Professional judgement will also be required when deciding the nature, timing and extent of audit procedure

1. Professional scepticism is an attitude which includes having a questioning mind and being alert to conditions which may indicate possible misstatement due to fraud or error and subjecting audit evidence to a critical assessment rather than just taking it at face value.

Maintaining Professional scepticism is essential throughout the audit to reduce the risks of overlooking unusual transactions, of overgeneralizing when drawing conclusion, and of using inappropriate assumption in determining nature, timing and extent os audit procedure and evaluating result of them.

Professional scepticism is important to critical assessment of audit evidence. This includes questioning contradictory audit evidence and reliability of documents and responses from management and those charged with governance.

2. Professional judgement is an application of relevant thinking, knowledge and experience in making informed decisions about appropriate course of action in circumstance of audit engagement. The auditor must exercise the professional judgement when planning the audit of the financial statement.

Professional judgement is required in many areas of planning. For example, the determination of materiality for the financial statement as a whole and performance materiality level requires the professional judgement.

Professional judgement will also be required when deciding the nature, timing and extent of audit procedure.

3.

The firm has recently been appointed as an auditor. There is a lack of cumulative knowledge and understanding the business which may result in failure to identify events and transaction which may impact on financial statements. Furthermore, The opening balance may be misstated.	Adopt procedures to ensure the opening balances are properly brought forward and corresponding amounts are correctly classified and disclosed. Review previous auditor’s working papers and consider performing additional substantive procedure on opening balances.
The directors only work part time at Sleeptight and there is no finance director. This may promote a weak control environment resulting in undetected errors and frauds.	The control will need to be documented and evaluated. If the control is weak, the level of substantive testing should be increased accordingly.
The customers are required to pay 40% of fee in advance on ordering and reminding after the delivery result in revenue may be recorded before it should be, if the deposit is recorded as a sale not deferred until delivery. This would result in revenue is being overstated. Alternatively, revenue could be understated if the final payment only be recognized when it is received rather than on the delivery date.	Enquire of the management the point at which revenue is actually recognized and review accounting system for deposits to ensure they are not included in revenue until the goods are delivery and signed for. For the sample of transaction within 8 weeks of the year end, ensure the revenue is recognized only in respect of the goods delivered to customer and they have been signed for.
Sleeptight offers it’s customers 2 year guarantee for the beds delivered and it requires high degree of judgement to raise a provision and it carries a risk of misstatement. This risk is increased by the loan covenants are profit related and there is an incentive to manipulate areas of financial statements based on judgement.	Establish basis of the amount provided for and assumption made by financial controller. Reperform any calculation and establish the level f warranty cost in the year end and compare with previous year’s provision. Review the level of repair cost incurred post year end and use these to assess reasonableness of provision.
The finished goods value is to be estimated by Anna Jones who appears to be basing her estimate on order value rather than IAS 2 rule that inventory must be valued at lower cost or NRV. This could result in inventory is being overstated in the financial statement.	For beds awaiting dispatch, establish the lower cost or NRV and compare with the figures provided by Anna Jones. Investigate any difference and evaluate the potential impact on inventory value in the financial statement.
The new workshop is undergoing refurbishment result in inappropriate treatment of capital and non-capital items potentially misstating the non-current asset or repair cost in the statement of profit or loss. Again, this risk is increased by the loan covenants are profit related and there is an incentive to manipulate areas of the financial statements based on judgement.	Obtain a breakdown of cost and establish which are included in non-current and which are treated repair cost. Review the nature of items included in non-current to ensure only capital items are included and review repair cost to ensure non capital items are included.
New premises was funded by bank loan which may not be classified correctly between current and non-current liabilities or may not be properly presented or disclosed as required IFRS.	Reperform calculation of the split between current and non-current liabilities and ensure the loan are properly presented and term are disclosed as required IFRS.
There is the risk that company may fail to comply with loan covenants, resulting in loan being recalled. This may possibly lead to going concern issues.	Obtain and review covenant calculations to identify any breaches. If there are any, assess likelihood of bank demanding repayment with the potential impact on company. Furthermore, the audit team need to maintain professional scepticism in areas that could be manipulated.

Recorder.

Recorder is a new client and detection risk is increased.	Ensure that audit team is made up of experienced staff. Ensure that sufficient time is allocated to obtain understanding of entity and assess risk of material misstatement
Increased the risk of material misstatement around the cut-off, purchase and payables, as a result of goods in transit takes two weeks to arrive at the company’s central warehouse.	Perform detailed cut-off testing for the goods in transit around the year end and ensure that cut-off has been correctly applied.
Increased the risk of material misstatement related to completeness, existence and valuation of inventory under the perpetual inventory system, if inventory is not counted at least once a year.	Review the inventory count instructions and perform audit procedure to determine whether all inventory is counted at least once a year.
Increased risk of material misstatement to sales cut-off, as a result of sales-based on bonus scheme encouraging sales staff to maximize their current year bonus.	Increase sales cut-off testing and perform additional audit procedure on post year end cancellations to identify sales cut-off errors.
Increased risk of overvaluation of receivable balance is explained by the level of receivable balances is higher than previous year and concerns about creditworthiness of some customers.	Perform extended testing of post year end cash payments and review the aged receivable ledger. Consider the adequacy of the allowance for receivables.

Walters.

Management were disappointed with previous year’s result and under pressure to improve 20x4 year’s result.There is the risk that management have a greater incentive to manipulate result by adopting more aggressive approach in relation to accounting estimates.	Audit team will need to remain alert to risk of creative accounting estimates throughout audit. It is important that they exercise professional scepticism and evaluate any assumption made by management in auditing accounting estimates. Current year end balances should be compared to previous year end balances, to identify any unusual trend.
Increased the risk of material misstatement to sales cut-off on bonus scheme encouraging salespeople to maximise their current year bonus.	Increase sales cut-off testing and perform additional audit procedure on post year end cancellations to identify sales cut-off errors.
Increased risk of overvaluation of inventory is explained by the inventory valuation policy has been changed with additional overhead cost to be included within inventory.	Discuss change in inventory valuation policy with management. Review the overhead cost to be included within inventory to ensure that cost is related to production.

Greystone

ISA 265 includes matter to consider when determining whether internal control deficiency is significant. These include:
1. The likelihood of deficiency resulting in material misstatement in the financial statement in the future.
2. The importance of control to financial reporting process.
3. the interaction of deficiency with other deficiencies in internal control.



Fox Industries
a) It is important that auditors should communicate throughout the audit with those charged with governance for the following reasons:
- It assists auditor and those charged with governance to understand audit related matters in the context and allow them to develop constructive working relationship.
-it allows the auditor to obtain information relevant to the audit.
- it assist those charged with governance to fulfill their responsibilities to oversee financial reporting process, thus reducing the risk of material misstatement in the financial statements.

B) example of matters to be communicated to those charged with governance:

- the planned approach, timing of, audit
- the auditor’s responsibilities in relation to the audit of financial statements including auditor is responsible to form and express an opinion on financial statements and auditor does not relieve management and those charged with governance of their responsibilities.
- significant deficiencies in internal control
- significant difficulties incurred during the audit.

-written representation requested by the auditor.

Purchasing and payment system

Board of directors

Fox industries Company

Dear Sirs

Audit of Fox Industries Co for the year ended 31 march 20X6
Please find the enclosed the report to management on deficiency in internal control identified during the audit for the year ended 31 March 20X6.

When raising the purchase order clerk chooses whichever supplier can dispatch goods fastest. This would result in Fox Industries Co ordering goods at higher price or lower quality than they would like, as the only factor that they consider was the speed of delivery.	It is important that goods are despatched promptly, but this the just one of many criteria should be used in deciding which supplier to use. An approved supplier list should be compiled: this should take into account the price of goods, their quality and also speed of delivery. Once the list produced, the orders should be placed with suppliers on the approved list.
Purchase orders are not sequentially numbered. Failing to sequentially number orders means ordering team are unable to monitor if all errors are being fulfilled on timely manner; this could result in stock out. If the all orders are sequentially ordered and then sequence check can be performed for any unfulfilled orders.	All purchase orders should be sequentially numbered and on a regular basis, sequence check should be performed for unfulfilled orders.
The purchase below the $5000 does not require authorization and it is processed solely by ordering clerk. This can result in goods being purchased which are not required by Fox industries Co. In addition, there is an increased risk of fraud which the clerk may order goods for personal use up to the value of $5000 which is significant.	Purchase orders should be authorized by appropriate personal. Authorized signatures should be established with varying level of purchase order authorization.
Purchase invoices are input daily by the purchase ledger clerk due to his experience, any application controls have not been utilized by him. If the application controls are not utilized, there is the risk of inaccuracy and invoices may not be entered entirely into the system. This could result in suppliers being paid incorrectly or not all leading to loss of supplier goodwill.	The purchase ledger clerk should input invoices in batches and apply application to ensure accuracy and completeness over the input of purchase invoices.
Fox Industries Co saving accounts are only reconciled every 2 months. If accounts are reconciled periodically, there is the risk that errors cannot be detected promptly. In addition, this also increases the risk of employees committing fraud. If they are aware that accounts are not reconciled regularly, they could use these amounts fraudulently.	All accounts should be reconciled regularly, at least every month to identify any unusual and missing items. Reconciliation should be reviewed by responsible official and they should evidence their review.
Fox Co delays payments to suppliers to maximize it’s cash balance. There is risk that suppliers may not refuse to deliver goods and Fox Co may lose suppliers goodwill, if Fox Co doesn’t pay to suppliers on time.	Fox Co should undertake cash flow budget or forecast to maximise its cash balance. Suppliers should be paid systematically to maintain goodwill.

Bluesberry

a) VFM focuses on best combination of services for a lowest level of resources. The purpose of VFM audit is to examine economy, efficiency and effectiveness of activity or process in question.

Economy: attaining appropriate quantity and quality of human, physical and financial resources at lower cost.

Efficiency: Relationship between output produced and input used to produce output.
Effectiveness: concerned with how well an activity is achieving it policy objectives and other intended effects.

b)

Buying department researches the lowest price from suppliers before raising purchase orders. This process helps with economy of the process, attaining resources at lowest cost.	The quality is also required to consider and approved list of suppliers should be prepared, and order must be placed from supplier which in the approved list.