Answers 2(a) In simple terms, outsourcing means when an entity passes some of its functions to a third party.

. The reason for this could be that the outsource service provider has superior or specialised knowledge to undertake the functions more effectively as compared to in-house. As an example a service organisation could be used to provide, accounting, advisory or even payroll services to a service user. The first matter to consider for planning the audit of salary expenses is the materiality. It appears that salary expense is at 21% of the profit before tax ( last year 26%), hence it is considered as material. Due attention would need to be paid to this account. Furthermore, salary cycle would constitue a significant process in any company. The next matter to consider would be with regards to audit work on salary expenses to be performed in Propays premises. The auditor may need to discuss with management on the accessibility of records and information deemed necessary for audit. It may also need to contact Propay to discuss on a possible timing on when they can access their premises. The third matter to consider is on the control risk assessment (assuming risk based audit approach is being used). Control risk may need to be reassessed as previous year knowledge is not relevant anymore. Previously the function was done in-house and control environment and procedures appears to be strong, hence control risk may have been assessed as low. Currently the control implemented by Propay on salary function needs to be evaluated thoroughly. (Note about the switch was done in June 2007, assuming year end December, then the function was in-house was 5 months and outsourced for 7 months) Another issues to consider is whether Sci Tech maintains any back up for salary expenses. If all (100%) of the data are maintained by Propay, risk of material misstatement may be heightened as there could be no independent check on Propays work. Hence the auditor nay need to obtain understanding and devise further audit plan to address the risk.

b) The first matter that would be considered is whether the capitalised developments cost are material. Amortised intangible assets constitute nearly 7% of total assets ( Last year around 7.6%) and is therefore material. The NBV has also increased by 13% as compared to last year, hence this is a significant fluctuation and further investigation is needed. According to IAS 38 intangible assets, research and development should only be capitalised if the following criteria is met:cost

o Management has the intention to complete the intangible asset and use or sell it. o Technical feasibility to use or sell it. o Ability to generate future economic benefits o Ability to measure the expenditure attributable to the intangible assets. If the development cost was found to be inappropriately classified, then the cost should instead have been expensed off, these effectively means that profit before tax would need to be reduced by$750,000, representing 42% reduction in profit. Hence this is a critical area. It can be noted that Pharmaceutical development is highly regulated, governments place quite a number of strict laws before a particular drug can be sold, if the government does not approve the product, then Sci Tech will not be able to use or sell it. Hence failing the recognition criteria. Lastly, the funding may be withdrawn by the providers, which renders difficulty in completing the product, this is due to the fact that Sci Tech has failed to meet one of its required key performance indicator ( the free donations are (0.8%) of revenue when it is supposed to be 1%.

 The first reason as to why it is difficult to provide high assurance is because there could be difficulty in valuing the products donated free of charge to health care. It is unclear as management may have used sales value or inventory cost to value them. The correct criteria may not be defined properly. Furthermore, it is difficult to verify serious accidents. What constitutes serious is also not define. Is it death ? Is it hospitalisation ? Is it based on physical injury?. The auditor may have difficulty designing the procedures to check the KPIs. Cost of involvement with charities are also not clearly defined and management may have their own way of justifying their results. This is an area that is very subjective and again, difficult to test. Sufficiency of audit evidence can also be questioned here as these are matters that may not form part of the accounting records, which are normally maintained well for statutory audit purpose. Management may not have a structure or organised filing system for all this. This may give rise to difficulties during the audit.