You are the manager in ABC& Co$,$ responsible for the audit of Job Co$,$ an owner$-$managed business which operates a chain of bars and restaurants. This is your firm's first year of auditing the client and the audit year ended $31$ March $2012$ is underway. The audit senior sends a note for your attention:

When I was auditing revenue I noticed something strange. Job Co's revenue which is almost entirely cash based is recognized at GH $5\mathrm{.}5$ million in the draft financial statements. However, the accounting system shows that till receipts for cash paid by customers amount to only GH$\%3\mathrm{.}5$ million. This seemed odd so I questioned Doris Green, the financial controller about this. She said Jack Job, the company's owner deals with cash receipts and posts through journals dealing with cash and revenue. Doris asked Job the reason for these journals but he refused to give an explanation.

While auditing cash, I noticed a payment of G$2$ million made by electronic transfer from the company's bank account to an overseas financial institution. The bank statement showed that the transfer was authorized by Jack Job, but no other documentation regarding the transfer was available.

Alarmed by the size of this transaction and the lack of evidence to support it$,$ I questioned Jack Job asking him about the source of cash receipts and the reason for electronic transfer. He would not give any answers and became quite aggressive.

Required

a$)$ Discuss the implications of circumstances described in the senior auditor's note. $[10$ MARKS$]$

b$)$ Explain the nature of any reporting that should take place by the audit senior. $[10$ MARKS$]$

QUESTION $2$

You are the senior manager in DEF & Co$,$ a firm of chartered Accountants offering audit and assurance services mainly to large, private owned companies. The firm has suffered from increased competition, due to two new firms of accountants setting up in the same town. Several audit clients have moved to the new firms leading to loss of revenue, and an over staffed audit department. Mike Roberts, one of the partners of DEF & CO$,$ has asked you to consider how the firm could react to this situation. Several possibilities have been raised for your consideration:

Roger Co$,$ a manufacturer of electronic equipment, is one of DEF & CO's audit clients. You are aware that the company recently designed a new product, which market research indicates is likely to succeed. The development of the new product has been a huge drain on cash resources. The managing director of Roger Co has written to the audit engagement partner to see if DEF & CO would provide finance for the completion of the development and the market of the product the finance would be in the form of convertible debentures. Alternatively, a joint venture company in which control is shared between Roger Co and DEF & CO could be established to manufacture, market and distribute the new product.

DEF & CO is considering the provision of non$-$ audit services. Moll Price, a senior manager in DEF & CO$,$ has suggested that the firm could offer a recruitment advisory service to clients, specializing in the recruitment of financial professionals. DEF & CO would charge a fee for this service based on the salary of the employee recruited. Moll Price worked as a recruitment consultant for a year before deciding to train as an accountant.