Mautz and Sharaf (1961) set out a series of postulates and assumptions on which their theory of auditing was based. Set out in not more than 500 words the basis of their approach and the
problems that subsequent commentators have indicated with their approach. Note it is not necessary for you to set out the postulates in detail merely use them to indicate points in your
answer where necessary.
Q2 25 pts
ISA 260 Communication with Those Charged with Governance provides guidance to auditors in relation to communicating with those charged with governance on matters arising from the audit of an entity’s financial statements.
(i) Explain why it is important that auditors communicate throughout the audit with those
charged with governance; (10 pts)
(ii) Describe five examples of matters that the auditors may communicate to those charged with governance. (15 pts)
Q3 50pts
You are an audit senior of May & Co and are planning the audit of Tuck Co for the year ending 31
March 20X8. The company is a manufacturer of portable music players and your audit manager has already had a planning meeting with the finance director. Forecast revenue is £68·6m and profit before tax is £4·2m.
She has provided you with the following notes of the meeting:
Planning meeting notes
Planning meeting notes Inventory is valued at the lower of cost and net realizable value. Cost is made up of the purchase price of raw materials and costs of conversion, including labor, production and general overheads. Inventory is held in three warehouses across the country. The company plans to conduct full inventory counts at the warehouses on 2, 3 and 4 April, and any necessary adjustments will be made to reflect post-year-end movements of inventory. The internal audit team will attend the counts. During the year, Tuck Co paid £2·1m to purchase a patent which allows the company the exclusive right for three years to customize their portable music players to gain a
competitive advantage in their industry. The £2·1m has been expensed in the current year statement of profit or loss. In order to finance this purchase, Tuck Co raised £2.2m through issuing shares at a premium. In November 20X7, it was discovered that a significant teeming and lading fraud had been carried out by four members of the sales ledger department who had colluded. They had stolen funds from wholesale customer receipts and then to cover this, they allocated later customer receipts against the older receivables. These employees were all reported to the police and subsequently dismissed. As a result of the vacancies in the sales ledger department, Tuck Co decided to outsource its sales ledger processing to an external service organization. This service organization handles all elements of the sales ledger cycle, including sales invoicing and chasing of receivables balances and sends monthly reports to Tuck Co detailing the sales and receivable amounts. Tuck Co ran its own sales ledger until 31 January 20X8, at which point the records were transferred to the service organization. In December 20X7, the financial accountant of Tuck Co was dismissed. He had been employed by the company for nine years, and he has threatened to sue the company for unfair dismissal. As a result of this dismissal, and until his replacement commences work in April, the financial accountant’s responsibilities have been adequately allocated to other members of the finance department. However, for this period no supplier statement reconciliations or purchase ledger control account reconciliations have been performed. In January 20X7, a
receivable balance of £0·7m was written off by Tuck Co as it was deemed irrecoverable as the customer had declared itself bankrupt. In February 20X8, the liquidators handling the bankruptcy of
the company publicly announced that it was likely that most of its creditors would receive a pay-out
of 40% of the balance owed. As a result, Tuck Co has included a current asset of £420,000 within the statement of financial position and other income in the statement of profit or loss.
Describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit of Tuck
Co. Note: Prepare your answer using two columns headed Audit risk and Auditor’s response
respectively