PART A $-10$ MARKS

a$)$ Explain the difference between Type I and Type II Subsequent Events noting their impact and effect on the audit and financial statements.

$[4$ marks$]$

b$)$ Outline and briefly explain three audit procedures that may be conducted to determine whether a company is still a Going Concern?

PART B $-20$ MARKS

pwit a

$[6$ marks$]$

Hummingbird Scents Co $($Hummingbird$)$ manufactures and sells luxury toiletries; they have been trading for over $20$ years and the company's year$-$end is $30$ September $2014.$

Hummingbird sells products to trade customers via its own website; this represents $60\%$ of revenue. Remaining revenue is generated by contracts to supply toiletries to hotels. Below is a description of the sales system.

Hotel revenue

The hotel revenue is made up of four key customers. Hummingbird has one sales clerk, Brenda, who maintains all aspects of this revenue stream; Brenda receives customer orders, raises sales invoices and processes payments. In raising invoices, the sales system automatically inserts the online trade customer prices for products. However, each hotel customer has contracted prices which are lower than the online prices and hence Brenda manually edits the invoices prior to despatch.

Online revenue

New trade customers are set up in the sales ledger master file upon passing suitable credit checks, and a credit limit is set at this stage by the finance director. Customers place online orders up to their pre$-$set credit limit; they receive an email confirmation and the sales order interfaces into the despatch system. The order number is linked to the customer account number. Goods are despatched daily with a goods despatched note which is referenced to the sales order number but are not sequentially numbered. Hummingbird used to despatch goods via a reliable national courier company. However, to reduce costs they have changed to a cheaper local courier and some orders have been delivered to customers late.

Trade customers' sales invoices are automatically generated by the system on the day the online order is placed. The prices are inserted in accordance with the website rates. Occasionally Hummingbird makes special offers or discounts sales; when this occurs the master file data has to be amended to ensure that the correct prices are used on invoices. This task is usually performed by a senior sales ledger clerk.

Revenue and receivables records

Monthly statements are sent to the hotel customers; several trade customers have been requesting monthly statements and Hummingbird is considering this request. The company only reconciles the sales ledger control account at the end of September in order to verify the year$-$end balance.

Required:

$($a$)$ As the external auditor of Hummingbird Co $,$ write a report to management in respect of the sales system described above which:

$[14$ marks$]$

$($i$)$ Identifies and explains SEVEN deficiencies in the sales system; and

$($ii$)$ Provides a recommendation to address each of these deficiencies. A covering letter IS required.

$($b$)$ Describe substantive procedures the auditor should perform to confirm Hummingbird Co $\text{'}$s revenue.

END OF EXAMINATION

$[4$ marks$]$