Reference no: EM132994037

QUESTION - Thomas is the engagement partner on the audit of Tidmouth Enterprises, a listed company selling small kitchen appliances. CEO is Robert Sanders.

Tidmouth Enterprises has a small internal audit team that was established after the business had suffered from accusations of 'channel stuffing' five years ago. The internal audit team reports directly to the audit committee, which has three directors. Two of the committee members including the chair Ben Ronald have been the senior executives at Robert Sander's private company 10 years ago.

Thomas has audited Tidmouth Enterprises for four years and in previous control testing, there were no exceptions detected in previous years.

One of the material items noted by Thomas for discussion and clarification with the chair of the audit committee Ben Ronald in a meeting was the major addition being made to the company warehouse, justified on the basis of the need for additional storage required for inventory to support expanding distributorship sales. Several potential accounting problems involving the expansion concerned Thomas. First, he was worried that Tidmouth might already be recording depreciation expense on the addition even though it was not yet in operation. Ben assumed that the company's method of accounting was correct but suggested that Thomas discuss the handling of this matter with the financial controller.

Thomas's final concern in auditing the warehouse expansion involved Tidmouth's method of separating repair expenses from capitalized costs. Improper capitalization of expenses was an issue in several recent accounting scandals, and this issue was discussed during the fraud brainstorming session by the audit team.

Thomas discussed his concerns in a formal meeting with the members of the audit committee on 15 July 2021.

Required -

1. Explain what approach Thomas should take to the audit of Tidmouth Enterprises' income statement accounts.

2. What specific type of audit procedure is this meeting illustrating? What specific type of audit evidence is being generated by this meeting?

3. Thomas has considered control testing is not required. Do you agree? Explain.

4. What are the procedures for auditing the company's warehouse. You should describe and explain the audit objectives and steps (procedures) that would be appropriate to address the objectives and present/disclose the warehouse addition properly presented and disclosed (true & fair) on the financial report of Tidmouth.