SECTION A

1. You are an audit manager at the firm BradleyLonsdale (BL) and have been asked to undertake the audit of a longstanding client Tabernacle Engineering Ltd (Tabernacle) for the year ended 30 June 2019. BL has audited Tabernacle for 20 years. You have collected together the following information to help plan the audit.

Background

Tabernacle was founded 30 years ago. It uses complex machines to make components from a variety of materials to their customers precise specifications. In the year ended 30 June 2019 it is expected to make an operating profit of £3.1 million on a turnover of about £15.2 million and has net assets of approximately £17.6 million. Its main strategic concern is maintaining high levels of quality assurance for its products.

Information related to the audit

Tabernacle has increased the number of employees from 70 to 88 in the last three months of the year. The new employees will help the company maintain and improve its quality assurance to maintain a high quality of product and will explain the companies design capacity. Payroll has increased from £2.9 million to £3.3 million.

Processing all the new employees has put pressure on the payroll clerk and so the personnel manager has been assisting by processing all the new employees onto payroll, so the payroll clerk can concentrate on the existing employees. The personnel manager also authorises that new posts can be released and carries out all the checks to ensure that the new employees are genuine (for example checking identity documents).

The rapid expansion of the firm’s activities has also put pressure on the remaining accounts clerks. This has created a backlog in invoicing and there is consequently now a three-week delay in sending invoices out to customers after each job has been completed and the components delivered.

During the year a company controlled by one of Tabernacle’s directors purchased a large order of components from Tabernacle. The transaction was carried out at the normal sales price and there are no outstanding receivables in connection with this transaction.

The four company directors are due to receive bonuses if Tabernacle makes a profit in excess of £3 million.

Required

a) Explain the elements of audit risk

b) Identify and explain five risk factors for the audit of the Tabernacle.

c) For each risk you have identified discuss what controls you would advise Tabernacle to adopt and how would you test those controls once implemented.

d) Explain what is meant by the familiarity threat (to independence) and discuss ways in which it can be mitigated.