Question

You have been asked, as a member of a small Accounting firm, to review the 31 December year-end financial statements of a small (R2 million revenues) companyin East London. The company has applied for a long-term loan from the bank. You are interesed to note as you beign your review of the company's records that a principal stockholder is your former college roommate. You are preparing your report and wonder about the following items:

- The company decided during the last month of the year to change their method of accounting for depreciation for this year's financial statements. You do not believe that any adjustments were made to prior years' reported results because of this change.

- You have been working at the bookkeepers' desk while she was away on vacation. You pushed the desk blotter aside at one point and noticed undermeath it a bill to the company from a local florist for R55. The bill is dated December, but you do not see it recorded anywhere in the company's books. A number of other unopened envelopes are under the blotter, the contents of which can not be judged from the outside.

- You read in yesterday's newspaper that a local manufacturer is seriously comptemplating a move to Atlanta. You know from your audit that they are an important customer of the company you are reviewing.

Required:

Should these items be disclosed in your report? why or why not? If you disclose, how should your disclosure be phrased? Should you disclose any other facts to the company, to your employer, or in your report? Should the audit have been conducted differently? In your answers, try to keep in mind some of the funingdamental qualitative principles underlying financial reporting and cite the where relevant.

Answer 1

a) The change in method of depreciation is a change in accounting policy, and sucha change should be given effect to retrospectively, from the date on which asset was first put into use. Accordingly, the change in depreciation should be adjusted in the previous years' reported figures.

b) There may be more ommissions, and the reason for not recording the same is to be enquired from the management. The nature of this ommission may be wilful or erroneous. In case of wilful concealment, the reason for the same and the potential impact is to be analysed, and the risk is to be recomputed on this basis. The risk of wrong opinion increases if there was a large amount of wilfully concealed invoices.

c) As an important customer of the concern is about to move, this calls into question the ability of the concern to maintain its current level of operations. In the instance that the above mentioned customer is a major customer, this could give doubts to the going concern concept itself. This is to be disclosed in the report as the shareholders need this information.

Disclosure of other facts:

​​As an auditor, anty conflicts of interest, or any potential cause for bias is to be disclosed prior to undertaking the assignment, and in cases where this might be material, should refuse to undertake said assignment to ensure independence.