Case study; This is all the information i have!

You are a partner in Jones & Co., a medium-sized firm of professional accountants based in London. The firm has five partners and fifty professional and support staff. Jones & Co. is licensed to provide audit services to private companies. For the last five years, you have been the Audit Engagement Partner of Alpha Limited (Alpha). Your firm provides Alpha with professional audit and taxation compliance services including the annual audit of Alphas financial statements and the computation and submission of its corporation tax affairs. Alpha has been a client of Jones & Co since it was founded in 2000 by its two business partners, London Design School graduates Rex Allison and Petra Vinzent. Alpha is a medium-sized enterprise that operates in the professional services sector providing interior design and related services to property development companies. Alpha has recently reported strong financial performances, reporting profit before tax of around 5 million in each of the last five years. Alphas profitability and judicious use of cash has enabled it to amass a war-chest of free cash that it has begun using, investing in related companies in its sector. This is in line with Alphas strategy of pursuing acquisitive growth over the next five years, building a group that can either be floated on the London stock exchange or be auctioned to trade buyers. This strategy will help fund the prospective retirements of Rex and Petra in the next decade or so. Alpha made its first acquisition on 30 November 2020, just prior to its year end, purchasing 100% of the ordinary shares of Beta Limited (Beta) for a capped consideration of 25 million in cash, payable in equal instalments on the first and second anniversary of the acquisition. Beta is a profitable professional interior design services company with around 100 staff. The purchase and sale agreement also provides that: Betas two founding directors are to remain as directors of Beta until the two- year anniversary of its acquisition by Alpha (30 November 2022); and 10 million of the purchase price is contingent on Beta delivering an audited profit before tax of 5 million for the year ended 31 December 2020. If the audited profit before tax of Beta is lower than 5 million, then the purchase price will be adjusted down by a ratchet of 2:1 for every 1 of the difference between forecast and audited actual profit before taxation. The accounting year ends of Alpha and Beta are both 31 December. The previous auditors of Beta retired on the acquisition date because Alphas management want to keep their external audits efficient and audit fees affordable. Jones & Co. have agreed to be auditors of Beta for the year ended 31 December 2020, but the audit fee has not yet been agreed. You are planning the final audit for the financial statements of both Alpha and Beta for the year ended 31 December 2020. Your initial enquiries of Alphas management reveal that as at 31 December 2020, Betas key client, Omega Limited, owed Beta 10 million, of which 5 million was more than three months overdue.

Question

1. The Managing Director of Alpha has privately proposed to you that a proportionately larger audit fee for the year ended 31 December 2020 could be payable to your firm if the audit of Beta leads to adjustments to Betas audited profits, reducing them to considerably lower than 5m. Prepare a list of relevant points to prepare for a discussion with the MD. (10 marks)

2. Since Beta is a new audit client and largely unknown to you and your other partners, enhanced diligence will be applied to the performance and documentation of the audit. Briefly describe five features of audit documentation and its management (2 marks each). (10 marks)

3. You plan to visit Beta twice, firstly to collect basic information about Beta from its management and secondly to carry out the substantive audit testing work. At these visits, your teams work will be carefully documented and filed.

   (i) Compare and contrast the two types of audit file. (5 marks)(ii) List five examples of the contents of audit files. (5 marks)

4. Describe the nature of the significant audit risk that you have been made aware of and describe examples of substantive testing that you will deploy at the final audit visit. (10 marks)