Question

You are the manager responsible for the audit of Vero & Eve Co Ltd, a manufacturing company with a year ending, 31st December 2017. The audit work has been completed and reviewed and you are due to issue the auditor's report in three days. The draft audit opinion is unmodified. The financial statements show revenue for the year ended 31st December 2017 of GH¢ 15 million, net profit of GH¢ 3 million, and total assets at the year-end are GH¢ 80 million. The finance director of Vero & Eve Co Ltd telephoned you this morning to tell you about the announcement yesterday, of a significant restructuring of Vero & Eve Co Ltd, which will take place over the next six months. The restructuring will involve the closure of a factory, and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is GH¢ 250,000. The financial statements have not been amended in respect of this matter. Required In respect of the announcement of the restructuring: (i) Comment on the financial reporting implications, and advise the further audit procedures to be performed. Recommend the actions to be taken by the auditor if the financial statements are not amended

Answer 1

An auditor is responsible to express his opinion on the financial statements of the organization as to whether these financial statements reflect the true and fair picture of the organization as on a particular date, i.e. whether the statement of profit and loss reflect the correct financial results of the company and the Balance sheet of the company reflect the true and fair financial position of the company.

Financial reporting implications:

Disclosure of significant restructuring in notes to accounts:

The implications of significant restructuring of Vero and Eve Co. Ltd. on the financial reports of the company is immense. The restructuring of the company that is about to take place in next six months must be disclosed in the notes to accounts to inform the stakeholders of the company about the restructuring of the company. Though the current profit and loss account of the company s well as its Balance sheet are not going to be affected but the fact that the significant restructuring will take place in next six months will alarm the stakeholders of the company and accordingly, they will be able to take correct decision.       

Recommendations about the actions to be taken by the auditor:

In this case three days prior to the submission of audit report of Vero and Eve Co. Ltd. the finance director of the company has informed about the significant restructuring in the company and its operations which will have material effects on the financial performance and position of the company. Thus, it would be improper and incorrect if the auditor left this matter untouched and unexpressed in his audit opinion. Thus, the auditor will convince the management to include necessary notes to the accounts to inform the stakeholders of the company about the significant restructuring of the organization that is about to take place in next six months. In case the management not agrees with the recommendation off the auditor then the auditor shall qualify his report to the extent necessary ensure that the stakeholders take note of his opinion.