You have just been appointed as a junior Audit Partner at Mahdi and Co, an audit firm.

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Question:

You have just been appointed as a junior Audit Partner at Mahdi and Co, an audit firm. Mahdi and Co is in reality a sole practitioner, Mr Mahdi, who has been auditing businesses in your suburb for 20 years. He is considered by locals to be a very nice man with a strong reputation for honesty.

In late April, the firm is approached by Mr Bamboozle, the Chairman of the Board of Grifters Company Ltd (GC), a real estate investment business, to conduct the audit of GC. Mr Bamboozle explains that the previous auditor had expressed a desire to retire from the audit, and they are looking for a replacement audit. Mr Mahdi asks you to undertake the preliminary review.

As part of your review of GC you undertake enquiries of businessmen in the neighbourhood. There is nothing directly adverse known about GC, and Mr Bamboozle is considered to be a very astute businessman.

However, one person who you know who worked with Mr Bamboozle previously had a short private conversation with you. From this conversation it becomes clear that Mr Bamboozle expects the companies he runs to appear perfect to outsiders. He will not accept situations that run counter to his views. In fact there was a feeling within the Accounting Department of GC that the accounts needed to be drawn in such a way as to satisfy Mr Bamboozle regardless of the true situation.

On behalf of Mr Mahdi, you approach Mr Bamboozle to obtain a letter of authority to the previous auditor to discuss the audit history with you. Mr Bamboozle explains that he does not wish to give such a letter as he does not trust the previous auditor to be honest in his dealings with Mahdi and Co as they would be jealous and are incompetent fools. He therefore will not give you the letter. On being told this, Mr Mahdi says: “We can do a much better job than him, I will consider accepting the audit!”

Required:

Give a full and detailed explanation of how the assertion of Cut Off would be proved for the monthly lease revenue accounts.

It is now the end of July, and you are finalising the audit. On 15th July, one of GC’s investment properties was having the foundations dug for a new garage, when the adjacent house slipped into the foundation hole and was destroyed. GC would normally be considered responsible for the event but insurance does not cover the huge amount of loss, and there is an extreme material discrepancy between the expected insurance payout and the loss.