PERMANENT AUDIT FILE INDEX - Croner-i Tax and ...

Manufacturing Company Limited 2010

Client: Manufacturing Company Limited Prepared by: AW Date: 3/10 Ref:

Year end: 31 Dec 2010 Reviewed by: JO Date: 3/10

File no: M0001

PERMANENT AUDIT FILE INDEX

1 General information

1.1 (PAF02) Y

1.2 (PAF03) Y

1.3 (PAF04) Y

1.4 (PAF05) Y

1.5 (PAF06) Y

1.6 Significant accounting policies (PAF07) Y

1.7 Significant accounting estimates (PAF13) Y

1.8 Y

1.9 Independence questionnaire Y

2 Engagement details

2.1 Y

2.2

2.3

2.4

2.5

2.6 (PAF08) Y

2.7 Register of non-audit services (PAF10) Y

2.8 Register of involvement in the audit (PAF11) Y

2.9

3 Accounting systems

3.1 Y

3.2 Y

3.3 Y

3.4 (PAF09) Y

3.5 [Not reproduced for model file] Y

3.6

4 Statutory information





4.5


4.7 Specified asset locked bodies (for CIC clients only) (PAF12)

4.8

5 Taxation (if no separate tax permanent file)

5.1

5.2

5.3

5.4

5.5

5.6

5.7

6

Background information

Details of bankers and professional advisors

Know Your Client Checklist

Register of laws and regulations

Details of related parties

Copy of current detailed risk assessment

Letter of engagement

Authorisations

Special instructions from client

Special instructions from group auditors

Copy of resolution re: appointment

New client checklist

Organisation chart

Review of design and implementation of controls

Internal Control Questionnaire

Systems notes

Letters of comment (copies)

List of shareholders

Details of mortgages/charges

Directors’ interests in shares and debentures

Copy annual return

Copy elective resolutions

Memorandum and Articles of Association

Direct tax elections

Indirect tax elections and certificates

Market values 6 April 1965 and 31 March 1982

Advance Corporation Tax details

PAYE dispensations

Relief claims (e.g. rollover, ABA)

Assets

PAFi of 52 MCL May 2012


6.1 Details of freehold/leasehold properties [Not reproduced for model file] Y

6.2 Details of location of title deeds [Not reproduced for model file] Y

6.3 Details of plant etc. (where no fixed asset register exists)

6.4 Details of intangible assets [Not reproduced for model file] Y

6.5 Investments in subsidiaries and associated undertakings

6.6 Details of professional valuations [Not reproduced for model file] Y

6.7 Details of insurance values and cover [Not reproduced for model file] Y

6.8

7

7.1 Details of contracts and agreements with index

7.2 Details of share options

7.3 Bank overdraft or loan facilities, security and covenants [Not reproduced for model file] Y

7.4 Details of other loans Finance leases Y

7.5

8

8.1 Index

9

9.1 Signed copies of full accounts [Not reproduced for model file] Y

9.2 Signed copies of abbreviated accounts

9.3 Company accounts disclosure checklist ICADC [Not reproduced for model file] Y

10

File updated by

AW

AW

Contracts and agreements

Correspondence and information of continuing interest

Accounts

Review

Year Reviewed by

2009 JO

2010 JO

PAFi of 52 MCL May 2012



Year end: 31 Dec 2010 Reviewed by: JO Date: 3/09 1.1

File no: M0001 Updated by: AW Date: 3/10

BACKGROUND INFORMATION AW 3/11

Registered office

Tel No. Tel No.

Fax No. Fax No.

2

66666666

UK

25/11/1990

VAT registration number 345345345 31.3 etc

31-Dec

No Specify

Other key personnel

NamePosition

Adrian Walker Accountant

Terence Ipplepen Production manager

Tiffany Wall Warehouse manager

Exact name of company Manufacturing Company Limited

Trading name (if different)

Main place of business (if different)

The Component Factory

Langage Business Park

Plymouth

01752 123456

01752 987654

Number of business locations

Registered number

Place of registration

Date of incorporation

01 February 1960 CEO

Year end date

Associated companies

Copy of search on file at 4.4.1 [Not reproduced in example file]

Copies of passports for directors on file at 2.6.3 [Not reproduced in example file]

Return periods

Specify the basis and/or documents on which you have determined that this is a bona-fide business operation:

Longstanding client that is properly registered with the appropriate authorities

Anthony Hope 05 June 1962 Development

Adele Long 03 March 1961 Finance

Anti-money laundering requirements

Names of directors/secretary Date of birth Specific responsibilities

Ray Chard

1.1 of 52 MCL May 2012


1.1.1Manufacturing Company LimitedThe company assembles components for PCs such as sound and graphics cards from bought in components. These are

sold largely to PC manufacturers that produce ‘own brand’ machines for other suppliers.

HistoryThe company (MCL) was started by Ray Chard and Adele Long in 1990. They had previously worked for HK Components,

a major British company specialising in electrical components and circuit boards in particular. Ray and Adele were

convinced that there was a good market for a company specialising in computer components. Their main products in the

early days were 5 ¼” and then 3 ½” floppy drives.

Initially, progress was slow and after about 5 years, the company had only expanded to employ about 60 staff and had a

turnover of £ 5 million.

1999 was the start of a mixed period for MCL. On top of the uncertainty caused by the millennium bug, a number of

major customers were affected by the financial crisis throughout Europe and the burst of the real estate bubble.

Turnover for MCL dropped a little but most customers were able to weather the storm and underlying demand was

strong driven by the success of Microsoft’s Windows 95 and 98 operating system.

Raymond and Adele were convinced that there are opportunities for companies such as MCL. They reconsidered their

strategic objectives and appointed Anthony Hope to the Board to try to identify areas of development. Over the next

five years the company moved away from floppy drives and started to specialise in components that could be added to a

desktop computer’s PCI slots such as sound and graphics cards (PCI – Peripheral Component Interface). The company

also transferred its assembly plant from Penzance to Plymouth.

From 2004, a new product line was introduced. The company started to produce network cards, again focusing on PCI

cards but also some USB versions. It soon became clear that network cards were a major growth area with growth in

home wireless networks driving the demand. Network cards quickly became a major part of the company’s business.

Another, somewhat surprising, development was the growth in TV tuner adapters. Again the company developed a PCI

version first but has produced USB models as well. The USB models are selling particularly well.

The rapid growth in flash drives, SD and other memory cards has meant the sale of floppy drives has declined steadily

over recent years. A decision to sell the Floppy Division was taken in 2009 once it was clear that many mainstream

manufacturers were producing machines that did not include a floppy drive as standard. The sale of the division went

through in December 2010.

Future plans for the directorsAt the date of writing, Ray Chard is 51 and Adele Long a couple of years younger. Between them they still own 67.3% of

the business with another 19.23% owned by Tony Hope. The balance is owned by two senior employees.

Tony has been the driving force behind a lot of the recent developments and is keen to continue to extend the company

products and to cover a wider geographical area (most sales are to manufacturers in Europe). Raymond and Adele enjoy

working in the business but are beginning to consider possible exit routes. They have made some pension provision but

are hoping to provide for their old age by realising the value of their shares.

The company regularly incurs research and development expenditure on the development of new products. Historically

there have been no problems with capitalising such expenditure and the products that relate to the existing capitalised

costs are currently selling well.

Business Sectors

1.1.1 of 52 MCL May 2012


Graphics cardsThis is a mature market for MLC and most sales are to existing customers.

The company has managed to avoid a lot of the turmoil in the market for graphics chips that has occurred in recent

years. This is partly because they have always used nVidia chips and it was nVidia that came out on top in the recent

upheavals, and partly because the company has always gone for mid range cards rather than budget price or cutting

edge. The cards they produced therefore had a longer shelf life.

The company currently sells 4 types of graphics card. All are for desktop computers. The difference between the cards is

the specification (speed - MHz and memory - MB) of the chip used. They range in price from £75 to over £150.

- MCL Xforce 8500GT 800MHz 256MB Graphics Card - £75

- MCL Xforce 3D 8500GT 800MHz 512MB Graphics Card - £81



Customers

The company does not sell to the public, only to computer manufacturers. Their main customers are based in Europe.

These customers in turn produce computers to be sold as ‘own brand’ by a number of major retailers.

The company occasionally supplies some of the major computer produces such as Compaq or Dell. However, the

company does not have the capacity to become a regular supplier to such companies.

Competitors

Their main competitors in this market are the major producers such as Sapphire and XFX and also smaller local

companies similar to MCL. The market is price sensitive, but other factors such as reliability and capacity are also

important.

Seasonality

There is a slight increase in demand towards Christmas, but nothing that significant.

Sound cardsSound is a relatively new capability for PCs because no-one really considered it when the PC was first designed. The

original IBM-compatible PC was designed as a business tool, not as a multimedia machine! However, like the rest of the

PC industry the sound card also underwent a significant acceleration in development in the late 1990s, fuelled by the

introduction of AGP (Accelerated Graphics Port – speeds up the connection) and the establishment of PCI-based sound

cards. Greater competition between sound card manufacturers - together with the trend towards integrated sound - has

led to ever lower prices. However, as the horizons for what can be done on a PC get higher and higher, there remain

many who require top-quality sound.

The result is that, as with graphics cards, there is a solid market for PCs that contain a good quality sound card (as

opposed to sound being integrated with the mother board). This does not only improve the sound for games and

multimedia applications, but with the right software, they allow users to record edit and play digital audio from a variety

of sources.

The company currently sells 3 types of sound card that range in price from £45 to £175

- MCL OEM X-FI Xtreme Audio card with X-Fi Crystallizer PCI - £45

- MCL OEM X-F2 Xtreme Audio card with X-Fi Crystallizer PCI - £115

- MCL OEM X-Fi Xtreme Music - Sound card - 24-bit - 192 kHz - 109 dB SNR - 7.1 channel surround - PCI - £175

Customers

The company’s customers for sound cards are essentially the same as those for graphics cards

1.1.1 of 52 MCL May 2012


Competitors

The position with competitors is again similar to that for graphics cards. Here the main producers are Creative, Philips

and Toshiba.

Seasonality


Network cardsAnthony Hope is convinced of the need to expand aggressively in this area and is considering moving further away from

the company’s traditional approach of only supplying computer manufacturers. He believes that there is considerable

demand for network cards in the domestic market from owners of PCs who want a home network but who do not want

to upgrade their PC. He sees the demand for USB adapters as being particularly strong as these can be fitted without

taking the back off!

A web based retail operation is being considered; however, this has not yet happened and currently all sales of PCI cards

are to the company’s usual customers. Sales of USB adapters are to retail outlets in the UK, this is a relatively new area

for the company.

The company has two types of PCI network adapter, a wireless version and an Ethernet (type of cable/connection)

version. The two USB models are the same; however, one has an extension adapter so it can be moved to obtain a

better signal.

- MCL 802.11g Wireless G PCI Network Card - £15

- MCL Ethernet PCI LAN card - £14

- MCL 802.11G Wireless USB Network Adapter - £15

- MCL 802.11G Wireless USB Network Adapter (with extension)- £29

Customers

The PCI cards are sold to the same customers as the graphics and sound cards.

The company started selling directly to retailers in the UK in 2007. Sales are currently on the basis of a catalogue and

mail order, although, as noted above, a web based system is being considered.

Competitors

The company is relatively new to this market and, although there is a lot of potential in this market, competition is

fierce. The company faces competition from some of the big names in this area such as Linksys and Belkin as well as

some smaller local companies.

Seasonality


TV TunersA recent innovation is the move into the market for TV adapters for PCs. Anthony Hope sees this as the next big market

in the PC market and sees it as, to a certain extent, complementing the company’s core business based on sounds and

graphics cards.

The range of TV tuners is as follows:

- MCL WinTV Express PCI TV Tuner Card - £37

- MCL WinTV Express PCI Digital TV Tuner Card - £47

- MCL WinTV Express USB TV Tuner Card - £45

- MCL WinTV Express USB Digital TV Tuner Card - £55

Major suppliers

1.1.1 of 52 MCL May 2012


The company is reliant on nVidia for the supply of graphics chips. This is the only component that is dependent on one

supplier. All other components can be sourced from a variety of suppliers. This has been a key element in the company’s

success as it is able to keep costs down.

StocksAll raw materials and finished goods are kept in its own factory and warehouse.

OwnershipShares are owned as follows

Ray Chard - 33.65%

Adele Long - 33.65%

Anthony Hope - 19.23%

Other employees - 13.47%

Initially, Ray and Adele owned all of the shares. New shares were issued to Anthony Hope once he had completed 2

years’ service. There is no formal employee share scheme in place; however, two of the more senior managers have

been allowed to acquire small shareholdings.

Accounting Policies and Presentation of AccountsThe main accounting policies are described on PAF 1.6. The company's accounting policies are fairly standard for this

type of company.

The company presents its accounts in accordance with UK GAAP and there are no particular problem areas. We prepare

the statutory accounts in accordance UK accounting principles from the management accounts prepared by the client.

Laws and RegulationsAccountsThe company prepares accounts under Company legislation. There are no other external reporting requirements.

The company is domiciled in the UK and is subject to the UK tax regime.

Most of the company's customers are in Europe and most sales transactions are settled in £. The company's suppliers

are again mainly in Europe, although nVidia, a key supplier is based in the US. Purchases are therefore denominated in

£, € or US$.

EstimatesAreas where accounting estimates are set out on PAF 1.7. Most estimates are relatively straightforward and do not

involve the use of complex formulae or models. They will usually be prepared by AW in the first instance and then

reviewed by AL. The valuation of property is based on the recommendations of a qualified surveyor and where

appropriate legal advice is also taken in determining the amount of any claims made by or against the company.

Management has not considered the effect of estimation uncertainty. Given the straightforward nature of the estimates

involved this is not considered to be a risk factor.

ProductsThe components manufactured by the company conform to the various industry standard specifications. However, there

are no specific laws or regulations that apply to them.

Health & safety

1.1.1 of 52 MCL May 2012


The company is subject to the normal UK laws and regulations. These have been discussed with the directors and their

view is that none of these laws and regulations, other than health and safety, gives rise to any significant business risk.

It is possible that an accident in the factory or warehouse could result in the serious injury or death of an employee,

which in turn may lead to a claim against the company. The company takes its responsibilities seriously and has good

systems for training and monitoring employees. Any incidents that do occur are recorded in an accident book.

Accordingly, there are no laws and regulations, other than health and safety, which would be expected to have a

material affect on the accounts other than those which relate specifically to the form and content of the financial

statements.

Related partiesThe only related parties are the directors. There are no transactions with directors other than minor payments made on

behalf of R Chard and the normal payment of remuneration and dividends.

Adrian Walker keeps a register of related parties and updates this when notified by the directors of any changes

required. The related parties noted on PAF 1.5 are taken from this register.

Mrs Sherry Chard (wife of Raymond Chard) runs a shop in the Plymouth Computer Centre - Chard Computers Limited.

Whilst this business may sometime sell components manufactured by MCL it never buys directly from MCL as the

volumes it purchases are too small. This business is run completely independently of MCL and there are no transactions

or sharing of facilities between the two companies.

Key Staff DirectorsRay Chard is the managing director and also oversees the factory operations in Plymouth.

Adele Long is finance director and oversees the sales and warehouse operations in Taunton.

Anthony Hope is responsible for marketing and business development.

Other senior personnelTerence Ipplepen - Production manager. He is responsible for the day to day running of the factory in Plymouth.

Tiffany Wall – Warehouse Manager – who is responsible for warehouse in Taunton.

Adrian Walker – Accountant – Part qualified, been with the company for three years. He is very competent with the

basic records but is not really involved in the management of the business.

Elizabeth Sharp - Raymond’s PA - who has been with the company from the start. With her team, she agrees and

monitors contracts with the major customers.

Measurement and review of financial performanceAlthough Adrian Walker prepares budgets and monthly accounts, these are not used to their full potential. There is no

formal comparison by the board of budget with actual results. Because the members of the board are not interested,

they feel they are quite hands on with the business, Adrian has ceased to provide detailed variance analyses and other

ratios and statistics.

Business objectives and strategiesThis subject has been discussed with the directors. They have not prepared a formal business plan but have agreed

objectives and key performance indicators.

The long term business objectives are:

1. To double the size of the business by 2015.

2. To increase the profitability of the business by an improvement in margins on newer product lines.

Reca Limited, a customer of MCL was purchased (100%

subsidiary) by Chard Computers Limited in January 2010. As

Reca Limited is controlled by Mrs Chard it is a related party of

1.1.1 of 52 MCL May 2012


3. To increase the size of the international business so that more than 50% of turnover will be generated outside the UK.

4. To prepare the company for flotation at some point after 2015 (this is how the directors see their exit route from the

business).

FinancingThe company has been historically been profitable and the directors have maintained the company's position in a

constantly changing industry. The company therefore has a good relationship with its bankers and in the past finance

has not been a problem.

The company leases the warehouse and owns the factory from which it operates and the majority of it's plant and

equipment although some is acquired on finance leases.

The company does not have any of the more complex forms of financial instrument although it does sometimes enter

into forward exchange contracts for € and US$. However, the company has moved away from this in the last couple of

years and the last contracts were in 2008.

Key Performance IndicatorsMany of the company's costs are fixed, at least in the short term. Therefore the financial key performance indicators

are:

1. Sales volume.

2. Gross profit margin.

Business RiskBusiness risk has been discussed with the directors and is set out on schedule 1.1.2. The directors have no formal

procedures for the identification of business risks and do not carry out a formal risk assessment.

Impact on the auditA number of the risks identified above relate to going concern. However, most of the problems are potential risks that

may arise in the future and so there is no need to consider them further this year. The risks have all be carried to C8.2

and C8.3 to ensure that none are overlooked.

Risk of fraudIn the view of the directors, the risk of any serious fraud is low. They are closely involved in all aspects of the company's

operation. Any fraud would therefore require collusion between their staff and staff at a supplier or customer in order

to go undetected and the directors simply do not see this as likely.

At a smaller scale theft of individual completed cards is possible as they are relatively small and can easily be sold on.

Physical controls over components and finished cards are good; however, the stock records for the warehouse in

Taunton are unreliable. This means that small discrepancies may go unnoticed or not be investigated. The directors are

looking at ways of resolving the problems with the stock records in Taunton; however, in terms of impact on the

accounts, the theft of a few cards by staff is not material.

Control environmentRay and Adele are involved in all aspects of the business. This is a powerful control and a deterrent to fraud. They set a

good tone in terms of the control environment. Both will operate the systems as intended and do not override controls

(although in theory this is possible). They are both very competent and have strong ethical values.

Ray is also responsible for hiring/dismissing employees. The remuneration package of the Company's employees is

periodically reviewed and approved by the directors/department heads.

Staff in the office respect this attitude and there does not appear to be any problems with the control environment.

AW 3/11

JO 3/11

1.1.1 of 52 MCL May 2012


1.1.2Risks arising from business background

Risk to considerDirectors’ comments or possible

management actions

Audit

response

The company is reliant on a relatively small

number of products. Technological advances

could render the companies existing

products obsolete very quickly.

The directors are happy that they are in

touch with technological developments and

trends in the market.

C8.2-1

In the past the directors have been very

good at spotting opportunities in the market

and have also moved out of older

technologies at the right time. There is no

guarantee that this will continue in the

future.

The directors see no reason for this to

change. As noted above the directors are in

touch with trends in the market and also

continue to invest in improved and new

technologies.

C8.2-2

The directors are managing the business

mainly by reference to the key performance

indicators and are not using the

management accounts to the full. This may

result in focus on too narrow a range of

indicators.

The directors will discuss with Adrian how

the management accounts can be made

more user friendly. They will then seek to

monitor fixed costs more closely.

C8.2-3

There is no management policy dealing with

the problems posed by foreign exchange.

Adrian will be asked to consider the potential

risks now that the business is dealing in

other countries . Considered to be low risk at

present.

The expansion plans are ambitious and,

notwithstanding the company's good

relationship with is bankers, could lead to

financing problems.

The directors have a good relationship with

the bankers and would not expand too

quickly.

C8.2-4

What would happen if directors or key staff

became ill or resigned?

Key person insurance is in place but it is true

to say that the loss of one of the directors

would have very serious implications for the

company.

C8.2-5

Manufacturing Company Limited

1.1.2 of 52 MCL May 2012




File no: M0001 Updated by: AW Date: 3/10

Details of bankers and professional advisorsAW 3/11

Bankers

Name

Name

Address

A Hope

Telephone

Fax

Name

Address

Telephone

Fax

Solicitor

Name

Address

Telephone

Fax

Other (specify)

Name

Address

Telephone

Fax

Account signatories

Specimen signature

Any Bank Ray Chard R ChardAvenue Road Adele Long

Anthony Hope

A Long

01666 777777

01666 999999

01888 222222

01888 333333

Shyster Leech & Shyster

Shady Towers

Bristol

1.2 of 52 MCL May 2012




File no: M0001

Y, N, N/A PAF Ref

1. The sector in which the client operates

1.1 Y 1.1.1

1.2 Cyclical or seasonal activity. Y 1.1.1

1.3 Product technology relating to the client’s products. Y 1.1.1

1.4 Energy supply and cost. N/A

2. The regulatory environment in which the client operates

2.1 Accounting principles and industry specific practices. Y 1.1.1

2.2 Y 1.4

2.3

* Regulatory requirements. Y 1.1.1

* Direct supervisory activities. N/A

2.4 Taxation (corporate and other). Y 1.1.1

2.5

* Monetary, including foreign exchange controls. N/A

* Fiscal. N/A

* Financial incentives (for example, government aid programs). N/A

* Tariffs, trade restrictions. N/A

2.6 Environmental requirements affecting the industry and the client's business. N/A

2.7 Procedures for ensuring compliance with relevant laws and regulations. Y 1.4

3. Other external factors currently affecting the client’s business

3.1 General level of economic activity (for example, recession, growth). Y 1.1.1

3.2 Interest rates and availability of financing. Y 1.1.1

KNOW YOUR CLIENT CHECKLIST

This checklist is intended as an aide memoire for issues that should be addressed on the permanent file. Where a

matter is relevant it should be addressed in sufficient detail on the file as to provide a basis for further review as part of

the risk assessment or evaluation of systems. The checklist should not be regarded as exhaustive.

The market and competition, including demand, capacity, and price

competition.

The legal and regulatory framework applicable to the entity and the industry or

sector in which it operates.

Laws and regulations having a direct effect on the determination of material

amounts and disclosures in the financial statements.

Government policies currently affecting the conduct of the client's business:

[Note. It will normally be possible to bring forward the Know Your Client Checklist from the previous year,

review it and make any changes required. However when, as is the case this year, a number of new

questions have been added to the checklist it will usually be easier to complete a new checklist.]

1.3 of 52 MCL May 2012


Y, N, N/A PAF Ref

3.3 Inflation, currency revaluation. N/A

4. Nature of the client's operations

Business Operations

4.1 Y 1.1.1

4.2 Y 1.1.1

4.3 Y 1.1.1

4.4 N/A

4.5 N/A

4.6 Geographic dispersion and industry segmentation. Y 1.1.1

4.7 Location of production facilities, warehouses and offices. Y 1.1.1

4.8 Key customers. Y 1.1.1

4.9 Y 1.1.1

4.10 Y 1.1.1

4.11 Research and development activities and expenditures. Y 1.1.1

4.12 Transactions with related parties. Y 1.1.1

4.13 N/A

Investments

4.14 N/A

4.15 Investments and dispositions of securities and loans. N/A

4.16 N/A

4.17 N/A

4.18 N/A

Financing

Employment (for example, by location, supply, wage levels, union contracts,

pension and other post employment benefits, stock option or incentive bonus

arrangements, and government regulation related to employment matters).

Acquisitions, mergers or disposals of business activities (planned or recently

executed).

Capital investment activities, including investments in plant and equipment and

technology, and any recent or planned changes.

Investments in non-consolidated entities, including partnerships, joint ventures

and special-purpose entities.

Group structure – major subsidiaries and associated entities,

including consolidated and non-consolidated structures.

Nature of revenue sources (for example, manufacturer, wholesaler, banking,

insurance or other financial services, import/export trading, utility,

transportation, and technology products and services).

Products or services and markets (for example, major customers and contracts,

terms of payment, profit margins, market share, competitors, exports, pricing

policies, reputation of products, warranties, order book, trends, marketing

strategy and objectives, manufacturing processes).

Conduct of operations (for example, stages and methods of production,

business segments, delivery of products and services, details of declining or

expanding operations).

Alliances, joint ventures, and outsourcing activities.

Involvement in electronic commerce, including internet sales and marketing

activities.

Important suppliers of goods and services (for example, long-term contracts,

stability of supply, terms of payment, imports, methods of delivery such as “just-

in-time”).

Areas of the business where the company might be exposed under the Bribery

Act 2010 including any procedures and controls implemented by management.

1.3 of 52 MCL May 2012


Y, N, N/A PAF Ref

4.19 N/A

4.20 Leasing of property, plant or equipment for use in the business. Y 1.1.1

4.21 Beneficial owners (local, foreign, business reputation and experience). Y 1.1.1

4.22 Related parties. N/A

4.23 Use of derivative financial instruments. Y 1.1.1

Financial Reporting

4.24 Accounting policies and industry specific practices. Y 1.6

4.25 Revenue recognition practices. Y 1.6

4.26 Accounting for fair values. Y 1.6

4.27 Stocks/inventories (for example, locations, quantities). Y 1.1.1

4.28 Foreign currency assets, liabilities and transactions. Y 1.1.1

4.29 N/A

4.30 N/A

4.31 Financial statement presentation and disclosure. Y 1.1.1

Accounting Estimates

4.32 Y 1.6

4.33 Y 1.1.1

4.34

Y 1.1.1

N/A

Y 1.1.1

Debt structure, including covenants, restrictions, guarantees, and

off-balance-sheet financing arrangements.

- Stock obsolescence

- Warranty obligations

- Depreciation method or asset useful life

- Carrying value of investments

- Outcome of long term contracts

- Costs arising from litigation

Industry-specific significant categories (for example, loans and investments for

banks, accounts receivable and inventory for manufacturers, research and

development for pharmaceuticals).

Accounting for unusual or complex transactions including those in controversial

or emerging areas (for example, accounting for share-based payments).

The requirements of the applicable financial reporting framework relevant to

accounting estimates, including related disclosures.

How management identifies those transactions, events and conditions that may

give rise to the need for accounting estimates to be recognised or disclosed in

the financial statements.

For example consider:

- Provision for doubtful debts

- Share based payments

- Financial instruments not traded in an active and open market

How management makes the accounting estimates, and an understanding of

the data on which they are based, including:

i) The method, including where applicable the model, used in making the

accounting estimate;

ii) Relevant controls;

iii) Whether management has used an expert;

1.3 of 52 MCL May 2012


Y, N, N/A PAF Ref

Y 1.1.1

N/A

Y 1.1.1

5. Objectives, strategies and related business risks

5.1 Y 1.1.1

5.2 Y 1.1.1

5.3 Y 1.1.1

5.4 N/A

5.5 N/A

5.6 N/A

5.7 N/A

5.8 N/A

5.9

a) Identifies business risks relevant to financial reporting objectives? Y 1.1.1/2

b) Estimates the significance of those risks? N/A

c) Assesses the likelihood of their occurrence? N/A

d) Decides about actions to address those risks? Y 1.1.2

N/A

6. Measurement and review of the client’s financial performance

6.1 Key ratios and operating statistics. N/A

6.2 Key performance indicators. Y 1.1.1

6.3 Employee performance measures and incentive compensation policies. Y 1.1.1

iv) The assumptions underlying the accounting estimates;

v) Whether there has been or ought to have been a change from the prior

period in the methods for making the accounting estimates, and if so, why.

vi) Whether and, if so, how management has assessed the effect of

estimation uncertainty.

How does the client address industry, regulatory and other risk factors relating to, for example:

Industry developments (a potential related business risk might be, for example,

that the client does not have the personnel or expertise to deal with the

changes in the industry).

New products and services (a potential related business risk might be, for

example, that there is increased product liability).

How the client:

e) Deals with the results of the above process?

Expansion of the business (a potential related business risk might be, for

example, that the demand has not been accurately estimated).

New accounting requirements (a potential related business risk might be, for

example, incomplete or improper implementation, or increased costs).

Regulatory requirements (a potential related business risk might be, for

example, that there is increased legal exposure).

Current and prospective financing requirements (a potential related business

risk might be, for example, the loss of financing due to the client’s inability to

meet requirements).

Use of IT (a potential related business risk might be, for example, that systems

and processes are incompatible).

Effects of implementing a strategy, particularly any effects that will lead to new

accounting requirements (a potential related business risk might be, for

example, incomplete or improper implementation).

1.3 of 52 MCL May 2012


Y, N, N/A PAF Ref

6.4 Trends. N/A

6.5 Use of forecasts, budgets and variance analysis. Y 1.1.1

6.6 Analyst reports and credit rating reports. N/A

6.7 Competitor analysis. N/A

6.8 N/A

6.9 N/A

7. Accounting Systems

The client's systems should be documented to include the following areas:

7.1 Y 3.4

7.2 Y 3.4

7.3 Y 3.4

7.4 Y 1.1.1

7.5 Y 3.4

7.6 Y 1.1.1/3.4

7.7 Y 3.4

7.8

Y 1.1.1

N/A

Service Organisations

7.9

Period-on-period financial performance (revenue growth, profitability, leverage).

The classes of transactions in the client’s operations that are significant to the

financial statements.

The procedures, within both IT and manual systems, by which those

transactions are initiated, recorded, processed, corrected as necessary,

transferred to the nominal ledger and reported in the financial statements.

The related accounting records, supporting information and specific accounts in

the financial statements that are used to initiate, record, process and report

transactions; this includes the correction of incorrect information and how

information is transferred to the nominal ledger.

Methods used by management in determining segment information.

Consider the following:

• Sales, transfers and charges between segments, and elimination of inter-

segment amounts.

• Comparisons with budgets and other expected results, for example,

operating profits as a percentage of sales.

• The allocation of assets and costs among segments.

• Consistency with prior periods, and the adequacy of the disclosures with

respect to inconsistencies.

b) external communications, such as those with regulatory authorities.

Where the entity uses a service organisation:

How the information system captures related party transactions. This should

include those controls in place for the approval, authorisation and identification

of related party transactions and transactions outside the normal course of

business.

How the information system captures events and conditions, other than classes

of transactions, that are significant to the financial statements.

The financial reporting process used to prepare the client’s financial

statements, including significant accounting estimates and disclosures.

Controls surrounding journal entries, including non-standard journal entries

used to record non-recurring, unusual transactions or adjustments.

Financial reporting roles and responsibilities and significant matters relating to

financial reporting, including:

a) Communications between management and those charged with

governance; and

1.3 of 52 MCL May 2012


Y, N, N/A PAF Ref

N/A

N/A

N/A

N/A

N/A

7.10 N/A

8. Control environment?

8.1 Y 1.1.1

8.2 Y 1.1.1

8.3 Y 1.1.1

8.4 Y 1.1.1

8.5 Y 3.1

8.6 Y 1.1.1

8.7 Y 1.1.1

9. Risk of Fraud

9.1 Y 1.1.1

9.2 Y 1.1.1

9.3 N/A

9.4 N/A

9.5 N/A

a) The nature of the services provided by the service organisation and the

significance of those services to the user entity, including the effect thereof

on the user entity's internal control;

b) The nature and materiality of the transactions processed or accounts or

financial reporting processes affected by the service organisation;

c) The degree of interaction between the activities of the service organization

and those of the user entity;

d) The nature of the relationship between the user entity and the service

organisation, including the relevant contractual terms for the activities

undertaken by the service organisation;

Management’s philosophy and operating style.

Organisational structure.

Assignment of authority and responsibility.

Human resource policies and practices.

Do we have notes on the following matters.

Management’s assessment of the risk that the financial statements may be

materially misstated due to fraud.

e) How the entity's use of a service organisation affects the user auditor's

reporting responsibilities in relation to accounting records arising from laws or

regulations.

Controls at the user entity that relate to the services provided by the service

organisation, including those that are applied to the transactions processed by

the service organisation.

Do we have notes on the attitude of the company to the following matters.

Communication and enforcement of integrity and ethical values.

Commitment to competence.

Participation by those charged with governance.

Management’s process for identifying and responding to the risks of fraud,

including any specific risks of fraud that management has identified or account

balances, classes of transactions or disclosures for which a risk of fraud is likely

to exist.

Management’s communication, if any, to those charged with governance

regarding its processes for identifying and responding to the risks of fraud in the

entity.

Management’s communication, if any, to employees regarding its views on

business practices and ethical behaviour.

How those charged with governance exercise oversight of management’s

processes for identifying and responding to the risks of fraud in the entity and

the internal control that management has established to mitigate these risks.

1.3 of 52 MCL May 2012


Y, N, N/A PAF Ref

10. Control activities

10.1 Y 3.4

Control activities include:

* Authorisation/Performance reviews

* Information processing

* Physical controls

* Segregation of duties

10.2 Y 3.4

11. Monitoring of controls

Y 3.4

12. Groups

N/A

13. Related Parties

Y 1.5

Are there any particular issues arising from the use of IT that require

documenting?

For areas where there is a risk of material misstatement do we have notes on

how the client monitors the operation of controls and control activities in those

areas including:

a) the sources of the information used in the entity's monitoring activities;

b) the basis upon which management considers the information to be

sufficiently reliable for the purpose;

c) how the entity initiates remedial actions to deficiencies in its controls;

d) the nature of the internal audit function's responsibilities and how the

internal audit function fits in the entity's organizational structure; and

How those charged with governance exercise oversight of management’s

processes for identifying and responding to the risks of fraud in the entity and

the internal control that management has established to mitigate these risks.

For areas where there is a risk of material misstatement do we have notes on

relevant control activities?

and as a minimum would include those within the main transaction cycles.

b) Ascertain the nature of the relationship.

c) Update details on PAF06 or elsewhere on the permanent file as

appropriate.

i) matters relating to the financial reporting framework;

ii) matters relating to the mechanics of the consolidation process;

iii) matters relating to consolidation adjustments.

d) Instructions issued by Group Management to the components including

accounting policies to be applied, identification of related party transactions,

identification and treatment of intra group transactions, balances and

unrealised profits.

a) Identify changes from the previous periods.

e) the activities performed, or to be performed, by the internal audit function.

For example monitoring by management or a separate internal audit function.

Sufficient understanding of the group to enable assessment of the risk of

material misstatement due to fraud or error. In particular:

a) Identification of components of the group that are likely to be significant.

b) Group wide controls including any internal audit function.

c) The consolidation process including:

Ascertain from management/ those charged with governance their assessment

of whether there are any individuals (in addition to the directors) or entities

which should be treated as related parties.

1.3 of 52 MCL May 2012




File no: M0001 AW 3/10

REGISTER OF LAWS AND REGULATIONSAW 3/11

1

2

3

None

Summary of the legal and regulatory framework What procedures ensure compliance? Audit approach

Laws and regulations governing accounts

(e.g. Companies Act/ Charities Act)

Companies Act and accounting standards The client uses this firm to prepare their

accounts from management accounts and to

ensure that disclosure is correct.

Completion of disclosure checklist/

annual review of changes

(e.g. FSA, ABTA)

Reference should be made to specific requirements not bland statements about say employment legislation.

Sufficient detail should be recorded to enable consideration of the impact of the laws and regulations on the determination of material amounts and disclosures in the financial statements.

General business laws and regulations The factory and warehouse managers are

responsible for health and safety issues. They are

required to report any problems or potential

problems to the board.

An accident book is kept and any incidents

recorded.

Review the accident book and

consider whether:

- any accidents recorded may give

rise to a claim against the company;

- the frequency or type of accidents

suggests that there may be a wider

problem.

(See C8.3-3)

(e.g. health and safety, employment, hygiene, planning)

Health and safety regulations are relevant in

both the factory and warehouse. However, there

are no particular concerns such as hazardous

chemicals or dangerous equipment.

Other specific laws and regulations

1.4 of 52 MCL May 2012




File no: M0001 AW Date: 3/10

DETAILS OF RELATED PARTIESAW 3/11

Adele Long Director/shareholder Remuneration

Dividends

Anthony Hope Director/shareholder Remuneration

Dividends

Name of related party Nature of relationship Nature of transactions

Ray Chard Director/shareholder Remuneration

Dividends

Loan account

Close family None.

They are in full time employment

and have no business interests or

relationship with MCL.

Sherry Chard, 100% shareholder in

Chard Computers Limited.

Spouse of Raymond Chard There are no transactions or

balances between MCL and

Chard Computers.

Spouses of Adele Long and Anthony

Hope

Reca Limited Subsidiary of Chard

Computers so controlled by

Mrs Chard

Sales to Reca on agreed

terms

Children of Adele Long and Anthony

Hope

(Note, the Chards have no children)

Close family None.

They are in full time education

and have no business interests or

relationship with MCL.

Parents of all directors Close family None.

The parents of all the directors

are either deceased or retired and

hence have no business interests.

1.5 of 52 MCL May 2012




File no: M0001

SIGNIFICANT ACCOUNTING POLICIES

Assessment of policy including

compliance with applicable

accounting standards

Revenue Revenue is measured at the fair value of the consideration

received or receivable and represents amounts receivable for

goods provided in the normal course of business, net of

discounts. Revenue is recognised when the goods are

dispatched to the buyer. Management would only be able to

manipulate the point at which revenue is recognised by

changing the date of dispatch.

Yes standard policy that complies

with SSAP 9 and UITF 40.

Foreign

exchange

Transactions in currencies other than the sterling are recorded

at the rate of exchange on the date the transaction occurred.

Monetary assets denominated in other currencies are

translated into the functional currency at the rate ruling at the

balance sheet date. All differences are taken to the profit and

loss account.

Finance leases Assets held under finance leases are initially recognised as

assets of the company at their fair value at the inception of the

lease or, if lower, at the present value of the minimum lease

payments. The corresponding liability to the lessor is included

in the balance sheet as a finance lease obligation.

Policy complies with SSAP 21

Depreciation and impairment loss are calculated and

recognised in the same manner as owned assets, except that

the estimated useful lives cannot exceed the relevant lease

terms, if shorter.

Policy complies with SSAP 21

Land & buildings

Area of

accountsAccounting policy

Borrowing costs Borrowing costs are recognised in the P&L in the period in

which they are incurred.

Deferred tax is provided in respect of all material timing

differences except: freehold property where there is not a

binding contract to sell the property and gains where it is

expected that rollover relief will be claimed.

Deferred tax assets are recognised to the extent that it is more

likely than not that they will be recoverable.

Current tax Current tax is the expected corporation tax payable on the

taxable profit for the year, using tax rates enacted or

substantively enacted at the balance sheet date, and any

adjustment to tax payable in respect of previous years.

Deferred tax

Land and buildings held and used in the company's own

activities for production and supply of goods or for

administrative purposes are stated in the balance sheet at

cost less accumulated depreciation unless revalued. If

revalued the revalued amounts equate to the market value on

an existing use basis at the date of revaluation, less any

depreciation or impairment losses subsequently accumulated.

Revaluations are carried out every five years with an interim

review every 3rd year.

Any revaluation increase or decrease on land and buildings is

credited to the property revaluation reserve.

Depreciation on revalued buildings is charged to profit or loss

so as to write off their value, over their estimated useful lives,

using the straight line method. A transfer from revaluation

reserve is made equivalent to the depreciation charge on the

revalued amount.

Complies with FRS 15


Complies with SSAP 20

Complies with FRS 4





1.6 of 52 MCL May 2012





Area of



Plant &

equipment

the related expenditure is separately identifiable, and

the outcome of such a project has been assessed with

reasonable certainty as to:

its technical feasibility, and

Research and

development

expenditure

Plant and equipment are stated at cost less accumulated

depreciation and accumulated impairment losses.

Research and development of products is capitalised when it

meets the following conditions:

there is a clearly defined project, and

Assets held under finance leases are depreciated in the same

manner as owned assets.

Depreciation on plant and equipment is charged to profit or

loss so as to write off their value, over their estimated useful

lives, using the straight line method. The estimated useful life

used in this calculation is regularly reviewed but is still subject

to estimation uncertainty.






adequate resources exist, or are reasonably expected to be

available, to enable the project to be completed and to

provide any consequential increases in working capital.

All other research and development expenditure is charged to

profit or loss in the period in which it is incurred.

its ultimate commercial viability considered in the light of

factors such as likely market conditions (including

competing products), public opinion, consumer and

environmental legislation, and

the aggregate of the deferred development costs, any

further development costs, and related production, selling

and administration costs is reasonably expected to be

exceeded by related future sales or other revenues, and

Stocks are stated at the lower of cost and net realisable value.

Costs are based on the method most appropriate to the type

of stock class, but usually on a first in first out method. Net

realisable value is based on selling price less any completion

or selling costs. Where the selling price could be subject to

market condtions, there will be estimation uncertainty in the

assessment of net realisable value.

Where it is not probable that an outflow of economic benefits

will be required, or the amount cannot be estimated reliably,

the obligation is disclosed as a contingent liability, unless the

probability of outflow of economic benefits is remote. Possible

obligations, whose existence will only be confirmed by the

occurrence or non-occurrence of one or more future events

are also disclosed as contingent liabilities unless the

probability of outflow of economic benefits is remote.

Provisions are recognised for liabilities of uncertain timing or

amount when the company has a legal or constructive

obligation arising as a result of a past event, it is probable that

an outflow of economic benefits will be required to settle the

obligation and a reliable estimate can be made. Where the

time value of money is material, provisions are stated at the

present value of the expenditures expected to settle the

obligation.

Provisions and

contingent

liabilities

Stock

1.6 of 52 MCL May 2012





Area of


All policies are standard for a manufacturing company and comply with the relevant accounting standards. There are

no areas of concern that may have a material impact on the accounts.

Conclusion

1.6 of 52 MCL May 2012




File no: M0001

SIGNIFICANT ACCOUNTING ESTIMATES

Accounting estimate Basis for estimate Audit approach

Rates of depreciation on

property, plant and

equipment

Past experience of useful economic life and also

planned replacement policy for plant and equipment

Review of gains and losses on

disposal of assets together with

review of fixed asset register for use

of fully depreciated assets

Valuation of property Valuation is provided by external valuer appointed

by management

Review of valuation and completion

of supplementary audit programme

for reliance on work of management's

expert

Rates of amortisation of

capitalised research and

development expenditure

Management estimate of period expected to benefit

from the expenditure

Review of how management made

their estimate

Allowance for recoverability

of debtors

Consideration of specific circumstances on a

customer by customer basis

Review of outcome of opening bad

debt provision

Provision for obsolete and

slow moving stock

Review of stock at stocktake and of stock records Review of any stock write offs during

the year, and management's

assessment of net realisable value

and results of standard tests.

Provision for recall costs of

faulty components

Total provision is the sum of a number of different

specific elements that has been costed on the basis

of current prices and multiplied by the estimated

number of units

Review of client calculations

Provision for claim re faulty

component

No provision required on basis of legal advice Review the basis of claim and the

legal advice received.

1.7 of 52 MCL May 2012


Client: Manufacturing Company Limited Ref:

Year end: 31 Dec 2009 C1.1

File no: M0001

ACCEPTANCE AND CONTINUANCE PROCEDURES

Yes No

1 Undue dependence on an audit client

a)

i) N

ii) N

b) N

c) N

2 Loans to or from a client; guarantees; overdue fees

a) N

b) N

3 Goods and services: hospitality

N

4 Litigation

N

5 Family or other personal relationships

N

Is this client/group of clients highly prestigious?

Is this client/group a public interest client or group?

Notes

1. APB Ethical Standards require an external independent quality control review where the regular annual fee income will

regularly exceed 10%.

2. Where fees will regularly exceed 15% this is an insurmountable threat and the firm must resign.

3. The above figures become 5% and 10% respectively for listed or public interest entities.

4. A public interest client is one that would attract national attention if a problem were publicised.

Do you or any of your staff have any loans or guarantees to or from the client?

Are there any overdue fees for any services?

Have you or any of your staff accepted any material goods or services on favourable

terms or received undue hospitality from the company?

Is there any actual or threatened litigation between yourself and the client in relation to

fees, audit work, or other work?

Do you or any of your staff have any personal or family connections with the company and

its officers?

15% of the annual fee income of the audit firm or the part of the firm by reference

to which the audit engagement partner’s profit share is calculated?

Regulations state that ‘a Registered Auditor shall not accept appointment or continue as auditor if the firm has any

interest likely to conflict with carrying out the audit properly’ and ISA 200.4.1 requires compliance with APB Ethical

Standards.

This questionnaire assumes a knowledge of APB ethical standards. It must be completed annually for all clients to

ensure that the standards have been complied with.

Note whether advantage being taken of ES - Provisions Available for Small Entities. YES / NO*

Do the total fees for this client/group of clients exceed:

10% of the annual fee income of the audit firm or the part of the firm by reference

to which the audit engagement partner’s profit share is calculated?

1.9 of 52 MCL May 2012


Yes No

6 Ex-partners or senior employees

a) N

b) N

7 Mutual business interest

N

8 Beneficial interests and trusteeships

a) N

b) N

c) N

d) N

9 Associated firms

N

10

a) N

b) Y

c) N

d) N

Any beneficial interest in shares or other investments?

Any beneficial interest in trusts?

Any trustee investments, nominee shareholdings or ‘bare trustee’ shareholdings?

Any trusteeships in a trust that holds shares in an audit client?

Are you or your staff associated with any other practice or organisation which has any

dealings with the company?

Provision of other services, specialist valuations and advocacy by the firm

or a network firm

Note: a network firm is any entity that is:

(i) controlled by the audit firm; or

(ii) under common control, ownership or management; or

(iii) otherwise affiliated or associated with the audit firm through the use of a common name or through

the sharing of significant common professional resources.

Are any services in relation to the management of the company performed by the firm

or a network firm?

Are any accounting services performed for the company such as preparation of the

statutory accounts from trial balance, bookkeeping or payroll services?

Do the accounts include any specialist valuations carried out by the firm or a network

firm?

Are the firm or a network firm currently acting for the client as an advocate in any

adversarial proceeding or situation such as a hearing before the Commissioners?

Do you or any of your staff have any financial involvement in the company in respect of

the following:

Has any officer of the company been a partner or senior employee in the practice?

Is the partner or any senior employee on the audit joining or involved in substantive

negotiations with the client?

Do you or any of your partners or staff have any mutual business interests with the client

or with an officer or employee of the client?

1.9 of 52 MCL May 2012


Yes Noe) N

f) Y

g) N

11 Rotation of audit engagement partner

Have you been acting as the audit engagement partner for more than ten years? N

12 Adequate resources

(a) N

(b) N

13 Proper performance

(a) N

(b) N

14 Client integrity

(a) N

(b) N

(c) N

(d) N

(e) NIndications of an inappropriate limitation in the scope of work.

Whether the client is aggressively concerned with maintaining the firm's fees as low

as possible.

Does the firm or a network firm provide advice on taxation matters or undertake tax

compliance work for the client?

Have any other services been provided to the client that may cause a threat to the

firm's objectivity or independence?

Note

There are specific requirements in ES3: Long association with the audit engagement that apply to listed companies. See

paragraphs 12 to 18 of ES 3.

Are there any indications that the engagement team is not competent or does not

have the necessary time and resources?

Are there any indications that the firm or engagement team will not be able to

demonstrate compliance with ethical requirements?

Are there any aspects of the client, or other factors, that will adversely affect the firm’s

ability to perform the audit properly?

Are there any issues concerning the integrity of the principal owners, key

management or those charged with governance of the entity?

Are there indications that the client lacks integrity, including:

The nature of the client's operations, including its business practices.

The identity and business reputation of the client's principal owners, key

management, related parties and those charged with governance.

Information concerning the attitude of the client's principal owners, key management

and those charged with its governance towards such matters as aggressive

interpretation of accounting standards/ internal control environment.

Has the firm or a network firm been involved in the design, provision or

implementation of any IT systems?

1.9 of 52 MCL May 2012


Yes No(f) N

(g) N

a)

b)

c)

d)

e)

Partner B Lee Date

Consultation (to be completed where appropriate)

Date

AW 11/3/11

The above independence questionnaire was completed last year and has been copied from

last year's file.

Reviewed this year for any changes; there are none

documented the conclusion on independence and any relevant discussions within the firm that support this view.

informed the client of all significant facts and matters that bear upon the firm's objectivity and independence.

19 March 2010

In my opinion the steps proposed are sufficient to maintain independence and to ensure the availability of resources

and the ability to perform the audit properly.

Second

Partner

Conclusion

Having regard to any safeguards identified above, I am satisfied that appropriate procedures regarding the

acceptance and continuance of this client relationship and audit engagement have been followed, and that the

conclusions reached in this regard are appropriate and have been properly documented. In arriving at this conclusion I

confirm that I have:

obtained all relevant information from the firm (and where applicable network firms) to identify and evaluate

circumstances and relationships that may create a threat to independence;

evaluated information on identified breaches, if any, of the firm’s independence policies and procedures to

determine whether they create a threat to independence for this audit engagement;

taken appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards;

and

The firm also provides tax compliance services to the client. The client's affairs are routine

and there are no contentious areas. However, in accordance with the firm's standard

practice the tax computations will be reviewed by a manager in the tax department. No

further specific safeguards are considered necessary.

Safeguards

Where any of the above questions have been answered ‘yes’, specify what safeguards are proposed to maintain

integrity and independence, and to ensure the availability of resources and the ability to perform the audit properly.

The firm prepares the statutory accounts from a trial balance provided by the client;

however, the client approves all journal adjustments and also approves the wording of any

narrative notes. The affairs of the client are routine, there are no contentious areas in

terms of presentation and so a 2nd partner review of the accounts is not required. There is

not a significant threat to the firm's independence from the provision of accounting services

and the option of a 2nd partner review of the presentation should any contentious issues

arise is considered a sufficient safeguard.

Indications that the client might be involved in money laundering or other criminal

activities.

The reasons for the proposed appointment of the firm and non-reappointment of the

previous firm.

1.9 of 52 MCL May 2012


Nickleby & ChuzzlewittCounting House

Kings Road

Plymouth

Devon

The Board of Directors


The Component Factory

Langage Business Park

Plymouth

Devon

Dear Sirs and Madam

You have requested that we audit the financial statements of Manufacturing Company limited. We are

pleased to continue the appointment as your auditors. Our audit will be conducted with the objective of our

expressing an opinion on the financial statements.

The purpose of this letter and the attached Standard Terms of Business is to set out the basis on which we

are to act as auditors and to clarify our respective responsibilities in respect of the audit. A separate letter

will be issued to cover all other work undertaken.

Auditing Standards require us to appoint an engagement partner who shall take overall responsibility for the

planning and conduct of the audit, and for the report that is issued on behalf of the firm. We have assessed

the professional requirements of this assignment and have nominated Mr R Lee as the Senior Statutory

Auditor. The Companies Act 2006 requires that the audited financial statements provided to you must have

the audit report signed by the Senior Statutory Auditor in their own name, on behalf of the firm. The financial

statements filed at Companies House will be signed in the firm's name.

We are bound by the Code of Ethics of the Institute of Chartered Accountants in England and Wales, and

accept instructions to act for you on the basis that we will act in accordance with those ethical guidelines.

1 Your responsibilities as directors

1.1 Our audit will be conducted on the basis that you acknowledge and understand that you have

responsibility:

(a) To prepare financial statements for each financial year that give a true and fair view of the state of affairs

of the company and of the profit or loss of the company for that period.

(b) In preparing those financial statements to:

(i) select suitable accounting policies and then apply them consistently;

(ii) make judgements and estimates that are reasonable and prudent; and

(iii) prepare the financial statements on the going concern basis unless it is inappropriate to presume that

the company will continue in business.

(c) For keeping adequate accounting records which disclose with reasonable accuracy at any time the

financial position of the company and to enable you to ensure that the financial statements comply with the

Companies Act 2006 (the Act) and applicable accounting standards.

(d) For safeguarding the assets of the company and hence for taking reasonable steps to ensure the

company’s activities are conducted honestly and for the prevention and detection of fraud and other

irregularities.

Partners: M.Chuzzlewitt BSc FCA, R.Lee BA FCA, N.Nickleby BSC ACA

Nickleby & Chuzzlewitt is registered to carry on audit work in the UK and regulated for a range of investment business activities by the

Institute of Chartered Accountants in England & Wales.

2.1 of 52 MCL May 2012


1.2 In addition to the general duties of directors specified in sections 170 to 177 of the Act you are

responsible for ensuring that the company complies with laws and regulations applicable to its activities,

and for establishing arrangements designed to prevent any non-compliance with laws and regulations and

to detect any that occur.

1.3 You have agreed to provide us with:

(a) Access to all information of which you are aware that is relevant to the preparation of the financial

statements such as company's books of account and all other relevant records and documentation,

including minutes of all management and shareholders' meetings and other matters;

(b) Additional information that we may request from you for the purpose of the audit; and

(c) Unrestricted access to persons within the company from whom we determine it necessary to obtain audit

evidence.

You are required to confirm in the directors’ report that so far as you are aware, there is no relevant audit

information of which we, the company’s auditors, are unaware and that you have taken all the steps that

you ought to take as directors in order to make yourselves aware of any relevant audit information and to

establish that we are aware of that information..

2 Our responsibilities as auditors

2.1 Our responsibility is to audit and express an opinion on the financial statements in accordance with

applicable law and International Standards on Auditing (UK and Ireland) as to whether:

• the financial statements give a true and fair view of the state of the company's affairs as at 31

December, and of its profit [loss] for the year then ended;

• the financial statements have been properly prepared in accordance with United Kingdom Generally

Accepted Accounting Practice;

• the financial statements have been prepared in accordance with the Companies Act 2006, and

• the information given in the directors' report is consistent with the financial statements.

In respect of the following matters specified in the Companies Act 2006 we will also report to you on

whether or not in our opinion:

• adequate accounting records have been kept by the company and returns adequate for our audit have

been received from branches not visited by us, or

• the financial statements are in agreement with the accounting records and returns, or

• certain disclosures of directors' remuneration specified by law are not made, or

• we have received all the information and explanations we require for our audit, and

• where the company has prepared accounts in accordance with the small company regime, whether it is

entitled to do so.

2.2 As noted above, our report will be made solely to the company's members, as a body, in accordance

with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work will be undertaken so that we might

state to the company's members those matters we are required to state to them in an auditor's report and

for no other purpose. In those circumstances, to the fullest extent permitted by law, we will not accept or

assume responsibility to anyone other than the company and the company's members as a body, for our

audit work, for the audit report, or for the opinions we form.

2.3 There are certain other matters, which according to the circumstances, may need to be dealt with in our

report. For example, where the financial statements do not give details of directors' remuneration or of their

transactions with the company, the Companies Act 2006 requires us to disclose such matters in our report.

2.4 In addition, we have a professional duty to report if the financial statements do not comply in any

material respect with Financial Reporting Standards or Statements of Standard Accounting Practice, unless

in our opinion non-compliance is justified in the circumstances. In determining whether or not any departure

is justified we will consider:

(a) whether the departure is required in order for the financial statements to give a true and fair view; and

(b) whether adequate disclosure has been made concerning the departure.

2.1 of 52 MCL May 2012


2.5 Our professional duties also include:

(a) incorporating in our report a description of the directors' responsibilities for the financial statements,

where the financial statements or accompanying information do not include such description; and

(b) considering whether other information in documentation containing the financial statements is consistent

with the audited financial statements.

3 Scope of audit

3.1 Our audit will be conducted in accordance with the International Standards on Auditing (UK and Ireland)

issued by the Auditing Practices Board. An audit involves obtaining evidence about the amounts and

disclosures in the financial statements sufficient to give reasonable assurance that the financial statements

are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

• whether the accounting policies are appropriate to the company's circumstances and have been

consistently applied and adequately disclosed;

• the reasonableness of significant accounting estimates made by the directors; and

• the overall presentation of the financial statements.

In addition, we read all the financial and non-financial information in the Annual Report to identify material

inconsistencies with the audited financial statements. If we become aware of any apparent material

misstatements or inconsistencies we consider the implications for our report.

3.2 Because of the test nature and other inherent limitations of an audit, together with the inherent

limitations of any accounting and internal control system, there is an unavoidable risk that even some

material misstatements may remain undiscovered even though the audit is properly planned and performed

in accordance with International Standards on Auditing (UK and Ireland).

3.3 We will obtain an understanding of the accounting and internal control systems in order to assess their

adequacy as a basis for the preparation of the financial statements and to establish whether the company

has maintained proper accounting records. We will need to obtain relevant and reliable evidence sufficient

to enable us to draw reasonable conclusions there from.

3.4 The nature and extent of our tests will vary according to our assessment of the company's accounting

and internal control systems, and may cover any aspects of the business's operations. We shall report to

the management any significant weaknesses in, or observations on, the company's systems that come to

our attention of which we believe the directors should be made aware. Any such report may not be provided

to any third party without our prior written consent. Such consent will only be granted on the basis that such

reports are not prepared with the interests of any party other than the members in mind and that we

therefore neither have nor accept any duty or responsibility to any other party as concerns the reports.

3.5 The responsibility for safeguarding the assets of the company and for the prevention and detection of

fraud, error and non-compliance with law or regulations rests with the management. However, we will plan

our audit so that we have a reasonable expectation of detecting material misstatements in the financial

statements resulting from irregularities, fraud or non-compliance with law or regulations, but our

examination should not be relied upon to disclose all such material misstatements or frauds, errors or

instances of non-compliance that might exist.

3.6 As part of our normal audit procedures, we may request you to provide formal representations

concerning certain information and explanations we receive from you during the course of our audit. In

particular, where we bring misstatements in the financial statements to your attention that are not adjusted,

we shall require written representation of your reasons. In connection with representations and the supply of

information to us generally, we draw your attention to section 501 of the Companies Act 2006 under which it

is an offence for an officer or employee of the company to knowingly or recklessly make misleading, false or

deceptive statements to the auditors.

3.7 To enable us to conduct a review of your financial statements, which constitutes part of our audit, we will

request sight of any documents or statements, which will be issued with the financial statements.

3.8 Once we have issued our report we will have no further direct responsibility in relation to the financial

statements for that financial year. However, we expect that you will inform us of any material event

occurring between the date of our report and that of the annual general meeting which may affect the

financial statements. We are entitled to attend all general meetings of the company, and to receive notice of

all such meetings.

2.1 of 52 MCL May 2012


3.9 We appreciate that the present size of your business renders it uneconomic to create a system of

internal control based on the segregation of duties for different functions within each area of the business.

In the running of your company we understand that the director(s) is/(are) closely involved with the control

of the company's transactions. In planning and performing our audit work we shall take account of this

supervision.

3.10 HM Revenue & Customs do not currently require the auditor to provide assurance on the XBRL

tagging of the financial statements submitted to it after 31 March 2011 with the Company Tax Return. In

addition, the current International Standards on Auditing (UK and Ireland) does not require the auditor to

confirm the accuracy of the tagging as part of the audit. Accordingly, our audit does not cover the accuracy

of the XBRL tagging in the financial statements, and we accept no responsibility for any inaccuracies

identified by HM Revenue & Customs.

3.11 A fuller description of the scope of an audit of financial statements arising from the requirements of

ISAs (UK and Ireland), together with other legal and regulatory requirements, is provided on the Auditing

Practices Board website at www.frc.org.uk/apb/scope/private.cfm.

4 Communication

4.1 In order to ensure that there is effective two-way communication between us we set out below the

expected form and timing of such communications.

• We shall contact Adele Long by telephone prior to each year-end for preliminary discussions concerning

the audit. We will confirm in writing the matters discussed and any agreed action.

• We will arrange a meeting to discuss the forthcoming audit prior to the expected start date. Again we will

confirm in writing the matters discussed and any agreed action.

• We will arrange a meeting to discuss any matters arising from the audit after completion of the detailed

work. Again we will confirm in writing the matters discussed and any agreed action.

4.2 The formal communications set out above are the minimum required to comply with auditing standards.

We shall of course contact you on a more frequent and regular basis regarding both audit and other

matters.

5 Other services

5.1 The provision of accounting and taxation services are dealt with in a separate engagement letter.

5.2 We have not agreed any other services. However, there are many other areas where we can be of

assistance and we shall be pleased to discuss any matters with you. These other services include:

(a) reports in support of returns or claims, e.g., insurance company certificates, government claims, etc.;

(b) advice on financial matters;

(c) management accounting, including such matters as cash flow statements, costing systems, etc., and

advice on management;

(d) advice on the selection and implementation of computer systems;

(e) investigations for special purposes, e.g., acquisitions of other businesses, or examination of specific

aspects of your business; and

(f) advice on the selection and recruitment of staff.

6 Limitation of liability

We have not agreed any limitation of our liability in respect of our audit work under sections 534 to 536 of

the Companies Act 2006.

2.1 of 52 MCL May 2012


7 Agreement of terms

7.1 This letter supersedes any previous engagement letter. The terms set out in this letter and our attached

Standard Terms of Business (last revised March 2009) shall take effect immediately upon your

countersigning this letter and returning it to us or upon the commencement of the audit for the accounting

period ended 31 December 2009. You or we may agree to vary or terminate our authority to act on your

behalf at any time without penalty. Notice of variation or termination must be given in writing.

7.2 Once it has been agreed, this letter and the attached Standard Terms of Business will remain effective

until they are replaced. We shall be grateful if you could confirm your agreement to these terms by signing

the enclosed copy of this letter and returning it to us immediately. If this letter and the attached terms of

business are not in accordance with your understanding of our terms of appointment, please let us know.

Yours faithfully,

I confirm that I have read and understood the contents of this letter and the attached Standard Terms of

Business and agree that they accurately reflect the services that we have instructed you to provide.

R Chard

Director, for and on behalf of the board of Manufacturing Company Limited

7 March 2009

Nickleby & Chuzzlewitt

2.1 of 52 MCL May 2012


Client: Manufacturing Company Limited Prepared by: JO Date: 2/07 Ref:

Year end: 31 Dec 2007 Reviewed by: BL Date: 2/07 2.6

File no: M0001

NEW CLIENT CHECKLIST

Yes No N/A Initials

1 JO

2 JO

3 JO

4 JO

1 JO

2 JO

3 JO

4 JO

5 JO

6 JO

7 JO

Have we obtained and copied for file specific proof

of identity (e.g. passport or photo driving license)

for all directors and shareholders (or the controlling

shareholders if any)?

Specify:

Copy passports obtained (2.6.3)[Not reproduced in case study]

Pre-interview

Are we satisfied that we are independent and are

likely to have adequate resources and knowledge to

complete the audit?

Are we satisfied that the acceptance of the

appointment would not have an adverse effect on

the reputation of the practice?

Are we satisfied that acceptance of the engagement

will not create any conflict of interest with existing

clients?

Are we satisfied that there are no other reasons

why we would not wish to act for the client (for

example financial difficulties or litigation)?

Money laundering considerations

Are we satisfied that the company is a bona fide

business?

Are there any concerns regarding the integrity of

the directors, management or shareholders of the

company?

Have we established the ultimate control of the

company?

If the client has been introduced by a principal or

staff member of the firm, or a long-standing client,

do we have written confirmation from the introducer

of the client’s identity?

Have we written for references from other sources?

Specify: N/A - not considered necessary

Have we obtained and copied for file specific proof

of the client’s address? (E.g. a current utility bill).

Specify: Copy of bank statement

2.6 of 52 MCL May 2012


Yes No N/A Initials

1 JO

2 JO

3 JO

4 JO

5

JO

JO

JO

JO

JO

JO

JO

JO

6 JO

7

JO

JO

JO

8

JO

No fee quoted

1 JO

2 JO

3 JO

· Organisation chart

Points for interview

Have we identified which marketing source gave

rise to the new client?

Specify: Brochure

Has the name of previous been accountant

obtained?

Specify: ABC & Co

Have full personal details of directors and

shareholders been obtained?

Have we completed section 1 of the permanent file?

Have we requested details/copies of the items

below?· Certificate of incorporation

· Memorandum and Articles of Association

· Last annual return

· Books and records

Have we written to the previous auditors for all

necessary information?

· Last set of accounts

· Fixed asset register

· Last tax return

Have we obtained all the documentation required

for the consideration of money laundering, as noted

above?

Has the client signed or agreed to sign the

necessary authorisations?

· Tax authority

· Bank authority

· Building society authority

· Other (specify)

Has the client been quoted a fee for the audit? If

yes, give details below:

Offices Procedures

Have all statutory matters concerning the

resignation of the previous auditor and our

appointment been dealt with?

Have we carried out a company search?

2.6 of 52 MCL May 2012


Yes No N/A Initials

4 JO

5 JO

6 JO

7 JO

8 JO

9 JO

Date

Date

Action agreed

Have we written for information from other sources?

Specify:

Have we sent an engagement letter covering all the

services that we will provide to the client?

Have we notified the tax authorities and requested

a copy of the last tax return if not otherwise

available?

Have the necessary files been opened?

Have the client’s details been entered onto the time

records?

Have we carried out an initial assessment to

determine whether the client will require a hot file

review under the firm’s quality control procedures?

Where “no” answer has been given to any of the questions and the appointment has been accepted detail below the

action taken and reasons, where necessary:

There are no 'no' answers

Principal:

Prepared by:

2.6 of 52 MCL May 2012


Client: Manufacturing Company Limited Prepared by: JO Date: 2/08 Ref:

Year end: 31 Dec 2008 Reviewed by: BL Date: 2/08 2.7

File no: M0001

Register of non-audit services for audit clients

Type of service Fee

SI SR M A F IAccounting services £4k

Tax services £3k

Internal audit services

Information technology

services

Valuation / actuarial

valuation services

Litigation support services

Legal services

Recruitment services

Remuneration services

Corporate finance

services

Transaction related

services

Total fee £z

Partner BL Date: 2/08

Second partner Date:

(where required)

*SI = self interest; SR = self review; M = management; A = advocacy; F = familiarity; I = intimidation

Which threats apply to

this service (tick all that

apply)?*

Safeguards required

Statutory accounts are prepared from the clients

management accounts. The client approves all

adjustments and also the wording of narrative

notes. Preparation of the statutory accounts is

therefore a largely mechanical exercise. The firm's

usual review processes are therefore an adequate

safeguard.

The tax computations are routine with no

contentious items. The firm's usual review processes

are therefore an adequate safeguard.

In my opinion the safeguards identified above ensure that any non-audit services provided to the audit client do not

jeopardise the firm’s objectivity and independence.

2.7 of 52 MCL May 2012


Client: Manufacturing Company Limited Prepared by: AW Date: 11/03/11 Ref:

Year end: 31 Dec 2010 Reviewed by: JO Date: 12/3/11 2.8

File no: M0001

REGISTER OF INVOLVEMENT IN THE AUDIT

Year

1 2007

2 2008

3 2009

4 2010

5

6

7

8

9

10

Independent / second partner Audit partnerManager / senior in

charge of the audit

BL Senior JO

BL Senior JO

BL

Senior AW

Manager JO

BL

Senior AW

Manager JO

2.8 of 52 MCL May 2012


3.1

Organisation chart

Directors

Managers

The chart shows those staff that are relevant from an audit perspective.


Raymond Chard Adele Long Anthony Hope(Managing) (Finance) (Development)

(Factory - Plymouth) (Warehouse - Taunton) (Accounts)

Elizabeth Sharp(PA)

Terence Ipplepen Tiffany Wall Adrian Walker

3.1 of 52 MCL May 2012


Manufacturing Company Limited AW 3/093.4

Systems NotesWeakness

(Ref A6)

Control

(Ref C5.1)Purchase OrderingA1 Orders below £ 10,000 are authorised by Terence Ipplepen (TI) Y (15)A2 Orders above £ 10,000 are authorised by Ray Chard (RC) Y (15)A3 Orders with new suppliers are authorised by Ray Chard (RC) Y (16)A4 Orders are three part documents and are pre-numbered:

1. Copy to supplier2. Copy retained by TI3. Copy to accounts.

A5 TI copy filed by supplierA6 Accounts copy placed in an order outstanding file in numerical orderA7 The outstanding orders file is periodically reviewed by RC Y (17)A8 Any acknowledgements of orders from suppliers are filed by TI by supplier

Goods Received - FactoryB1 All deliveries are recorded in a goods received book. This lists the date, supplier,

goods received note number and purchase order number.B2 Goods received are checked against the goods received note (GRN) Y (3)B3 Any missing items are reported to the supplier and noted on the (GRN) Y (3)B4 The GRN is signed by the stores manager Y (3)B5 Stock records are updated from the GRN. This is also noted on the GRNB6 The GRN is passed to accounts B7 The GRN is matched with the outstanding purchase orderB8 If any items on the order are still outstanding a copy of the order is taken and

placed back on the outstanding orders file amended to show what is still

outstanding.B9 The order with the GRN attached is placed on a fulfilled orders file in purchase

number order.B10 There is a separate lockable store for the more valuable components to which the

only the directors, the store manager and the factory manager have a key.

Y (4)

Purchase Invoices (All)C1 All invoices are recorded in the purchase day bookC2 Invoices are matched to orders from the fulfilled orders fileC3 Invoices that match with an fulfilled order that has been signed by TI or RC are

approved for payment by Adrian Walker (AW) .

Y (18)

C4 The cost per unit for each component for this delivery is updated in the factory

stock records (maintained in Access - see below) from the invoice and goods

received note.C5 The invoices are then placed on a payment pending file with the purchase order

and GRN attached.C6 Invoices not fully supported by an approved order are sent to RC for approval. Y (7)

C7 Authorised invoices received back from RC are added to the payment pending file

PaymentsD1 There is a weekly purchase ledger payment run. D2 Invoices in the payment pending file are reviewed by AW to identify those due for

payment based on the credit terms agreed with the supplier.D3 A list of proposed payments is produced and presented to Adele Long (AL),

together with the supporting invoices, orders & GRNs, for approval.

Y (19)

D4 All payments are made by bank transfer where possibleD5 Once paid, invoices (with orders & GRNs attached) are filed in numerical order of

the payment reference (electronic or cheque)D6 All payments are recorded in the cash book by the accounts department

3.4 of 52 MCL May 2012


Weakness

(Ref A6)

Control

(Ref C5.1)Purchase LedgerE1 The purchase ledger is posted weekly from the purchase day book and cash book

E2 All supplier statements are reconciled as received by AW.E3 Any differences are investigated by AW.E4 All completed supplier statement reconciliations are reviewed by AL. Y (11)E5 Any adjustments to a purchase ledger account as a result of a reconciliation must

be approved by AL

Factory ProductionF1 Each new card is given a job number. All card types use the same number

sequence. A suffix is added to denote the card type.

Y (5)

S - Sound cardG - Graphics cardN - Network cardT - TV tuner card

F2 When a job is created the production manger starts a job card and records the

components to be issuedF3 The stores manager checks that the components issued match those recorded on

the job cardF4 Factory inventory records are updated from the job card and the job card is

initialled to indicate that this has occurredF5 As the job moves through the factory labour hours are added by each section

F6 The completed number of cards is recorded on the job cardF7 Factory stock records are updated from the job card before the job cards are sent

to factory managerF8 TI reviews the job cards for all completed jobs to ensure that the materials and

labour booked to each job appear reasonable

Y (6)

F9 TI prices the job cards based on the hourly rates for each section and the cost of

components booked to the jobF10 The factory stock records are updated for the costs of new production batches by

TI

Factory Stock RecordsG1 Records are maintained in an Access databaseG2 A despatch note is generated for all transfers to the warehouse in TauntonG3 The stock records are updated from the despatch notes by the stores manager

who retains a copy in date order.G4 The component cost for each delivery is updated by the accounts department. Y (8)

G5 All components are valued at latest invoice price although the database keeps a

record of the quantity and cost of each delivery.

Y (9)

G6 A sample of stock lines are counted each week to confirm the accuracy of the

stock records. The number of lines counted each week is such that every line is

counted at least once in the year in addition to the year end count

G7 Any discrepancies in the counts are investigated by the stores manager Y (7)G8 Any damaged or apparently old stock is also reported to the stores manager.

Goods Received - WarehouseH1 Stock records are updated from the factory despatch noteH2 The goods received are not checked against the despatch note Y (4)

SalesI1 All customer orders are approved by Adele Long (AL) in terms of credit worthiness,

ability to satisfy order etc

Y (12)

I2 Accounts check the order against the stock records to confirm that the items

required are in stock.

Y(5) Y (13)

This control may not work effectively as the warehouse stock records are not up-to-

date. (AW)

3.4 of 52 MCL May 2012


Weakness

(Ref A6)

Control

(Ref C5.1)I3 Where there is insufficient stock to meet an order the order is passed back to AL

who liaises with RC to determine whether further cards should be manufactured

I4 Where there is sufficient stock AW generates a sales invoice from the customer

orderI5 This is a five part pre numbered document: Y (14)

1. Sales invoice to customer2. Accounts copy - numerical3. Accounts copy - alphabetical4. Despatch note to customer5. Picking list for stores

I6 The sales invoice is sent to the customerI7 The despatch note and picking list are sent to the warehouseI8 Warehouse staff use the picking list to collate the orderI9 The picking list is initialled as fulfilled and filed in numerical orderI10 Goods are sent to the customer with the despatch noteI11 Sales are recorded on a daily basis in the sales day book

Warehouse stock recordsJ1 Warehouse stock records are kept on an Access database. This is separate from

the factory database but is structured in an identical way.J2 There is a backlog of despatch notes to be entered on the system Y (3)J3 There should be weekly counts of stock lines as in the factory stores. However,

these are not undertaken as backlogs in processing factory despatch notes and

picking lists mean that the stock records are frequently wrong.

Y (3)

Sales ledgerK1 Sales are posted daily from the sales day bookK2 Receipts from customers are allocated to the sales ledger in accordance with

remittance advices on a daily basisK3 Customer remittance advices are filed in date orderK4 An aged analysis of debtors is produced every month and is reviewed by AL. Y (8)

K5 Any late payment on larger accounts is dealt with directly by AL. Smaller accounts

are passed to AW to chase

Y (9)

PayrollL1 Payroll for the warehouse and the factory are maintained on A+Payroll package by

the accounts department L2 For weekly paid staff the respective payrolls (factory & warehouse) are approved

by TI and TW prior to payment

Y (21)

L3 Overtime is notified on a weekly basis and is paid a week in arrearsL4 Overtime is approved by the warehouse and factory managers Y (22)L5 Monthly staff (directors and managers) are not paid overtimeL6 The monthly payroll is approved by AL Y (21)L7 All payments are by bank transfer

Other expenditureM1 All expenditure outside the normal production process must be approved by one

of the directors

Y (20)

Cash bookN1 The cash book is posted dailyN2 All bank accounts are reconciled monthly by AW Y (10)N3 All reconciliations are reviewed by AL Y (10)

Accounting systemO1 This is maintained on A+Accounts packageO2 Exceptions reports are run each week by AW and reviewed by AL to confirm the

integrity of data posting.

Y (23)

O3 There is a network across the warehouse and the factory O4 A back-up is run overnight at the end of each working day and stored off-site. Y (24)

3.4 of 52 MCL May 2012


Weakness

(Ref A6)

Control

(Ref C5.1)O5 There are 5 back-up tapes one for each day of the week so at any time there are 5

days worth of back-ups. In addition the month-end tapes are retained.

O6 Monthly management accounts are prepared by AW from a standard report on

the A+ packageO7 Monthly management accounts are reviewed by AL before being circulated to

other board membersO8 Routine month end journals are prepared by AW and approved by AL.O9 Non-routine journals are initiated and approved by AL.

Fixed assetsP1 The fixed asset register is maintained in Excel by AWP2 All assets have a label with a unique number that corresponds to the entry in the

fixed asset register

Y (1)

P3 The register includes the cost, location and date of purchase of each assetP4 AW periodically checks a sample of assets from the register to the physical assets.

However, this is not done on a regular basis and the records are not always

retained.

Y (2)

3.4 of 52 MCL May 2012


MCL AW 7.4.1

27/3

Finance Lease Interest Calculations JO 2/4

Asset description MITSUBISHI FGC20N (4,000lb gas forklift)

Interest rate on agreement 9.90%

Original amount advanced 17500.00

Total interest payable 2798.76

Total payable under agreement 20298.76

Length of agreement (months) 36

Monthly repayments 563.85

Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011

May-2008 36 17,500.00 151.28 (563.85) 17,087.43 412.57

Jun-2008 35 17,087.43 147.08 (563.85) 16,670.67 416.77

Jul-2008 34 16,670.67 142.88 (563.85) 16,249.70 420.97

Aug-2008 33 16,249.70 138.68 (563.85) 15,824.52 425.17

Sep-2008 32 15,824.52 134.47 (563.85) 15,395.15 429.38

Oct-2008 31 15,395.15 130.27 (563.85) 14,961.57 433.58

Nov-2008 30 14,961.57 126.07 (563.85) 14,523.79 437.78

Dec-2008 29 14,523.79 121.87 (563.85) 14,081.81 441.98

Jan-2009 28 14,081.81 117.67 (563.85) 13,635.62 446.18

Feb-2009 27 13,635.62 113.46 (563.85) 13,185.24 450.39

Mar-2009 26 13,185.24 109.26 (563.85) 12,730.65 454.59

Apr-2009 25 12,730.65 105.06 (563.85) 12,271.86 458.79

May-2009 24 12,271.86 100.86 (563.85) 11,808.86 462.99

Jun-2009 23 11,808.86 96.65 (563.85) 11,341.67 467.20

Jul-2009 22 11,341.67 92.45 (563.85) 10,870.27 471.40

Aug-2009 21 10,870.27 88.25 (563.85) 10,394.67 475.60

Sep-2009 20 10,394.67 84.05 (563.85) 9,914.86 479.80

Oct-2009 19 9,914.86 79.84 (563.85) 9,430.86 484.01

Nov-2009 18 9,430.86 75.64 (563.85) 8,942.65 488.21

Dec-2009 17 8,942.65 71.44 (563.85) 8,450.24 492.41

Jan-2010 16 8,450.24 67.24 (563.85) 7,953.63 496.61

Feb-2010 15 7,953.63 63.04 (563.85) 7,452.81 500.81

Mar-2010 14 7,452.81 58.83 (563.85) 6,947.80 505.02

Apr-2010 13 6,947.80 54.63 (563.85) 6,438.58 509.22

May-2010 12 6,438.58 50.43 (563.85) 5,925.16 513.42

Jun-2010 11 5,925.16 46.23 (563.85) 5,407.53 517.62

Jul-2010 10 5,407.53 42.02 (563.85) 4,885.70 521.83

Aug-2010 9 4,885.70 37.82 (563.85) 4,359.68 526.03

Sep-2010 8 4,359.68 33.62 (563.85) 3,829.44 530.23

Oct-2010 7 3,829.44 29.42 (563.85) 3,295.01 534.43

Nov-2010 6 3,295.01 25.21 (563.85) 2,756.37 538.64

Dec-2010 5 2,756.37 21.01 (563.85) 2,213.54 542.84

Jan-2011 4 2,213.54 16.81 (563.85) 1,666.50 547.04 547.04

Feb-2011 3 1,666.50 12.61 (563.85) 1,115.25 551.24 551.24

Mar-2011 2 1,115.25 8.40 (563.85) 559.81 555.45 555.45

Apr-2011 1 559.81 4.20 (564.01) (0.00) 559.81 559.81

666 2,798.76 (20,298.76) 17,500.00 2,213.54

529.50 2,213.54

Q8.1 L6

31 December 2010

Net

repayable

analysis

y/end

bal

L6

7.4.1 of 52 MCL May 2012


MCL AW 7.4.2

27/3


Asset description MITSUBISHI EOP15-24 (3,000lb Order picker)







Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011

May-2008 36 15,700.00 135.72 (505.86) 15,329.86 370.14

Jun-2008 35 15,329.86 131.95 (505.86) 14,955.96 373.91

Jul-2008 34 14,955.96 128.18 (505.86) 14,578.28 377.68

Aug-2008 33 14,578.28 124.41 (505.86) 14,196.83 381.45

Sep-2008 32 14,196.83 120.64 (505.86) 13,811.62 385.22

Oct-2008 31 13,811.62 116.87 (505.86) 13,422.63 388.99

Nov-2008 30 13,422.63 113.10 (505.86) 13,029.87 392.76

Dec-2008 29 13,029.87 109.33 (505.86) 12,633.35 396.53

Jan-2009 28 12,633.35 105.56 (505.86) 12,233.05 400.30

Feb-2009 27 12,233.05 101.79 (505.86) 11,828.98 404.07

Mar-2009 26 11,828.98 98.02 (505.86) 11,421.15 407.84

Apr-2009 25 11,421.15 94.25 (505.86) 11,009.54 411.61

May-2009 24 11,009.54 90.48 (505.86) 10,594.16 415.38

Jun-2009 23 10,594.16 86.71 (505.86) 10,175.01 419.15

Jul-2009 22 10,175.01 82.94 (505.86) 9,752.10 422.92

Aug-2009 21 9,752.10 79.17 (505.86) 9,325.41 426.69

Sep-2009 20 9,325.41 75.40 (505.86) 8,894.95 430.46

Oct-2009 19 8,894.95 71.63 (505.86) 8,460.72 434.23

Nov-2009 18 8,460.72 67.86 (505.86) 8,022.72 438.00

Dec-2009 17 8,022.72 64.09 (505.86) 7,580.96 441.77

Jan-2010 16 7,580.96 60.32 (505.86) 7,135.42 445.54

Feb-2010 15 7,135.42 56.55 (505.86) 6,686.11 449.31

Mar-2010 14 6,686.11 52.78 (505.86) 6,233.03 453.08

Apr-2010 13 6,233.03 49.01 (505.86) 5,776.18 456.85

May-2010 12 5,776.18 45.24 (505.86) 5,315.56 460.62

Jun-2010 11 5,315.56 41.47 (505.86) 4,851.17 464.39

Jul-2010 10 4,851.17 37.70 (505.86) 4,383.02 468.16

Aug-2010 9 4,383.02 33.93 (505.86) 3,911.09 471.93

Sep-2010 8 3,911.09 30.16 (505.86) 3,435.39 475.70

Oct-2010 7 3,435.39 26.39 (505.86) 2,955.92 479.47

Nov-2010 6 2,955.92 22.62 (505.86) 2,472.68 483.24

Dec-2010 5 2,472.68 18.85 (505.86) 1,985.67 487.01

Jan-2011 4 1,985.67 15.08 (505.86) 1,494.89 490.78 490.78

Feb-2011 3 1,494.89 11.31 (505.86) 1,000.34 494.55 494.55

Mar-2011 2 1,000.34 7.54 (505.86) 502.02 498.32 498.32

Apr-2011 1 502.02 3.77 (505.79) (0.00) 502.02 502.02

666 2,510.89 (18,210.89) 15,700.00 1,985.67

L6

475.03 1,985.67

Q8.1 L6

31 December 2010

Net

repayable

analysis

y/end

bal

L6

7.4.2 of 52 MCL May 2012


MCL AW 7.4.3

27/3


Asset description 3 x Mini Cooper (D4T4 1, D4T4 2, D4T4 3)







Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011 2012

Aug-2009 36 62,940.00 718.70 (2,117.67) 61,541.03 1,398.97

Sep-2009 35 61,541.03 698.74 (2,117.67) 60,122.10 1,418.93

Oct-2009 34 60,122.10 678.78 (2,117.67) 58,683.21 1,438.89

Nov-2009 33 58,683.21 658.81 (2,117.67) 57,224.35 1,458.86

Dec-2009 32 57,224.35 638.85 (2,117.67) 55,745.53 1,478.82

Jan-2010 31 55,745.53 618.88 (2,117.67) 54,246.74 1,498.79

Feb-2010 30 54,246.74 598.92 (2,117.67) 52,727.99 1,518.75

Mar-2010 29 52,727.99 578.96 (2,117.67) 51,189.27 1,538.71

Apr-2010 28 51,189.27 558.99 (2,117.67) 49,630.60 1,558.68

May-2010 27 49,630.60 539.03 (2,117.67) 48,051.95 1,578.64

Jun-2010 26 48,051.95 519.06 (2,117.67) 46,453.35 1,598.61

Jul-2010 25 46,453.35 499.10 (2,117.67) 44,834.78 1,618.57

Aug-2010 24 44,834.78 479.14 (2,117.67) 43,196.24 1,638.53

Sep-2010 23 43,196.24 459.17 (2,117.67) 41,537.74 1,658.50

Oct-2010 22 41,537.74 439.21 (2,117.67) 39,859.28 1,678.46

Nov-2010 21 39,859.28 419.24 (2,117.67) 38,160.85 1,698.43

Dec-2010 20 38,160.85 399.28 (2,117.67) 36,442.46 1,718.39

Jan-2011 19 36,442.46 379.32 (2,117.67) 34,704.11 1,738.35 1,738.35

Feb-2011 18 34,704.11 359.35 (2,117.67) 32,945.79 1,758.32 1,758.32

Mar-2011 17 32,945.79 339.39 (2,117.67) 31,167.51 1,778.28 1,778.28

Apr-2011 16 31,167.51 319.42 (2,117.67) 29,369.26 1,798.25 1,798.25

May-2011 15 29,369.26 299.46 (2,117.67) 27,551.05 1,818.21 1,818.21

Jun-2011 14 27,551.05 279.50 (2,117.67) 25,712.88 1,838.17 1,838.17

31 December 2010

Net repayable analysis

22

,1

77

.8

4 L6

y/end

bal

L6

6,108.98

Q8.1

7.4.3 of 52 MCL May 2012


Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011 2012


Jul-2011 13 25,712.88 259.53 (2,117.67) 23,854.74 1,858.14 1,858.14

Aug-2011 12 23,854.74 239.57 (2,117.67) 21,976.64 1,878.10 1,878.10

Sep-2011 11 21,976.64 219.60 (2,117.67) 20,078.57 1,898.07 1,898.07

Oct-2011 10 20,078.57 199.64 (2,117.67) 18,160.54 1,918.03 1,918.03

Nov-2011 9 18,160.54 179.68 (2,117.67) 16,222.55 1,937.99 1,937.99

Dec-2011 8 16,222.55 159.71 (2,117.67) 14,264.59 1,957.96 1,957.96

Jan-2012 7 14,264.59 139.75 (2,117.67) 12,286.67 1,977.92 1,977.92

Feb-2012 6 12,286.67 119.78 (2,117.67) 10,288.78 1,997.89 1,997.89

Mar-2012 5 10,288.78 99.82 (2,117.67) 8,270.93 2,017.85 2,017.85

Apr-2012 4 8,270.93 79.86 (2,117.67) 6,233.12 2,037.81 2,037.81

May-2012 3 6,233.12 59.89 (2,117.67) 4,175.34 2,057.78 2,057.78

Jun-2012 2 4,175.34 39.93 (2,117.67) 2,097.60 2,077.74 2,077.74

Jul-2012 1 2,097.60 19.96 (2,117.56) 0.00 2,097.60 2,097.60

666 13,296.01 (76,236.01) 62,940.00 22,177.88 14,264.60

L6 L6

22

,1

77

.8

4 L6

14

,2

64

.6

4 L6

7.4.3 of 52 MCL May 2012


MCL AW 7.4.4

27/3


Asset description 2 x MITSUBISHI PMWT11N







Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011 2012 2013

Oct-2010 36 24,450.00 233.78 (799.30) 23,884.48 565.52

Nov-2010 35 23,884.48 227.29 (799.30) 23,312.47 572.01

Dec-2010 34 23,312.47 220.79 (799.30) 22,733.96 578.51

Jan-2011 33 22,733.96 214.30 (799.30) 22,148.96 585.00 585.00

Feb-2011 32 22,148.96 207.81 (799.30) 21,557.47 591.49 591.49

Mar-2011 31 21,557.47 201.31 (799.30) 20,959.48 597.99 597.99

Apr-2011 30 20,959.48 194.82 (799.30) 20,355.00 604.48 604.48

May-2011 29 20,355.00 188.32 (799.30) 19,744.02 610.98 610.98

Jun-2011 28 19,744.02 181.83 (799.30) 19,126.55 617.47 617.47

Jul-2011 27 19,126.55 175.34 (799.30) 18,502.58 623.96 623.96

Aug-2011 26 18,502.58 168.84 (799.30) 17,872.13 630.46 630.46

Sep-2011 25 17,872.13 162.35 (799.30) 17,235.17 636.95 636.95

Oct-2011 24 17,235.17 155.85 (799.30) 16,591.73 643.45 643.45

Nov-2011 23 16,591.73 149.36 (799.30) 15,941.79 649.94 649.94

Dec-2011 22 15,941.79 142.87 (799.30) 15,285.35 656.43 656.43

Jan-2012 21 15,285.35 136.37 (799.30) 14,622.43 662.93 662.93

Feb-2012 20 14,622.43 129.88 (799.30) 13,953.01 669.42 669.42

Mar-2012 19 13,953.01 123.38 (799.30) 13,277.09 675.92 675.92

Apr-2012 18 13,277.09 116.89 (799.30) 12,594.68 682.41 682.41

May-2012 17 12,594.68 110.40 (799.30) 11,905.78 688.90 688.90

Jun-2012 16 11,905.78 103.90 (799.30) 11,210.38 695.40 695.40

Jul-2012 15 11,210.38 97.41 (799.30) 10,508.49 701.89 701.89

Aug-2012 14 10,508.49 90.91 (799.30) 9,800.10 708.39 708.39

31 December 2010


7,4

48

.6

7 L6

681.86

Q8.1

y/end

bal

L6

7.4.4 of 52 MCL May 2012


Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011 2012 2013


Sep-2012 13 9,800.10 84.42 (799.30) 9,085.22 714.88 714.88

Oct-2012 12 9,085.22 77.93 (799.30) 8,363.85 721.37 721.37

Nov-2012 11 8,363.85 71.43 (799.30) 7,635.98 727.87 727.87

Dec-2012 10 7,635.98 64.94 (799.30) 6,901.62 734.36 734.36

Jan-2013 9 6,901.62 58.45 (799.30) 6,160.77 740.85 740.85

Feb-2013 8 6,160.77 51.95 (799.30) 5,413.42 747.35 747.35

Mar-2013 7 5,413.42 45.46 (799.30) 4,659.58 753.84 753.84

Apr-2013 6 4,659.58 38.96 (799.30) 3,899.24 760.34 760.34

May-2013 5 3,899.24 32.47 (799.30) 3,132.41 766.83 766.83

Jun-2013 4 3,132.41 25.98 (799.30) 2,359.09 773.32 773.32

Jul-2013 3 2,359.09 19.48 (799.30) 1,579.27 779.82 779.82

Aug-2013 2 1,579.27 12.99 (799.30) 792.96 786.31 786.31

Sep-2013 1 792.96 6.49 (799.45) 0.00 792.96 792.96

666 4,324.95 (28,774.95) 24,450.00 7,448.61 8,383.73 6,901.62

L6 L6 L6

15

,2

85

.2

9

L6

7.4.4 of 52 MCL May 2012


MCL AW 7.4.5

27/3


Asset description Flux Capacitor







Month Factor B/fwd Interest Repay C/fwd Capital repaid 2011 2012 2013 2014 2015

May-2010 60 76,000.00 604.49 (1,573.95) 75,030.54 969.46

Jun-2010 59 75,030.54 594.42 (1,573.95) 74,051.00 979.53

Jul-2010 58 74,051.00 584.34 (1,573.95) 73,061.40 989.61

Aug-2010 57 73,061.40 574.27 (1,573.95) 72,061.71 999.68

Sep-2010 56 72,061.71 564.19 (1,573.95) 71,051.95 1,009.76

Oct-2010 55 71,051.95 554.12 (1,573.95) 70,032.12 1,019.83

Nov-2010 54 70,032.12 544.04 (1,573.95) 69,002.21 1,029.91

Dec-2010 53 69,002.21 533.97 (1,573.95) 67,962.22 1,039.98

Jan-2011 52 67,962.22 523.89 (1,573.95) 66,912.16 1,050.06 1,050.06

Feb-2011 51 66,912.16 513.82 (1,573.95) 65,852.03 1,060.13 1,060.13

Mar-2011 50 65,852.03 503.74 (1,573.95) 64,781.82 1,070.21 1,070.21

Apr-2011 49 64,781.82 493.67 (1,573.95) 63,701.54 1,080.28 1,080.28

May-2011 48 63,701.54 483.59 (1,573.95) 62,611.18 1,090.36 1,090.36

Jun-2011 47 62,611.18 473.52 (1,573.95) 61,510.75 1,100.43 1,100.43

Jul-2011 46 61,510.75 463.44 (1,573.95) 60,400.24 1,110.51 1,110.51

Aug-2011 45 60,400.24 453.37 (1,573.95) 59,279.66 1,120.58 1,120.58

Sep-2011 44 59,279.66 443.29 (1,573.95) 58,149.00 1,130.66 1,130.66

Oct-2011 43 58,149.00 433.22 (1,573.95) 57,008.27 1,140.73 1,140.73

Nov-2011 42 57,008.27 423.14 (1,573.95) 55,857.46 1,150.81 1,150.81

Dec-2011 41 55,857.46 413.07 (1,573.95) 54,696.58 1,160.88 1,160.88

Jan-2012 40 54,696.58 402.99 (1,573.95) 53,525.62 1,170.96 1,170.96

Feb-2012 39 53,525.62 392.92 (1,573.95) 52,344.59 1,181.03 1,181.03

Mar-2012 38 52,344.59 382.84 (1,573.95) 51,153.48 1,191.11 1,191.11

31 December 2010


13

,2

65

.6

2 L6

y/end

bal

L6

4,553.82

Q8.1

7.4.5 of 52 MCL May 2012




Apr-2012 37 51,153.48 372.77 (1,573.95) 49,952.30 1,201.18 1,201.18

May-2012 36 49,952.30 362.69 (1,573.95) 48,741.05 1,211.26 1,211.26

Jun-2012 35 48,741.05 352.62 (1,573.95) 47,519.72 1,221.33 1,221.33

Jul-2012 34 47,519.72 342.54 (1,573.95) 46,288.31 1,231.41 1,231.41

Aug-2012 33 46,288.31 332.47 (1,573.95) 45,046.83 1,241.48 1,241.48

Sep-2012 32 45,046.83 322.39 (1,573.95) 43,795.27 1,251.56 1,251.56

Oct-2012 31 43,795.27 312.32 (1,573.95) 42,533.64 1,261.63 1,261.63

Nov-2012 30 42,533.64 302.24 (1,573.95) 41,261.94 1,271.71 1,271.71

Dec-2012 29 41,261.94 292.17 (1,573.95) 39,980.16 1,281.78 1,281.78

Jan-2013 28 39,980.16 282.10 (1,573.95) 38,688.30 1,291.85 1,291.85

Feb-2013 27 38,688.30 272.02 (1,573.95) 37,386.37 1,301.93 1,301.93

Mar-2013 26 37,386.37 261.95 (1,573.95) 36,074.37 1,312.00 1,312.00

Apr-2013 25 36,074.37 251.87 (1,573.95) 34,752.29 1,322.08 1,322.08

May-2013 24 34,752.29 241.80 (1,573.95) 33,420.14 1,332.15 1,332.15

Jun-2013 23 33,420.14 231.72 (1,573.95) 32,077.91 1,342.23 1,342.23

Jul-2013 22 32,077.91 221.65 (1,573.95) 30,725.60 1,352.30 1,352.30

Aug-2013 21 30,725.60 211.57 (1,573.95) 29,363.23 1,362.38 1,362.38

Sep-2013 20 29,363.23 201.50 (1,573.95) 27,990.77 1,372.45 1,372.45

Oct-2013 19 27,990.77 191.42 (1,573.95) 26,608.24 1,382.53 1,382.53

Nov-2013 18 26,608.24 181.35 (1,573.95) 25,215.64 1,392.60 1,392.60

Dec-2013 17 25,215.64 171.27 (1,573.95) 23,812.96 1,402.68 1,402.68

Jan-2014 16 23,812.96 161.20 (1,573.95) 22,400.21 1,412.75 1,412.75

Feb-2014 15 22,400.21 151.12 (1,573.95) 20,977.38 1,422.83 1,422.83

Mar-2014 14 20,977.38 141.05 (1,573.95) 19,544.48 1,432.90 1,432.90

Apr-2014 13 19,544.48 130.97 (1,573.95) 18,101.50 1,442.98 1,442.98

May-2014 12 18,101.50 120.90 (1,573.95) 16,648.45 1,453.05 1,453.05

Jun-2014 11 16,648.45 110.82 (1,573.95) 15,185.32 1,463.13 1,463.13

Jul-2014 10 15,185.32 100.75 (1,573.95) 13,712.12 1,473.20 1,473.20

Aug-2014 9 13,712.12 90.67 (1,573.95) 12,228.85 1,483.28 1,483.28

Sep-2014 8 12,228.85 80.60 (1,573.95) 10,735.49 1,493.35 1,493.35

Oct-2014 7 10,735.49 70.52 (1,573.95) 9,232.07 1,503.43 1,503.43

Nov-2014 6 9,232.07 60.45 (1,573.95) 7,718.57 1,513.50 1,513.50

Dec-2014 5 7,718.57 50.37 (1,573.95) 6,194.99 1,523.58 1,523.58

Jan-2015 4 6,194.99 40.30 (1,573.95) 4,661.34 1,533.65 1,533.65

54

,6

96

.6

0 L6

7.4.5 of 52 MCL May 2012




Feb-2015 3 4,661.34 30.22 (1,573.95) 3,117.62 1,543.73 1,543.73

Mar-2015 2 3,117.62 20.15 (1,573.95) 1,563.82 1,553.80 1,553.80

Apr-2015 1 1,563.82 10.07 (1,573.89) 0.00 1,563.82 1,563.82

1,830 18,436.94 (94,436.94) 76,000.00 13,265.64 14,716.42 16,167.20 17,617.97 6,194.99

L6 L6

39,980.16 L6

7.4.5 of 52 MCL May 2012

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