Question

While completing your audit work for the 30 June 2008 audit of Grape Ltd, you become aware of the following material matters:

(i) On 5 July, Red Pty Ltd, a major customer of Grape Ltd, was placed into liquidation. As Red Pty Ltd had confirmed the balance due to Grape Ltd as at balance date, management of Grape Ltd has refused to write off or provide for the Red Pty Ltd account in the 30 June 2008 financial report. However, they are prepared to disclose this information as a note to the financial report.

(ii) On 15 July, Grape Ltd entered into a new contract to supply wine to Wine Taster, a major new wine store that had set up operations in northern Queensland. The contract was similar in nature to other contracts previously negotiated with other wine stores. Management does not believe that any change to the financial report is required.

(iii) Grape Ltd has capitalised significant funds incurred in developing an improved new wine cap that allows the wine to continue to develop in the bottle. On 20 July, Grape Ltd applied for a patent for the cap, only to discover that a competitor had lodged a similar application on 15 June. The granting of Grape Ltd’s patent application is now in serious doubt. Management do not believe any change to the financial report is required.

(iv) A note to the financial report of Grape Ltd refers to an agreement to sell its major subsidiary, Cleanskins Pty Ltd, to a rival wine company. This agreement was finalised the day before the financial report was to be signed and the sale is to take place a month after the audit report is to be signed. You have verified this transaction. However, when reviewing the ‘Chairman's Review’, which is to be included in the annual report that contains the audited financial report, you see that:

(a) Plans for expanding Cleanskins Pty Ltd's facilities are outlined;

(b) The additional revenue to be generated over the next ten years as a result of this expansion is tabulated; and

(c) There is no reference to the sale of Cleanskins Pty Ltd.

Management believe that it is too late to make any changes to the annual report, as it is ready to send to the printers, as soon as the audit report is signed.

(v) An auditor hires an actuary to assist in corroborating a client’s complex superannuation calculations concerning accrued superannuation liabilities that account for 35 percent of the client’s total liabilities. The actuary’s findings are reasonably close to the client’s calculations and support the financial report.

Required:

For each independent situation, state the type of audit report that you should issue and give reasons for your answer.

Answer 1

1. Red Pty Ltd is a Debtor of Grape Ltd. As per financial reporting framework, a Company is required to evaluate completness of doubtful provision made at the reporting date. Since in the given case Red Pty Ltd is already into liquidation, Grape Ltd is required to assess and make provision for loss due to non recovery of debts from Red Pty Ltd in liquidation process. Disclosure in notes is not sufficient as per financial reporting framework followed by the company. Thus Auditor should give a qualification in his audit report (Qualified report)

2. Entering in new contract is related to business of the Company. It is not auditors concern. Thus no impact on audit report.

3. Grape Ltd would have capitalised expenses incured on R&D of new design of wine cap. Since Company has failed to file an application for patent of design, it has become difficult for company to get the same. Company should continue to record the capital expenses as Asset. However they need to check for the impairment of Asset which is as per Company financial reporting framework. Thus Auditor should give a qualification in his audit report if Company refuses to assess and impair the asset recorded. (Qualified report)

4. Auditor should evaluate all the information which is supplied alongwith the financial report which should be in line with Financial statements. There is a note in financial statement regarding sale of Companys' Subsidiary Clean Skins Pty Ltd. Since there is a contradiction between Chairman's Review and Financial statements, Auditor should ask management to get the Chairman's Review rectified. If Management refuses to do the same, Auditor should include in his report Emphasis of Matter Paragraph in order to draw user attention to the point. Since point has no impact on financial statements, no qualification is required only inclusion of emphasis of matter is required. (Unmodified report)

5. If there is material mismatch between what is reported and what should have been reported, then the Auditor should express opinion as Qualified/Adverse/Disclaimer as the case may be. However if the difference is immaterial then Auditor should ignore the same while expressing his opinion. Materiality is something which impacts judgement of users of financial statement. Since there actuary’s findings are reasonably close to the client’s calculations, Auditor should ignore the same as immaterial and issue unmodified report.