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(a) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Encore Co’s vehicle additions and disposals.

1.  Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note
for property, plant and equipment.
2.  For a sample of new vehicles on the schedule of additions agree the cost to the purchase
invoice, ensuring that the recorded cost includesthe cash amount paid .
3.  Physically inspect a sample of additions, confirming that the registration number of the
vehicle agrees to that on the non‐current assets register.
4.  Review the non‐current assets register to confirm that the 20 old vehicles were removed and
that the 20 new vehicles were included.
5.  Recalculate the loss on disposal of $1.1 m ($1.8 – ($4.6m – $3.9m) and agree to the trial
balance and statement of profit or loss.
6.  Agree the cash payment of $3.9m to the cash book and bank statement.
7.  Recalculate the depreciation expense, confirming that the depreciation expense was based
on the old vehicles until 1 February and on the cost of the new vehicles after that date.
8.  Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has
been removed from accumulated depreciation carried forward.
9.  In light of the loss on disposal, review depreciation rates on existing vehicles to establish if
the carrying amount of other vehicles may be overstated.
10.  Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles
are being used for the entire period of their estimated useful life.
11.  Discuss with management why trade‐in allowances were so much lower than the carrying
amounts of the vehicles to provide further evidence as to whether depreciation policies are
reasonable.
12.  Review the notes to the financial statements to ensure that disclosure of the additions and
disposals is in accordance with IAS 16 Property, Plant and Equipment.

(b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the VALUATION of Encore Co’s trade receivables

1. Review the aged receivables listing to identify slow moving or old balances. Discuss the
status of these balances with the credit controller to assess whether the customers are likely
to pay or if an allowance for receivables is required.
2. Review whether there are any after‐date cash receipts for slow‐moving/old receivable
balances. 
3. Review correspondence with customers in order to identify any balances which are in dispute
or unlikely to be paid and discuss with management whether any allowance is required. 
4. Review board minutes to identify whether there are any significant concerns in relation to
outstanding receivables balances and assess whether the allowance is reasonable. 
5. Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to
any potentially irrecoverable balances to assess if the allowance is adequate.
6. Review the payment history for evidence of slow paying by any customers who were granted
credit in the period when there was no credit controller and who may not, therefore, have
been properly scrutinised.
7. Discuss with the finance director the rationale for maintaining the allowance at the same level
in light of the increase in the receivables collection period and the absence of a credit
controller. 
8. Inspect post year‐end sales returns/credit notes and consider whether an additional
allowance against receivables is required

(c) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the potential breach of transport regulations by
Encore Co

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1. Review correspondence with the transport authority to establish details of the complaint and
the number of times the breach has allegedly occurred. 
2. Enquire of the directors why they are unwilling to provide or make disclosure, whether they
accept that any breaches took place but believe that the effect is immaterial or whether they
dispute their occurrence. 
3. Review Encore Co’s policies and procedures to record driving hours and rest periods and
compare to the regulations to determine the likelihood that breaches have occurred and how
frequently.
4. Review correspondence with the transport authority to establish if there have been
discussions about other instances of potential non‐compliance.  Review correspondence with
Encore Co’s legal advisers or, with the client’s permission, contact the lawyers to establish
their assessment of the likelihood of the breach being proven and any fines that would be
payable.
5. Review the board minutes to ascertain management’s view as to the likelihood of payment to
the transport authority.
6. Obtain a written representation to the effect that the directors are not aware of any other
breaches of laws or regulations that would require a provision or disclosure in the financial
statements.
7. Inspect the post year‐end cash book and bank statements to identify whether any fines have
been paid.

(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this
issue remain unresolved.

The breaches in regulations and the initial investigation into the breaches occurred before the year
end. The announcement by the authorities that they are taking legal action provides further
evidence regarding these conditions which existed at the year‐ end date therefore IAS 10 Events
after the Reporting Period would classify this as an adjusting subsequent event.

As it seems probable that the fine will be payable, a provision must be included rather than merely
the disclosure. Failure to make such a provision will cause profits to be overstated and provisions
to be understated.

The potential fine of $850,000 (17 × $50,000) is 16% ($850k/$5.3m) of profit before tax and 2.1%
($850k/$40.1 m) of total assets. It is therefore material.

If the directors refuse to make a provision, then Velo & Co should issue a modified opinion on the
grounds that there is a material misstatement of profit and liabilities.

As this is material but not pervasive a qualified opinion would be appropriate.

A basis for qualified opinion paragraph would be included after the opinion paragraph.

This would explain the material misstatement in relation to the non‐recognition of the provision and
the effect on the financial statements.

The opinion paragraph would be qualified ‘except for’.

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