17 Elounda Co manufactures chemical compounds using a continuous production process. Its year end was 31 July
20X6 and the draft profit before tax is $13·6 million. You are the audit supervisor and the year-end audit is due to
commence shortly. The following matters have been brought to your attention.
(i) Revaluation of property, plant and equipment (PPE)
At the beginning of the year, management undertook an extensive review of Elounda Co’s non-current asset
valuations and as a result decided to update the carrying value of all PPE. The finance director, Peter Dullman,
contacted his brother, Martin, who is a valuer and requested that Martin’s firm undertake the valuation, which
took place in August 20X5. (5 marks)
(ii) Inventory valuation
Your firm attended the year-end inventory count for Elounda Co and ascertained that the process for recording
work in progress (WIP) and finished goods was acceptable. Both WIP and finished goods are material to the
financial statements and the quantity and stage of completion of all ongoing production was recorded accurately
during the count.
During the inventory count, the count supervisor noted that a consignment of finished goods, compound E243,
with a value of $720,000, was defective in that the chemical mix was incorrect. The finance director believes
that compound E243 can still be sold at a discounted sum of $400,000. (6 marks)
(iii) Bank loan
Elounda Co secured a bank loan of $2·6 million on 1 October 20X4. Repayments of $200,000 are due quarterly,
with a lump sum of $800,000 due for repayment in January 20X7. The company met all loan payments in
20X5 on time, but was late in paying the April and July 20X6 repayments. (4 marks)
(a) Describe substantive procedures you should perform to obtain sufficient, appropriate audit evidence in
relation to the above three matters.
Note: The mark allocation is shown against each of the three matters above.
(b) Describe the procedures which the auditor of Elounda Co should perform in assessing whether or not the
company is a going concern. (5 marks)
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