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:

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

Answer 1

A: As an auditor I will be seeking management report on how the investment amount will be paid back to investor. As audit report has yet not been signed, as an auditor I will have to give the notes on capitalised amount with all the break up and also make aware to the users that investor is withdrawing the said investment. And will also suggest management to stop spending any amount from the invested amount and will also report the balance lying with the company of the invested amount.

B: As an auditor I will estimate the loss the of the value of appropriation protion. The said amount will be reflected as per the notes.

C: As an auditor, I have to seek the management review on going concern. As bank has agreed to provide the loan before the signing of the audit report I cannot represent any going concern report. But after sigining of the auditor report Bank comes in the month of March for non paymen of loan will be matter of going concern in next year.

D: As the audit report has not been signed till yet therefore company can show it as a prior period expense adjusting with the retained earnings.

E: Cash purchase of the shares to be reported in the management report.