Question

Consider each of the following independent and material situations. In each case:

• the financial report date is 31 December 2019;

• the field work was completed on 12 February 2020;

• the directors declaration and the audit report were signed on 19 February 2020; and

• the completed financial report accompanied by the signed audit report were mailed to shareholders on 18 March 2020

A. You are an auditor pf PP Limited (PP), a company specialising in industrial property development. On 10 February 2020, you become aware that a major overseas investor has informed the management of PP of their intention to withdraw their investment in a proposed major development. On the basis of its discussions with the investor and previously pledged funds from them, PP has incurred substantial costs in feasibility studies, structural engineering reports and architectural plans. A significant portion of these costs has been capitalised. The management is dependent on finding a new investor to be able to meet these expenses and to continue with the project.

B. You are the auditor of XY Limited (XY), a manufacturing client. XY has plans to upgrade its manufacturing process and plans to finance this by a sale of property which is superfluous to its needs, situated next to its head office. The property has been subdivided for the purposes of the sale and placed on the market in December 2019. On 25 January 2020, the state government approved a plan for the construction of an express freeway. The plan will result in the appropriation of a portion of the property owned by XY and subdivided for the purpose of sale. Construction of the freeway will begin in late 2020. No estimate of the compensation payment is available.

C. You are an auditor of Q limited (Q), a major public company involved in the property development industry. Prior to signing your audit report you sought a letter of comfort from Q’s bankers that the bank would continue to support Q by providing finance over the coming year. The bank agrees that it would continue to provide finance. It was your view that without such support Q had severe cash flow problems and the financial report would need to be modified with respect to a going concern assumption. On 15 March 2020, the company’s bankers wrote to you advising that the company had breached its loan covenant with the bank in February 2020 and that the loan facility was now due and payable and would not be renewed.

D. You are the auditor of Turbo Limited (Turbo), a professional services client. On 15 January 2020, Turbo settled and paid a personal injury claim to a former employee as the result of an accident that occurred in September 2017. The company had not previously recorded a liability for the claim.

E. You are the auditor of Charge Limited (Charge), an automobile parts manufacturer. On 2 February 2020, Charge agreed to purchase for cash the outstanding shares of Electronic Fuel Injection Limited. The acquisition is likely to double the sales volume of Charge.

Required: For each of the events A to E:

1. Outline the required treatment in the financial report, if any. Justify your answer. (5 X 2 Marks = 10 Marks)

2. Determine whether additional audit evidence needs to be obtained. If so, describe the nature of the audit evidence to be obtained and the audit procedures used to obtain it. (5 X 2 Marks = 10 Marks)

3. If no action is taken by management, determine the most appropriate audit report to be issued.

Answer 1

1.

As per ISA 560:

Facts Which Become Known to the Auditor after the Date of the Auditor’s Report but before the Date the Financial Statements Are Issued.

The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. However, if, after the date of the auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:

(a) Discuss the matter with management and, where appropriate, those charged with governance;

(b) Determine whether the financial statements need amendment and, if so,

(c) Inquire how management intends to address the matter in the financial statements.

Facts Which Become Known to the Auditor after the Financial Statements Have Been Issued.

After the financial statements have been issued, the auditor has no obligation to perform any audit procedures regarding such financial statements. However, if, after the financial statements have been issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:

(a) Discuss the matter with management and, where appropriate, those charged with governance;

(b) Determine whether the financial statements need amendment; and, if so,

(c) Inquire how management intends to address the matter in the financial statements.

A. Since on 10th February, that is before completition of the audit, the event came to light. Therefore, the event will be adjusted in the financial report after consultating with those charged with governance.

B. Since on 25th January, that is before completition of the audit, the event came to light. Therefore, the event will be discussed with those charged with governance and then determined if amendment is required.

C. The event came to light before signing of the audit report and is of such nature which will modify the opinion, therefore the audit report will be modified and same will be communicated with those charged with governance.

D. Event took place before signing of audit report, hence will be assessed and reported if required.

E. Event took place before signing of audit report, hence will be assessed and reported if required.

2.

A: As an audit evidence, will be requiring the expense records and supporting vouchers. Additionally, we can communicate with the investor and check the agreement for all situations under which the investment can be withdrawn.

B: A copy of a the Government plan. Also, a notice regarding the extent of appropriation and information if the government will pay any compensation.

C: Assess the financial ratios provided by the company. If bank is providing the loan as per their discretion it becomes their liability. Additionally, ISA 570, going concern will be reported.

D: Require proper reasoning for not reporting the liability. If the accident took place in 2017, what were the expenses borne by company. Also will be looking for the policy of the company for the same.

E: Cash voucher for purchase will be required along with the share certificates approved the board.

3. If no action is taken by the management, the auditor can make a modiefied opinion in the auditors report.