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正确答案：
(c) Each of the strategic goals will have a profound impact on the marketing mix as it currently exists. As each goal affects the
market position of Churchill developing an appropriate marketing mix will be the key to successful implementation of the
overall growth strategy. The product, the brand and the reputation it creates are at the heart of the company’s marketing
strategy. Their focus on the premium segment of the market seems a sensible one and one which allows a small family-owned
business to survive and grow slowly. Evidence suggests this is a luxury indulgence market reflecting changing consumer tastes
and lifestyles. Managing the product range will be a major marketing activity. While the core products may develop an almost
timeless quality there will be a need to respond to the product innovations introduced by its much larger competitors. The
company’s emphasis on the quality of its products resulting from the quality of its ingredients is at the heart of its competitive
advantage. Growing the product range will also bring the danger of under performing products and a consequent need to
divest such products. Packaging is likely to be a key part of the products’ appeal and will be an area where constant innovation
is important.
Pricing raises a number of issues. Why is Churchill’s core product priced at ￡1 less than its immediate competition? What is
the basis on which Churchill prices this product? Each of the methods of pricing has its advantages and disadvantages. Using
cost plus may create an illusion of security in that all costs are covered, but at the same time raises issues as to whether
relevant costs have been included and allocated. Should the company price in anticipation of cost reductions as volume
increases? Should the basis for pricing be what your competitors are charging? As a luxury product one would assume that
its demand is relatively price inelastic: a significant increase in price e.g. ￡1 would lead to only a small reduction in quantity
demanded. Certainly, profit margins would be enhanced to help provide the financial resources the company needs if it is to
grow. One interesting issue on pricing is the extent to which it is pursuing a price skimming or price penetration policy –
evidence from the scenario suggests more of a price skimming policy in line with the luxury nature of the product.

Place is an equally important issue – the vertical integration strategy of the company has led to company-owned shops being
the main way customers can buy the product. At the same time, this distribution strategy has led to Churchill’s sales being
largely confined to one region in the UK – although it is the most populous. If Churchill has a desire to grow, does it do this
through expanding the number of company owned and franchised outlets or look for other channels of distribution in
particular the increasingly dominant supermarket chains? Each distribution strategy will have significant implications for other
elements in the marketing mix and for the resources and capabilities required in the company.
Finally, promotion is an interesting issue for the company. The relatively recent appointment of a sales and marketing director
perhaps reflects a need to balance the previous dominance of the manufacturing side of the business. Certainly there is
evidence to suggest that John Churchill is not convinced of the need to advertise. There are some real concerns about how
the brand is developed and promoted. Certainly sponsorship is now seen as a key part of the firm’s promotional strategy. The
company has a good reputation but customer access to the product is fairly limited. Overall there is scope for the company
to critically review its marketing mix and implement a very different mix if it wants to grow.
The four Ps above are very much the ‘hard’ elements in the marketing mix and Churchill in its desire to grow will need toensure that the ‘softer’ elements of people, physical evidence and processes are aligned to its ambitious strategy.

正确答案：
(b) Unmodified auditor’s reports
Ethical and professional issues
■ An unmodified opinion means, inter alia, that:
– there are no material matters giving rise to disagreement with the auditor; and
– the auditor’s report does not include an emphasis of matter paragraph (e.g. regarding going concern).
■ By implication the auditor must have obtained sufficient appropriate evidence that notwithstanding the losses:
– the going concern basis is appropriate to Ayora’s financial statements and any related matters (e.g. parental
support) are adequately disclosed therein;
– goodwill in Chatam’s consolidated financial statements is not materially impaired.
■ Management’s written representation (that the goodwill is not impaired) must have been necessary (otherwise it should
not have been asked for). This means that Bartolome does not have sufficient other audit evidence. This seems dubious
as management should have carried out an impairment test to satisfy themselves that goodwill is not impaired. This
test should similarly have satisfied Bartolome.
■ If there is evidence that goodwill is impaired management’s refusal to write it down might be considered a fraud.
■ The matter may cast doubt on the quality of audit evidence obtained in other areas. All other matters on which
management representations have been obtained should be reviewed by another audit partner/manager.
■ Charles Barrington is retiring next year and his share options would presumably be worth less if goodwill were written
down. His position in this long-standing client suggests a familiarity threat.
■ Bartolome may be threatened by self-interest to accept the representation as sufficient in order to retain the client.
■ Bartolome may be unduly influenced by a combination of factors (familiarity and previous experience) and failing to
exercise the necessary degree of professional scepticism.
Implications for continuation with assignment
There is no reason why the audit should not be continued. However, a change in senior audit staff and audit manager may
be overdue. The unmodified auditor’s reports should be subject to a cold review and any quality control issues raised with
the staff who conducted the audit.

正确答案：
4 JOHNSTON CO
(a) Reporting responsibilities specific to initial engagements
For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:
■ the opening balances do not contain misstatements that materially affect the current period’s financial statements;
■ the prior period’s closing balances have been correctly brought forward to the current period (or, where appropriate, have
been restated); and
■ appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted
for (and adequately presented and disclosed).
If the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances there will be a limitation
on the scope of the audit. The auditor’s report should include:
■ a qualified (‘except for’) opinion;
■ a disclaimer of opinion; or
■ in those jurisdictions where it is permitted, an opinion which is:
– qualified (or disclaimed) regarding the results of operations (i.e. on the income statement); and
– unqualified regarding financial position (i.e. on the balance sheet).
If the effect of a misstatement in the opening balances is not properly accounted for and adequately presented and disclosed,
the auditor should express a qualified (‘except for’ disagreement) opinion or an adverse opinion, as appropriate.
If the current period’s accounting policies have not been consistently applied in relation to opening balances and if the change
has not been properly accounted for and adequately presented and disclosed, the auditor should similarly express
disagreement (‘except for’ or adverse opinion as appropriate).
However, if a modification regarding the prior period’s financial statements remains relevant and material to the current
period’s financial statements, the auditor should modify the current auditor’s report accordingly.

正确答案：
(b) Financial statement risks
Assets
■ There is a very high risk that inventory could be materially overstated in the balance sheet (thereby overstating profit)
because:
? there is a high volume of metals (hence material);
? valuable metals are made more portable;
? subsidy gives an incentive to overstate purchases (and hence inventory);
? inventory may not exist due to lack of physical controls (e.g. aluminium can blow away);
? scrap metal in the stockyard may have zero net realisable value (e.g. iron is rusty and slow-moving);
? quantities per counts not attended by an auditor have increased by a third.
■ Inventory could be otherwise misstated (over or under) due to:
? the weighbridge being inaccurate;
? metal qualities being estimated;
? different metals being mixed up; and
? the lack of an independent expert to identify/measure/value metals.
■ Tangible non-current assets are understated as the parts of the furnaces that require replacement (the linings) are not
capitalised (and depreciated) as separate items but treated as repairs/maintenance/renewals and expensed.
■ Cash may be understated due to incomplete recording of sales.
■ Recorded cash will be overstated if it does not exist (e.g. if it has been stolen).
■ Trade receivables may be understated if cash receipts from credit customers have been misappropriated.
Liabilities
■ The provision for the replacement of the furnace linings is overstated by the amount provided in the current and previous
year (i.e. in its entirety).
Tutorial note: Last replacement was two years ago.
Income statement
■ Revenue will be understated in respect of unrecorded cash sales of salvaged metals and ‘clinker’.
■ Scrap metal purchases (for cash) are at risk of overstatement:
? to inflate the 15% subsidy;
? to conceal misappropriated cash.
■ The income subsidy will be overstated if quantities purchased are overstated and/or overvalued (on the quarterly returns)
to obtain the amount of the subsidy.
■ Cash receipts/payments that were recorded only in the cash book in November are at risk of being unrecorded (in the
absence of cash book postings for November), especially if they are of a ‘one-off’ nature.
Tutorial note: Cash purchases of scrap and sales of salvaged metal should be recorded elsewhere (i.e. in the manual
inventory records). However, a one-off expense (of a capital or revenue nature) could be omitted in the absence of
another record.
■ Expenditure is overstated in respect of the 25% provision for replacing the furnace linings. However, as depreciation
will be similarly understated (as the furnace linings have not been capitalised) there is no risk of material misstatement
to the income statement overall.
Disclosure risk
■ A going concern (‘failure’) risk may arise through the loss of:
? sales revenue (e.g. through misappropriation of salvaged metals and/or cash);
? the subsidy (e.g. if returns are prepared fraudulently);
? cash (e.g. if material amounts stolen).
Any significant doubts about going concern must be suitably disclosed in the notes to the financial statements.
Disclosure risk arises if the requirements of IAS 1 ‘Presentation of Financial Statements’ are not met.
■ Disclosure risk arises if contingent liabilities in connection with the dumping of ‘clinker’ (e.g. for fines and penalties) are
not adequately disclosed in accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
Appropriate audit approach
Tutorial note: In explaining why AN audit approach is appropriate for Indigo it can be relevant to comment on the
unsuitability of other approaches.
■ A risk-based approach is suitable because:
? inherent risk is high at the entity and financial assertion levels;
? material errors are likely to arise in inventory where a high degree of subjectivity will be involved (regarding quality
of metals, quantities, net realisable value, etc);
? it directs the audit effort to inventory, purchases, income (sales and subsidy) and other risk areas (e.g. contingent
liabilities).
■ A systems-based/compliance approach is not suited to the risk areas identified because controls are lacking/ineffective
(e.g. over inventory and cash). Also, as the audit appointment was not more than three months ago and no interim
audit has been conducted (and the balance sheet date is only three weeks away) testing controls is likely to be less
efficient than a substantive approach.
■ A detailed substantive/balance sheet approach would be suitable to direct audit effort to the appropriate valuation of
assets (and liabilities) existing at balance sheet date. Principal audit work would include:
? attendance at a full physical inventory count at 31 December 2005;
? verifying cash at bank (through bank confirmation and reconciliation) and in hand (through physical count);
? confirming the accuracy of the quarterly returns to the local authority.
■ A cyclical approach/directional testing is unlikely to be suitable as cycles are incomplete. For example the purchases
cycle for metals is ‘purchase/cash’ rather than ‘purchase/payable/cash’ and there is no independent third party evidence
to compensate for that which would be available if there were trade payables (i.e. suppliers’ statements). Also the cycles
are inextricably inter-related to cash and inventory – amounts of which are subject to high inherent risk.
■ Analytical procedures may be of limited use for substantive purposes. Factors restricting the use of substantive analytical
procedures include:
? fluctuating margins (e.g. as many factors will influence the price at which scrap is purchased and subsequently
sold, when salvaged, sometime later);
? a lack of reliable/historic information on which to make comparisons.