You are a qualified chartered accountant, employed as an audit manager at Fox & Company (“Fox”), a firm of professional auditors and accountants based in Manchester. Founded by James Fox almost fifty years ago, Fox has ten partners and more than 100 professional and support staff. Fox principally provides audit services to the North-West of England area and has a variety of clients who are mostly SMEs. One of its audit clients, Chase Limited (“Chase”), is a medium-sized manufacturing company based in Manchester, producing UK-manufactured components to the auto industry including JLR in Liverpool. Chase has been an audit client of Fox for many years. The Fox audit team is headed by Simon Jenkins, an experienced audit partner who leads the audits of Fox’s manufacturing sector-based clients. Following your promotion from supervisor, you are the manager in charge of the audit of Chase. You have been a member of the Chase audit team for its last three financial years since you qualified, in the positions of audit senior and audit supervisor. Part of your responsibilities for this year’s audit is to carefully plan the audit for the current financial year. You have recently had an audit planning meeting with Simon Jenkins to discuss relevant issues relating to this year’s audit. 

You discussed the following: 

• In Chase’s previous financial year, it had made material financial losses arising from theft of precious metals and other marketable raw materials from its inventory stores. The perpetrators were no longer with the company, having been dealt with by the local police and subsequently dismissed from their roles. 

• In its audit of Chase’s previous financial year, Fox had identified significant improvements being planned for Chase’s corporate governance and internal control environment, particularly relating to inventory. These initiatives had been led by Grace Jones, the new Finance Director of Chase. 

• The interim audit for this year would include a variety of tests to confirm the integrity of Chase’s internal control systems. The tests would be applied to the revenue and trade debtor cycle, the purchases and trade creditors cycle and the inventory cycle. 

• Following its financial losses of the previous year, Grace Jones is leading the effort to raise further private equity. Grace Jones is mindful that a strong financial performance for this year would enhance their ability to raise additional capital. 

• Trading for the current year has been challenging, principally because of the currently fragile UK auto market and the impact of Covid-19. 

• The potential for fraud in this year’s financial statements.

Questions;

(a) Describe five types of internal and external documents used as evidence during audit testing and give an example of each type. 

(b) Fox have always deployed analytical-based audit procedures during the audit of Chase. Briefly describe the nature and merits of analytical audit procedures. 

(c) With respect to the work that you plan to carry out on Chase’s internal control systems:

(i) What key steps will you take to understand Chase’s enhanced systems of internal control? 

(ii) What different audit approaches will you propose if Chase’s internal control environment is found to be either strong or weak? 

(d) You and the audit partner discussed the risk of fraud in this year’s financial statements.

(i) What are the three conditions that usually exist when fraud occurs?

(ii) Do these conditions exist at Chase? 

Answer rating: 100% (QA)

a The documents needed for internal and external auditing includes audit engagement letter trial balance financial statement Income statement list of directors Meetings of meetings Fixed asset registe... View the full answer