Question

Worldcomet is one of Enronoff’s lessors. The CFO of Worldcomet is very different in his approach with disclosures in general. In fact, the two CFOs clash all the time.

The CFO of Worldcomet strictly adheres to the wording of some of the accounting standards. However, he only does so to try to find words that allow him to misrepresent certain accounts to his advantage.

So far he has been able to debate his way out of getting a qualified audit because his auditors have only sent inexperienced auditors to audit his work.

This is about to change, as the CFO is now being audited by some that has taken Accounting Theory seriously during his degree.

How do you think this new auditor should address the situation (please write 2 short paragraphs per answer):

What accounting standard or corporate legality can the auditor quote to this CFO? Summarise this standard or corporate legality & the right paragraph.

Explain how this standard applies to the CFO’s behaviour.         

Write a letter describing the CFOs behaviour to the auditor’s supervisor – alerting the supervisor of the CFO’s behaviour – critically and from an ethical perspective.     

Answer 1

SA-701 -“Communicating Key Audit Matters in the Independent Auditor’s Report”- A way forward to auditor’s reporting

Introduction

With the purpose of enhancing the communicative value of auditors report by offering better transparency about audit and to provide additional information to the users of financial statements in assisting them to understand those matters which are of critical importance in auditors professional judgement, SA 701 is introduced.

Applicability

SA 701 is applicable for audits of financial statements for periods beginning on or after April 01,2018 for audits of complete sets of general purpose financial statements of listed entities. It casts a new reporting requirement on auditors of listed entities to communicate the key audit matters in their audit reports. This Standard is also applicable in audit of unlisted entities in situations where law or regulation requires communication of key audit matters in the audit report.

KAM- Meaning

Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

Identification/ Determination of Key Audit Matters

While determining the key audit matters which are to be reported in the auditors report, the auditor will

have to follow filter approach as mentioned below.