4 （a) The purpose of ISA 510 ‘Initial Engagements – Opening Balances’ is to establish standards and provide guidance
regarding opening balances when the financial statements are audited for the first time or when the financial
statements for the prior period were audited by another auditor.
Required:
Explain the auditor’s reporting responsibilities that are specific to initial engagements. （5 marks)
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1 Geno Vesa Farm （GVF), a limited liability company, is a cheese manufacturer. Its principal activity is the production of a traditional ‘Farmhouse’ cheese that is retailed around the world to exclusive shops, through mail order and web sales. Other activities include the sale of locally produced foods through a farm shop and cheese-making demonstrations and tours. The farm’s herd of 700 goats is used primarily for the production of milk. Kids （i.e. goat offspring), which are a secondary product, are selected for herd replacement or otherwise sold. Animals held for sale are not usually retained beyond the time they reach optimal size or weight because their value usually does not increase thereafter. There are two main variations of the traditional farmhouse cheese; ‘Rabida Red’ and ‘Bachas Blue’. The red cheese is coloured using Innittu, which is extracted from berries found only in South American rain forests. The cost of Innittu has risen sharply over the last year as the collection of berries by local village workers has come under the scrutiny of an international action group. The group is lobbying the South American government to ban the export of Innittu, claiming that the workers are being exploited and that sustaining the forest is seriously under threat. Demand for Bachas Blue, which is made from unpasteurised milk, fell considerably in 2003 following the publication of a research report that suggested a link between unpasteurised milk products and a skin disorder. The financial statements for the year ended 30 September 2004 recognised a material impairment loss attributable to the equipment used exclusively for the manufacture of Bachas Blue. However, as the adverse publicity is gradually being forgotten, sales of Bachas Blue are now showing a steady increase and are currently expected to return to their former level by the end of September 2005. Cheese is matured to three strengths – mild, medium and strong – depending on the period of time it is left to ripen, which is six, 12 and 18 months respectively. When produced, the cheese is sold to a financial institution, Abingdon Bank, at cost. Under the terms of sale, GVF has the option to buy the cheese on its maturity at cost plus 7% for every six months which has elapsed. All cheese is stored to maturity on wooden boards in GVF’s cool and airy sheds. However, recently enacted health and safety legislation requires that the wooden boards be replaced with stainless steel shelves with effect from 1 July
The management of GVF has petitioned the government health department that to comply with the legislationwould interfere with the maturing process and the production of medium and strong cheeses would have to cease. In 2003, GVF applied for and received a substantial regional development grant for the promotion of tourism in the area. GVF’s management has deferred its plan to convert a disused barn into holiday accommodation from 2004 until at least 2006. Required: （a) Identify and explain the principal audit risks to be considered when planning the final audit of GVF for the year ending 30 September 2005. （14 marks)
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（c) Explain the extent to which you should plan to place reliance on analytical procedures as audit evidence.
（6 marks) -
2 Plaza, a limited liability company, is a major food retailer. Further to the success of its national supermarkets in the late 1990s it has extended its operations throughout Europe and most recently to Asia, where it is expanding rapidly. You are a manager in Andando, a firm of Chartered Certified Accountants. You have been approached by Duncan Seymour, the chief finance officer of Plaza, to advise on a bid that Plaza is proposing to make for the purchase of MCM. You have ascertained the following from a briefing note received from Duncan. MCM provides training in management, communications and marketing to a wide range of corporate clients, including multi-nationals. The ‘MCM’ name is well regarded in its areas of expertise. MCM is currently wholly-owned by Frontiers, an international publisher of textbooks, whose shares are quoted on a recognised stock exchange. MCM has a National and an International business. The National business comprises 11 training centres. The audited financial statements show revenue of $12·5 million and profit before taxation of $1·3 million for this geographic segment for the year to 31 December
Most of the National business’s premises are owned or held on long leases. Trainers in the National businessare mainly full-time employees. The International business has five training centres in Europe and Asia. For these segments, revenue amounted to $6·3 million and profit before tax $2·4 million for the year to 31 December 2004. Most of the International business’s premises are held on operating leases. International trade receivables at 31 December 2004 amounted to $3·7 million. Although the International centres employ some full-time trainers, the majority of trainers provide their services as freelance consultants. Required: （a) Define ‘due diligence’ and describe the nature and purpose of a due diligence review. （4 marks)
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（c) Pinzon, a limited liability company and audit client, is threatening to sue your firm in respect of audit fees charged
for the year ended 31 December 2004. Pinzon is alleging that Bartolome billed the full rate on air fares for audit
staff when substantial discounts had been obtained by Bartolome. （4 marks)
Required:
Comment on the ethical and other professional issues raised by each of the above matters and their implications,
if any, for the continuation of each assignment.
NOTE: The mark allocation is shown against each of the three issues. -
（b) State, with reasons, the principal additional information that should be made available for your review of
Robson Construction Co. （8 marks)