(c) Construct the arguments in favour of Professor Leroi’s remark that external reporting requirements on internal

controls were ‘too ambitious’ for small and medium companies. (4 marks)

(b) Illustrate how you might use analytical procedures to provide audit evidence and reduce the level of detailed

substantive procedures. (7 marks)

4 You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made

responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several

matters came to light during your most recent review of client invoice files:

Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect

of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states

that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information

in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended

28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued

imminently.

Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices

relating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you

notice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager

responsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse,

with the following comment handwritten on the invoice: ‘rental space being used for storage of Ms Hobson’s

speedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice,

Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Co

sometimes uses the empty warehouse for rental income, though this is not the main trading income of the company.

In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a

client of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply

Co to several audit clients regarding the supply of bespoke accounting software’.

Required:

Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend

what action, if any, Smith & Co should now take in respect of:

(a) Norman Co; (8 marks)

(b) Calculate the value of the closing stocks of finished goods at the end of the three-month period, and the value

of cost of sales for the period. (3 marks)

(ii) Briefly discuss TWO factors which could reduce the rate of return earned by the investment as per the

results in part (a). (4 marks)

(b) Explain the matters you should consider before accepting an engagement to conduct a due diligence review

of MCM. (10 marks)

(c) (i) Calculate Benny’s capital gains tax liability for 2006/07. (6 marks)

(iii) State any disadvantages to the relief in (i) that Sharon should be aware of, and identify and describe

another relief that she might use. (4 marks)