3 You are the manager responsible for the audit of Seymour Co. The company offers information, proprietary foods and
medical innovations designed to improve the quality of life. （Proprietary foods are marketed under and protected by
registered names.) The draft consolidated financial statements for the year ended 30 September 2006 show revenue
of $74·4 million （2005 – $69·2 million), profit before taxation of $13·2 million （2005 – $15·8 million) and total
assets of $53·3 million （2005 – $40·5 million).
The following issues arising during the final audit have been noted on a schedule of points for your attention:
（a) In 2001, Seymour had been awarded a 20-year patent on a new drug, Tournose, that was also approved for
food use. The drug had been developed at a cost of $4 million which is being amortised over the life of the
patent. The patent cost $11,600. In September 2006 a competitor announced the successful completion of
preliminary trials on an alternative drug with the same beneficial properties as Tournose. The alternative drug is
expected to be readily available in two years time. （7 marks)
Required:
For each of the above issues:
（i) comment on the matters that you should consider; and
（ii) state the audit evidence that you should expect to find,
in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended
30 September 2006.
NOTE: The mark allocation is shown against each of the three issues.
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（b) Describe the principal matters that should be included in your firm’s submission to provide internal audit
services to RBG. （10 marks) -
（iii) the warranty provision. （3 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. -
（c) Explain the extent to which you should plan to place reliance on analytical procedures as audit evidence.
（6 marks) -
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)