XYZ & Co., Chartered Accountants, have been appointed as the statutory auditors of Ess Kay Engineering Limited, a listed company engaged in…

XYZ & Co., Chartered Accountants, have been appointed as the statutory auditors of Ess Kay Engineering Limited, a listed company engaged in manufacturing heavy industrial equipment. During the year ended 31st March 2026, the company acquired a foreign subsidiary, implemented a new cloud-based ERP system across all manufacturing units and entered into long-term maintenance contracts involving multiple performance obligations. At the planning stage of the audit, the Engagement Partner held discussions with the audit team and concluded that the audit would require significant attention in the areas of revenue recognition, consolidation of the foreign subsidiary, valuation of inventory and IT general controls. Accordingly, he decided to deploy IT specialists, assign experienced audit personnel to revenue recognition and consolidation, perform interim testing of selected controls before the year-end and commence audit work at the foreign subsidiary prior to the reporting date. Based on these decisions, the Audit Manager prepared a detailed audit programme specifying the nature, timing and extent of audit procedures for each significant account balance, the allocation of work among engagement team members and the audit procedures to be performed in response to the identified risks. While obtaining an understanding of the entity and its environment, the engagement team noted that revenue from maintenance contracts was recognised through the ERP system based on inputs provided by project managers. The team also observed that manual journal entries relating to contract modifications required approval from the Chief Financial Officer (CFO). Internal audit reports highlighted deficiencies in monitoring manual overrides within the ERP system, and the newly acquired subsidiary had not yet fully integrated its financial reporting processes with the parent company's ERP environment. During discussions with the audit team, the CFO stated that the manual approval controls were operating effectively and that adequate provision had been made for obsolete inventories. However, the Internal Audit Head informed the auditor that several contract modifications had been approved after considerable delay. Further, the Warehouse Manager stated that obsolete inventories identified during physical verification were still awaiting disposal because Board approval had not yet been obtained. Inventory ageing reports also reflected a significant increase in slow-moving inventory compared to the previous year. The Engagement Partner instructed the audit team to evaluate all the information obtained from different sources before designing further audit procedures. He further emphasised that inquiry alone would not ordinarily provide sufficient appropriate audit evidence. Accordingly, management's oral explanations should be corroborated with other audit evidence and, wherever appropriate, confirmed through written representations.