• Whether our firm has the necessary resources and experience to carry out the investigation of PQR Ltd’s losses.
• What reliance is to be placed on the report that we produce as a result of the investigation and whether it will be relied upon by any third parties such as lenders
• What type of report it is to be and what level of assurance will be given
• Whether any potential independence issues exist with other clients that our firm has and therefore potential conflicts of interest
• What level of detail is required in terms of the work to be undertaken Procedures to carry out
• Review staff availability and timings to assess whether sufficient resource for the investigation exists.
• Discuss with the management of ECO Ltd the scope of the investigation and its purpose (eg whether any third parties will be relying on it or whether it is an internal report only) and other issues such as expected timing, fees etc.
• Clarify the terms of reference of this engagement in writing from the management of West.
• Draft an engagement letter for this investigation and obtain agreement of terms in writing from the management of ECO Ltd.            (Any 5 points)

• Inventory will be undervalued if cut-off has not been appropriately applied therefore particular focus needs to be on this area of the quarter-end count.
• Inventory will be undervalued if not all inventory items have been included in the count therefore the investigation should focus on the procedures in place for the quarterly counts.
• Inventory will be undervalued if the valuation methods are incorrect. Inventory is valued manually so the investigation should examine how items of inventory, such as scrap are valued.

• Obtain inventory counting instructions in place at PQR Ltd and review to make an assessment of their adequacy for the quarterly counts, together with discussion with appropriate staff at ECO Ltd.
• Perform analytical procedures using figures from the quarterly management accounts, such as comparisons between 31 March 2018 and 31 December 2017.
• Discuss scrap and wastage policy with warehouse staff.
• Examine details of scrap and discuss figures with appropriate staff to establish whether there are any reasons for wastage being higher in this quarter.
• Test cut-off is correct by tracing the last goods delivery notes and despatch notes to the invoices.
• Recast additions on inventory sheets to verify accuracy.     (Any 3 points)

•  If closing inventory has been undervalued or undercounted, this could explain a high materials consumption in this quarter. It could also be due to excessive consumption or wastage of materials. If recorded inventory has been stolen from production areas this could be another contributory factor to a high materials consumption in this quarter.
• If cut-off was incorrectly applied, then this would affect the materials consumption, ie if goods delivered after the year end were incorrectly included as purchases in the quarter then this would give rise to a higher materials consumption.
• Also if revenue is understated due to incorrect cut-off, then materials consumption as a % of revenue will be overstated.          (Any 2 points) 

• Test cut-off of purchases and sales has been done correctly by matching purchase invoices to goods received notes and matching despatch notes to invoices raised around the quarter-end date.
• Compare value of inventory identified as obsolete or damaged at the quarter-end to the previous quarter-end, discussing discrepancies with appropriate staff.
• Discuss levels of scrap and wastage with warehouse managers to ascertain normal levels and understand how it arises.
• Review a sample of credit notes received after the quarter-end to identify any returned materials.
• Inspect scrap materials to confirm it is not suitable for manufacture and therefore is not included in inventory.                  (Any 2 points)

In an initial audit engagement there are several factors which should be considered in addition to the planning procedures which are carried out for every audit. ISA 300 Planning an Audit of Financial Statements provides guidance in this area.

• ISA 300 suggests that unless prohibited by laws or regulation, arrangements should be made with the predecessor auditor, for example, to review their working papers. Therefore communication should be made with the previous auditor to request access to their working papers for the financial year ended 31 May 2014. The review of the previous year’s working papers would help us in planning the audit, for example, it may highlight matters pertinent to the audit of opening balances or an assessment of the appropriateness of HighTec Limited’s accounting policies.
• It will also be important to consider whether any previous years’ audit reports were modified, and if so, the reason for the modification.
• As part of the client acceptance process, we should request from previous auditors if there are any professional or other reasons why we cannot take up the audit of HighTec Limited.
• Any matters which were brought to our firm’s attention by the previous auditor should be considered for their potential impact on the audit strategy.
• There should also be consideration of the matters which were discussed with HighTec Limited’s management in connection with our appointment such as significant accounting policies which may impact on the planned audit strategy.
• Particular care should be taken in planning the audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances, and procedures should be planned in accordance with ISA 510 Initial Audit Engagements – Opening Balances. For example, procedures should be performed to determine whether the opening balances reflect the application of appropriate accounting policies and determining whether the prior period’s closing balances have been correctly brought forward into the current period.
• With an initial audit engagement it is particularly important to develop an understanding of the business, including the legal and regulatory framework applicable to the company. This understanding must be fully documented and will help the audit team to perform effective analytical review procedures and to develop an appropriate audit strategy.
• Obtaining knowledge of the business will also help to identify whether it will be necessary to plan for the use of any experts.
• Our firm should have quality control procedures in place for use in the case of initial engagements, for example, the involvement of another partner or senior individual to review the overall audit strategy prior to commencing significant audit procedures.
• Given that this is a new audit client, that it is newly listed, when developing the audit strategy, consideration should be given to using an experienced audit team in order to reduce detection risk.

• Rapid growth
  We were told that the company has seen rapid growth has occurred during the last few years. The growth could indicate a control risk, in that systems and personnel may struggle to keep pace with the volume of transactions which are being processed, leading to accounting errors being made. This is exacerbated by the lack of an internal audit department to provide assurance on systems and controls.
• Management bias
  The second audit risk identified relates to HighTec Limited becoming a listed entity during the year. This creates an inherent risk at the financial statement level and is caused by the potential for management bias. Management will want to show good results to the new shareholders of the company, in particular the institutional shareholders, and therefore there is an incentive for the overstatement of revenue and profit.
  There is a related risk of overstatement due to Ama Tawiah and her family members retaining a 30% equity interest in HighTec Limited, which is an incentive for inflated profit so that a high level of dividend can be paid.
  It appears that governance structures are not strong, for example, there are too few non-executive directors, and therefore Ama Tawiah is in a position to be able to dominate the board and to influence the preparation of the financial statements.
• This increases the risk of material misstatement due to management bias.
  There is also a risk that management lacks knowledge of the reporting requirements specific to listed entities, for example, in relation to the calculation and disclosure of earnings per share
• E-commerce
  With 30% of revenue generated through the company’s website, this represents a significant revenue stream, and the income generated through e-commerce is material to the financial statements. E-commerce gives rise to a number of different audit risks, including but not limited to the following:
  For the auditor, e-commerce can give rise to detection risk, largely due to the paperless nature of the transactions and the fact there is likely to be a limited audit trail, making it difficult to obtain audit evidence. For the same reason, control risk is increased, as it can be hard to maintain robust controls unless they are embedded into the software which records the transaction. The auditor may find it difficult to perform tests on the controls of the system unless audit software is used, as there will be few manual controls to evaluate.
• A risk also arises in terms of the recognition of sales revenue, in particular cut-off can be a problem where sales are made online as it can be difficult to determine the exact point at which the revenue recognition criteria of IAS 18 Revenue have been met. Hence, over or understatement of revenue is a potential risk to be considered when planning the audit.
• HighTec Limited also faces risks relating to the security of the system, for example, risks relating to unauthorised access to the system, and there is an increased risk of fraud. All of these risks mean that there is high audit risk in relation to the revenue generated from the company’s website.
• Franchise income
  The Franchise income which is deferred in the statement of financial position represents 13·4% of total assets and is therefore material.
  There is a risk that the accounting treatment is not appropriate, and there are two separate risks which need to be considered.
  First, it may be the case that the revenue from the sale of a Franchise should not be deferred at all. The revenue recognition criteria of IAS 18 need to be applied to the transaction, and if, for example, it were found that HighTec Limited has no continuing management involvement and that all risk and reward had been transferred to the buyer, then the revenue
  should be recognised immediately and not deferred. This would mean a significant understatement of revenue and profit.
  Second, if it is appropriate that the revenue is deferred, for example, if HighTec Limited does retain managerial involvement and has retained the risk and reward in relation to the Franchise arrangement, then the period over which the revenue is recognized could be inappropriate, resulting in over or understated revenue in the accounting period.
• Foreign exchange transactions
  HighTec Limited’s products sell in over 60 countries and the products are manufactured overseas, so the company is involved with foreign currency transactions which can be complex in nature. There is a risk that the requirements of IAS 21 the Effects of Changes in Foreign Exchange Rates have not been followed. For example, if transactions have not been retranslated to HighTec Limited’s GHS at the date of the transaction, then the amounts involved may be over or understated.
  There is also a risk that outstanding receivables and payables have not been retranslated at the year-end closing exchange rate, leading to over or understatement of assets and liabilities and unrecorded exchange gains or losses.