\mathrm{.}6m.$

The following matters have been brought to your attention for each company:

Vega Vista Co

Income

Vega Vista Co generates income in a number of ways. The main source of income is via an annual food and music festival held in September every year. Tickets, which cost $$35,$ are sold in the nine$-$month period prior to the event and can be purchased in advance online or on the day of the event for cash.

Approximately $15,000$ people attended the September $204$ event and more are anticipated for $205.$ At the event there are a number of stalls selling food and the charity receives a fixed percentage of these sundry sales. Also, during the festival, volunteers of the charity sign up individuals to make monthly donations, and these are paid by bank transfer to the charity. During the audit planning, the completeness and cut$-$off of income was flagged as a key audit risk.

Canopus Co

Restructuring provision

Canopus Co recently announced plans to fundamentally restructure its production processes due to a change in the focus of the company's operations. It has included a $$2\mathrm{.}1m$ restructuring provision in the draft financial statements. The restructure involves a refurbishment of the factories, the purchase of new plant and equipment and retraining of existing staff. These plans were finally agreed at a board meeting in March $20$X$5$ and announced to shareholders and employees just before the year end.

Bank loans

In readiness for the operational changes, the directors of Canopus Co decided to restructure the company's bank loans. As a result, several long$-$term loans were repaid early and a new ten$-$year bank loan of $$4\mathrm{.}8m$ was taken out on $1$ January $205.$ Repayments of $$150,000$ are due quarterly in arrears which includes interest.

$($a$)$ Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Vega Vista Co's income.

Note: You should assume that the charity adopts International Financial Reporting Standards.

$(3$ marks$)$

$($b$)$ Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Canopus Co's restructuring provision.

$(3$ marks$)$

$($c$)$ Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Canopus Co's bank loans.

$(2$ marks$)$

During the audit of Canopus Co's restructuring provision, the audit team discovered that $$270,000$ of costs included did not meet the criteria for inclusion as per IAS $37$ Provisions, Contingent Liabilities and Contingent Assets. The finance director has suggested that no adjustment is made in the $20$X$5$ financial statements as the provision is a matter of judgement and the provision has been deemed reasonable by the board.

$($d$)$ Discuss the issue and describe the impact on the auditor's report, if any, should this issue remain unresolved.

$(2$ marks$)$

Total: $10$ marks