You
are the audit supervisor of Maple & Co and are currently planning the
audit of an existing client, Sycamore Science Co (Sycamore), whose year end
was 30 April 2015. Sycamore is a pharmaceutical company, which manufactures and
supplies a wide range of medical supplies. The draft financial statements show
revenue of $35·6 million and profit before tax of $5·9 million.

 

Sycamore’s
previous finance director left the company in December 2014 after it was
discovered that he had been claiming fraudulent expenses from the company for
a significant period of time. A new finance director was appointed in January
2015 who was previously a financial controller of a bank, and she has expressed
surprise that Maple & Co had not uncovered the fraud during last year’s
audit.

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During
the year Sycamore has spent $1·8 million on developing several new products. These
projects are at different stages of development and the draft financial
statements show the full amount of $1·8 million within intangible assets. In
order to fund this development, $2·0 million was borrowed from the bank and
is due for repayment over a ten-year period. The bank has attached minimum
profit targets as part of the loan covenants.

 

The
new finance director has informed the audit partner that since the year end
there has been an increased number of sales returns and that in the month of
May over $0·5 million of goods sold in April were returned.

 

Maple
& Co attended the year-end inventory count at Sycamore’s warehouse. The
auditor present raised concerns that during the count there were movements of
goods in and out the warehouse and this process did not seem well controlled.

 

During
the year, a review of plant and equipment in the factory was undertaken and
surplus plant was sold, resulting in a profit on disposal of $210,000.

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