a)

Audit Risk 1: New Client

• Risk: ITC is a new client for Add Consult, and the team is not familiar with the company’s accounting policies, transactions, and balances, increasing detection risk.
• Auditor’s Response: The audit team should ensure they have a suitably experienced team, and adequate time should be allocated for team members to obtain an understanding of the company and the risks of material misstatement.

Audit Risk 2: Goods in Transit

• Risk: The company purchases goods from China, and these goods are in transit for a fortnight. There is a risk that cut-off for inventory, purchases, and payables may not be accurate.
• Auditor’s Response: The audit team should undertake detailed cut-off testing of goods in transit from suppliers to ensure that cut-off is complete and accurate.

Audit Risk 3: Perpetual Inventory Counts

• Risk: ITC undertakes continuous (perpetual) inventory counts at its central warehouse. Inventory could be under or overstated if counts are incomplete or adjustments are not accurately made.
• Auditor’s Response: The audit team should review the completeness of the continuous inventory counts and the level of adjustments made to inventory to assess the reliability of inventory records.

Audit Risk 4: Sales-Based Bonus Scheme

• Risk: A bonus scheme was introduced for salespersons based on increased student sign-ups, which could lead to sales cut-off errors.
• Auditor’s Response: Increased sales cut-off testing should be performed, along with a review of any post-year-end cancellations of contracts.

Audit Risk 5: Receivables Valuation

• Risk: Receivables are considerably higher than the previous year, and concerns exist about the creditworthiness of some students, raising the risk of overvalued receivables.
• Auditor’s Response: Extended post-year-end cash receipts testing and a review of the aged receivables ledger should be performed to assess receivables’ valuation.

(Total: 10 marks)

b)

1. Attend Continuous Inventory Counts: The audit team should attend at least one of the continuous (perpetual) inventory counts to observe and assess the adequacy of internal controls over the counting process. This ensures that proper procedures are followed during each count.
2. Review Inventory Count Schedules: The auditor should verify that all inventory items are counted at least once during the year by reviewing the schedule of inventory counts. This ensures that no inventory items are missed or undercounted.
3. Reconcile Adjustments to Inventory Records: Review the adjustments made to the inventory records following each monthly count. This helps to ensure that any discrepancies identified during the counts are accurately reflected in the inventory records.
4. Test Inventory Movements: Perform test counts at the year-end by selecting a sample of items and tracing them from the records to the physical inventory (and vice versa). This will help verify the existence and completeness of inventory.
5. Review Internal Control Over Inventory Counts: Assess the adequacy of the internal controls in place to monitor the perpetual inventory system, including checks on count accuracy, segregation of duties, and proper documentation of inventory adjustments.

(Total: 5 marks)

c)

1. Obtain a Schedule of Directors’ Remuneration: Request a detailed schedule of directors’ remuneration, including the bonus payments, and verify the accuracy of the figures by casting the totals.
2. Agree to Payroll Records: Trace the individual bonus payments from the schedule to the payroll records to ensure that the amounts paid are accurate and in line with approved remuneration.
3. Verify Payments to Bank Statements: Cross-check the actual payments made to directors by agreeing the bonus amounts to the cash book and corresponding bank statements to ensure that the payments were made.
4. Review Board Minutes for Approval: Inspect the board minutes to confirm that the bonus payments were authorized by the board in accordance with company policy and were properly recorded.
5. Review Disclosure Compliance: Ensure that the directors’ bonuses are correctly disclosed in the financial statements, as required by the Companies Act, ensuring full compliance with relevant regulations.

(Total: 5 marks)