You are an audit manager in Judd & Co, a firm of Chartered Certified Accountants, and you are working on the audit of Filter Co for the year ended 31 December 2018. Profit for the year is

$950,000 and total assets are carried at $2.2 million in the financial statements. You are currently reviewing the audit working paper files in March 2018 before drafting the auditor's report for this client, and have discovered the following issues.

(a)Filter Co manufactures high specification engineering products to individual order. During the year, it contracted a consultant to software programme for use in the design and manufacture of high specification products. The consultant's costs have been divided into design and production costs of $60,000 plus software registration expense of $23,000. The software is registered in Filter's name at the local patent office.(6 marks)

(b)Filter Co has been using its substantial overdraft facility for a number of years. During the audit it became clear to your firm that the company is currently failing to comply with the covenants associated with that overdraft and the bank is threatening to withdraw the facility. You were previously not aware of any issues with Filter Co's banking arrangements.

(6 marks)

(c)When the audit junior at Filter Co tried to test payroll transactions, the finance director told him the payroll function had been outsourced during the year. The audit senior wrote to the payroll provider, Pellagrino Payroll, to confirm that this was the case and to obtain verification that the payroll figures in the financial statements are correct. There is no reply on file.(7 marks)

Required

Discuss the implications of these issues for the auditor's report, indicating the impact, if any, on the audit opinion and any further procedures that may be required.

Note: the split of the mark allocation is shown against each of the issues above.

(d)The first audit of a new client, Kobra Co, has recently been completed by Judd & Co. You have reviewed the cost records and note that the cost of the audit was far greater than the price

agreed with the client. You have cross-referred to the tender documents and note that the tender was priced extremely competitively, but that the actual cost of carrying out the audit was higher than budgeted for in the tender process. The directors of Kobra Co were impressed with the audit service and have opened discussions with the partner about the firm providing other services to Kobra Co.

Required

Identify and comment on the ethical and other professional issues raised by this matter and state what action, if any, Judd & Co should now take.