a) The manager has selected these three headings for further investigation due to the following reasons:

• Property, Plant, and Equipment:
  Property, plant, and equipment account for 87% of net assets, which is material for a manufacturing company. Although the balance has increased by 2%, depreciation and loss on sale have increased by 72%. This inconsistency suggests that there might be an issue with the recognition of depreciation or disposals, and further investigation is needed to ensure the balance is not overstated.
• Trade Receivables:
  Trade receivables have increased by 67%, while revenue has increased by only 6%, indicating a possible recoverability issue. This is supported by the increase in the collection period from 19 days to 30 days. There might be a need for increased allowances for receivables, and further testing is required to assess the recoverability of debts and the accuracy of the cut-off.
• Inventory:
  Inventory has increased by 16%, driven by significant increases in raw materials and finished goods, despite a 22% decrease in work-in-progress. The inventory turnover has decreased, suggesting possible slow-moving or obsolete inventory. The 6% increase in revenue, without a corresponding increase in cost of sales, could indicate an issue with inventory valuation or cut-off errors.

b) The audit manager should request the following information from the financial controller:

• Property, Plant, and Equipment:
  • An explanation for the increase in net book value and the significant increase in depreciation/loss on disposals.
  • Confirmation that the depreciation policy is consistent with the prior year.
  • A detailed analysis of additions, disposals, and depreciation charges during the year.
  • Information on whether any assets are carried at valuation rather than cost.
  • A breakdown of the expense between depreciation and loss on sales.
• Trade Receivables:
  • An explanation for the increase in the trade receivables collection period.
  • Details of significant new customers and their credit ratings.
  • An analysis of bad debts written off and the provision for doubtful debts.
  • An aged receivables analysis.
  • Details of post-year-end cash receipts to assess the collectibility of receivables.
• Inventory:
  • Explanations for the movements in raw materials, work-in-progress, and finished goods, particularly the reasons for the build-up in inventory.
  • Details of any adjustments required from the year-end inventory count.
  • Post-year-end sales and next year’s order book to assess inventory turnover and potential obsolescence.
  • An analysis of the provision for obsolete or slow-moving inventory.
  • Confirmation that inventory is valued at the lower of cost and net realizable value.