Question

Before the audit report was signed, the audit team encountered the following situation. Treat each situation independently and assume the remaining financial statements are fine.

1) A property owned by Cook’s Furniture Ltd was sold to Lidia Preston, the wife of Howard Cook in June 2020. The property has a market value of four million and was sold at 3.2 million. Management did not disclose this in the financial statement because they believed this was a private matter. The disposal of this asset has been appropriately accounted for on the financial statements (e.g. the asset was removed from PPE and the loss of disposal was correctly recognised as an expense).

2) The subsequent selling price of the ready-made furniture range suggests the inventory valuation as at 30 June 2020 should be written down by $48,000 but management only wrote $38,000 off as per the financial statements because they were confident that they can increase the selling price again in 2021 after people settling back to normality.

3) Carl Cook decided to retire in 2021 due to health reasons, Carl is willing to sell his shareholding to the remaining shareholders. However, the BoD decided to explore the potential of selling the business. By the time to sign the 2020 financial statements, the company has not commenced a negotiation with any potential buyer. The BoD said to the auditor that they may not sell the business if they cannot get a good deal. Carl’s retirement decision is disclosed on the financial statements, but not the intention to sell the business.

REQUIRED: For each of the above situation:

a) Discuss the audit procedure that the auditor needs to perform in relation to each situation.

b) Explain which audit opinion is appropriate for each situation.

Answer 1

Answer:

1|•

a) Audit Procedure:

In the given case the company has entered into a related party transaction which is required to be disclosed in the financial statements, such informations are material to the users understanding of the financial statements.

Further, the furniture has been sold for less than the market value and consequently Company has suffered loss due to such transaction. The auditor should inspect documentary evidences like invoice, payment details and also obtain confirmations from Lidia Preston.

b) Audit opinion:

Since the management has refused to make disclosures citing that this was a private matter, a Qualified opinion would be the most appropriate.

2|•

a) Audit Procedure:

In the instant situation, the auditor needs to evaluate the appropriateness of estimates made by the management regarding inventory writen off and require the management to justify their belief that they can increase the selling price again in 2021.

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b) Audit opinion:

In case the management estimates are not justified, a Qualified opinion would be the most appropriate.

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3|•

a) Audit Procedure:

Carl's retirement decision is significant and material which has already been disclosed. However, the fact that Management has intentions to sell the business in near future is of utmost importance and requires disclosures.

Auditor should obtain explanations for the management and reveiwe whether any substantial portion of Assets have been disposed or is under discussions. Auditor may also inspect the minutes of the meeting (if any) having discussions for proposed sale of business and accordingly request to make disclosures.

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b) Audit opinion:

If the management refuses to disclose then considering the materiality of the fact, an Adverse opinion would be the most appropriate.