Question

Audit Opinion and Reporting - 20 Marks

a) During the engagement wrap-up, what are the audit procedures regarding evidence? Why are these procedures appropriate at the completion phase?

b) ITSystems Ltd your audit client, during its financial year lost two key personnel, was involved in legal disputes, and had substantial fall in revenue and cash flows. It is concluded that ITSystems is not a going concern.

Identify TWO appropriate treatments of this matter in relation to financial report.

c) Your client is Funky Ltd, a company running a large venue including a bistro, bars and restaurants, and other club facilities. The following dates are relevant to the current audit engagement:

End of the reporting period:                        30 June 2023
Financial statements signed:                       15 August 2023
Auditor’s report signed:                                 15 August 2023
Annual report mailed to members:          22 August 2023

During your subsequent events review, you noted the following independent and material event:

On 16 August 2023, the financial controller informed you that a serious fire occurred in one of the club’s kitchens during the football celebrations. Although covered by insurance, the fire caused extensive damage to the bistro area and the adjacent bar. Both the bistro and bar are expected to remain unserviceable until at least the end of October 2023, resulting in an expected fall in revenue of around 20%.

i) What type of subsequent event is this? Explain.

ii) What further evidence would you seek in relation to the matter, and how should it be treated in the financial report?

iii) The corroborating evidence confirms the event is material and pervasive. What audit opinion would be appropriate if the directors of Funky Ltd follow the auditor’s recommendations regarding the above event? Justify your answer.

Answer 1

a. During engagement wrap, review financial statement and perform analytical proceedures are .most important one for evidence collection. Analytical procedures include comparisons of different sets of financial and operational information, to see if historical relationships are continuing forward into the period. Helps an auditor understand the client's business and changes in the business, and to corroborate with other eviences collected so far.

b. The Company should prepare financial statement using liquidation basis and secondly, disclosure for facts leading to impariment of going concern should be made in the financial statements.

c. (i) Since fire has occured subsequent to balance sheet date and no evidence exist that event existed on balance sheet date, hence it is a non-adjusting and disclosure event.

(ii) The auditor should obtain insurance companies assessment report and final damages being reimbursed as an evidence to assess the impact on going concern.

(iii) The auditor should evaluate the going concern and give a qualified opinion, if going concern is imparied

Otherwise, an auditor should give clean report.