3 Better budgeting in recent years may have been seen as a movement from ‘incremental budgeting’ to alternative

to the following three audits of financial statements for the year ending 31 December 2006:
(a) Blythe Co is a new audit client. This private company is a local manufacturer and distributor of sportswear. The
company’s finance director, Peter, sees little value in the audit and put it out to tender last year as a cost-cutting
exercise. In accordance with the requirements of the invitation to tender your firm indicated that there would not
be an interim audit.
(b) Huggins Co, a long-standing client, operates a national supermarket chain. Your firm provided Huggins Co with
corporate financial advice on obtaining a listing on a recognised stock exchange in 2005. Senior management
expects a thorough examination of the company’s computerised systems, and are also seeking assurance that
the annual report will not attract adverse criticism.
(c) Gray Co has been an audit client since 1999 after your firm advised management on a successful buyout. Gray
provides communication services and software solutions. Your firm provides Gray with technical advice on
financial reporting and tax services. Most recently you have been asked to conduct due diligence reviews on
potential acquisitions.
Required:
For these assignments, compare and contrast:
(i) the threats to independence;
(ii) the other professional and practical matters that arise; and
(iii) the implications for allocating staff.
(15 marks)

designs and manufactures wooden tables and chairs. The business has expanded rapidly in the last two years, since
the arrival of Patrick Tiler, an experienced sales and marketing manager.
The directors want to secure a loan of $3 million in order to expand operations, following the design of a completely
new range of wooden garden furniture. The directors have approached LCT Bank for the loan. The bank’s lending
criteria stipulate the following:
‘Loan applications must be accompanied by a detailed business plan, including an analysis of how the finance will
be used. LCT Bank need to see that the finance requested is adequate for the proposed business purpose. The
business plan must be supported by an assurance opinion on the adequacy of the requested finance.’
The $3 million finance raised will be used as follows:
$000
Construction of new factory 1,250
Purchase of new machinery 1,000
Initial supply of timber raw material 250
Advertising and marketing of new product 500
Your firm has agreed to review the business plan and to provide an assurance opinion on the completeness of the
finance request. A meeting will be held tomorrow to discuss this assignment.
Required:
(a) Identify and explain the matters relating to the assurance assignment that should be discussed at the meeting
with Mulligan Co. (8 marks)