You are an audit manager at Penrose & Co, an audit firm with offices across the UK. Today is 12 January 2027. The audit engagement partner, Joanna Fry, has asked you to prepare briefing notes for the planning of two audit clients that operate in very different industries: Calder Foods Co (Calder), a manufacturer of chilled ready meals, and Ormond Software Co (Ormond), a provider of cloud payroll software. The tables show extracts of Calder's financial information, the results of the audit team's preliminary analytical procedures on Calder, and key performance information for Ormond.

Exhibit 1: Calder Foods Co, background. Calder makes chilled ready meals at two factories and sells them to three supermarket chains. Its products have a shelf life of no more than 12 days. Calder is a private company owned by its founding family, and Penrose & Co has audited it for six years. Its year end is 31 March 2027, and the figures for that year in the tables are projections prepared by management in January 2027. Penrose & Co sets materiality for Calder at 5% of projected profit before tax. Exhibit 2: Notes of a meeting on 10 January 2027 with Calder's finance director, Ruth Ellison. 1. Brightmart contract. From 1 June 2026 Calder has supplied Brightmart Supermarkets under a three-year contract. In each contract year (1 June to 31 May) Calder must pay Brightmart a rebate of 5% of all sales in that year if sales in the year exceed $22m. Sales to Brightmart from 1 June 2026 to 31 March 2027 are projected at $18.5m, and Calder's sales forecast for April and May 2027 is a further $4.6m. Ms Ellison has not accrued any rebate for Brightmart because, in her words, the threshold will not be reached until May 2027. The rebate accrual in the table relates only to Calder's other customers. 2. Gross margin. Ms Ellison says the improvement in gross margin comes from the higher prices Brightmart pays and the efficiency of the new production line. The food manufacturers' trade association reports that ingredient and energy costs in the sector rose by about 9% in the last year and that most manufacturers' margins fell. 3. New production line. A new production line at the Lowfield factory came into use on 1 September 2026. Calder has capitalised $9.4m in property, plant and equipment: equipment bought from the supplier $7.6m, installation by the supplier's engineers $0.9m, time spent by Calder's own engineers on installing the line $0.5m, training of the operators $0.25m and a launch event for customers $0.15m. Calder depreciates plant on a straight-line basis over ten years. Ms Ellison intends to start depreciating the line on 1 April 2027, when she expects it to be running at full capacity. 4. Inventory. Ms Ellison says finished goods are higher because Calder now holds more stock to meet Brightmart's delivery targets. Inventory also includes $0.6m of printed packaging bearing Calder's old brand. New brand packaging will be used from April 2027. 5. Product recall. In November 2026 Calder recalled a batch of chicken meals after its own tests found listeria. Recall costs of $0.35m incurred to date have been expensed. Fairshop Stores, a supermarket customer, has claimed $1.2m from Calder for lost sales and disposal costs, and is withholding payment of $1.4m of Calder's invoices until the claim is settled. Calder's lawyers have not yet given a view on the claim; Ms Ellison intends to disclose it as a contingent liability. The local food safety authority inspected the Lowfield factory in December 2026 and has not yet issued its report. 6. Finance. On 1 May 2026 Calder drew a loan of $12m from Northgate Bank to pay for the new line, repayable in instalments over five years. A covenant requires interest cover (operating profit divided by finance costs) of at least 5 times, measured on the audited financial statements; if it is breached the loan becomes repayable on demand. From this year the directors receive a bonus of 20% of salary if profit before tax is $5.5m or more. Exhibit 3: Ormond Software Co, background. Ormond's shares are listed on the main market of a UK stock exchange. It sells cloud payroll and human resources software to small and medium-sized businesses through annual subscriptions invoiced in advance. Its year end is 30 April 2027; the 2027 figures in the table are projections. Penrose & Co is in its third year as auditor; the audit fee for the year ended 30 April 2026 was $240,000. Exhibit 4: Notes from the planning meeting with Ormond's chief financial officer. 1. Ormond raised its subscription prices by 12% from 1 July 2026. 2. On 1 September 2026 Ormond bought Pellow Ltd, a provider of human resources software, for $14m: $9m from cash and $5m drawn on a $10m revolving credit facility from Westway Bank, which expires in October 2027. 3. In October 2026 a cyber attack exposed the payroll data of 1,200 of Ormond's customers. The UK data protection regulator has opened an investigation and could impose a fine. 4. The government has announced that from April 2028 it will offer free basic payroll software to businesses with fewer than ten employees. Such businesses make up 45% of Ormond's customers. 5. Ormond's chief technology officer resigned in December 2026. A new mobile app, on which $3.2m of development costs has been capitalised, is four months behind schedule. 6. All of Ormond's software runs on the servers of a single cloud hosting provider, whose contract is due for renewal in June 2027; the provider has indicated a significant price increase. Exhibit 5: Email from Ormond's audit committee chair, Neil Adebayo, to Joanna Fry. "The board would like Penrose & Co to value the customer relationships and software acquired with Pellow Ltd, so that we can complete the allocation of the purchase price in this year's financial statements. Our finance team does not have the expertise. We expect a fee of about $85,000 and would like the work to start in February."