Question

Lundin PLC

Lundin plc operates a number of divisions, but the board of directors has been considering closing those that no longer fit into the future plans of the company. On 30 November 2015 (year end is 31 December 2015), the board decided to close two of the Divisions (Division A and Division B), make the employees redundant and to realise the assets of the divisions as quickly as possible. A detailed plan for closing down Division A was published by the board on 12 December 2015, letters were sent out to customers and suppliers informing them of the closure and redundancy notes were posted to employees. In the case of Division B, although a detailed plan of closure had been agreed by the board on 30 November 2015, no action had been taken to effect the closure of the division and no notifications had been sent to business associates and employees.

Required

You are the auditor of Lundin plc. How would you expect these matters to be accounted for, and how would you audit any estimate of the amount of the obligation, if any?

Answer 1

The audit opinion is intended to provide reasonable assurance, but not absolute assurance, that the financial statements are presented fairly, in all material respects, and/or give a true and fair view in accordance with the financial reporting framework. The purpose of an audit is to provide an objective independent examination of the financial statements, which increases the value and credibility of the financial statements produced by management, thus increase user confidence in the financial statement, reduce investor risk and consequently reduce the cost of capital of the preparer of the financial statements

In the given question as the division A & B are about to close in future as they are not running profitably hence it raises question on the concept of going concern to be adopted by the Lundin Plc in future for other divisions also. As far as division A is concerned the entire procedure for its closure its clear and properly documented and communicated. But as far as Division B is concerned its closure procedure are not carried out properly and not even document. Hence while issuing audit report auditor may express a modified opinion.

As far as any estimate of any amount of obligation is concerned Lundin Plc must create contingent liability for amount to be paid to discharge any liability or any litigation before disposing off division B completely.