Heroes Ltd, a small manufacturing company based on the south coast of England, appears to be a successful enterprise with turnover that has been increasing annually by about 10% and had reached £55m by the year end March 31, 2014. Non-current assets also had increased by about the same annual percentage, reaching £25m by that year end; net assets at that time amounted to £40m. Net Net profit for the year ended March 31, 2014 were £11m.

Heroes had been audited by a small firm for a number of years until the directors (who are also the major shareholders) decided that they needed a change. They plan to sell the company in the next two or three years and consider that a larger audit firm would enable the sale to go through more smoothly and at a higher price. With this in mind they approached Bishop & Co. with the invitation to become the auditors.

The senior partner of Bishop & Co. performed some basic background checks on the company. Heroes had received an unmodified auditors' report in each of the preceding five years. Having obtained 'professional clearance', Bishop & Co. accepted the appointment and became the auditors of Heroes Ltd in August 2014.

In October 2014, Bishop & Co. performed a short interim audit designed to get an understanding of the accounting systems for sales, purchases and wages. The accounting staff of Heroes were reported to be helpful but a little disorganised and under a lot of pressure. They were not always able to produce accounting records when asked to do so by the audit team. The audit team learned that the majority of the expenditure on non-current assets in recent years had gone into a remote warehouse located in the North of England where the majority of the inventory was kept. No mention of this location had been made in the initial discussions between audit partner and Heroes directors.

During the final audit which started in March 2015, Bishop's auditors were refused permission to visit the warehouse and found that no one was prepared to tell them exactly where it was. In addition, they noted that the opening balances for non-current assets included expenditure on an advertising campaign that ran in 2013-14. They also noted that a number of inventory items were valued at selling price which was above cost. In addition, the accounting information requested at the interim audit had still not been located. In early April 2015, Heroes' bank had responded to the auditors' letter confirming the bank balance on the main account but also revealing a loan account with an outstanding balance of £1m. The draft balance sheet had made no mention of this and the directors explained to the auditors that it must be a mistake by the bank.

Required: What issues should be of concern to Bishop & Co and what action should Bishop & Co take in relation to each issues?

Answer rating: 100% (QA)

1 Client acceptance stated above The senior partner of Bishop Co performed some basic background checks on the company Bishop Co might consider not ju... View the full answer