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1 Your client, Island Co, is a manufacturer of machinery used in the coal extraction industry. You are currently planning
the audit of the financial statements for the year ended 30 November 2007. The draft financial statements show
revenue of $125 million (2006 – $103 million), profit before tax of $5·6 million (2006 – $5·1 million) and total
assets of $95 million (2006 – $90 million). Your firm was appointed as auditor to Island Co for the first time in June
2007.
Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments: 50%
is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successful
installation in the customer’s coal mine (stage three). Generally it takes six months from the order being finalised until
the final installation.
At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputed
stage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, is
running at 100% efficiency.
One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages for
injuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. Kate
Shannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally known
that Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which were
placed by Sawyer Co in October 2007 have been cancelled.
Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on
17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of the
major components included in the coal extracting machinery is now being sourced from overseas. The new supplier,
Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to Locke
Co recorded within current liabilities.
All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at
$2·5 million (2006 – $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported by
customers, and this estimate forms the basis of the provision.
Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office to
Island Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the audit
to be finished by that time.
Required:
(a) Using the information provided, identify and explain the principal audit risks, and any other matters to be
considered when planning the final audit for Island Co for the year ended 30 November 2007.
Note: your answer should be presented in the format of briefing notes to be used at a planning meeting.
Requirement (a) includes 2 professional marks. (13 marks)
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更多 “ 1 Your client, Island Co, is a manufacturer of machinery used in the coal extraction industry. You are currently planningthe audit of the financial statements for the year ended 30 November 2007. The draft financial statements showrevenue of $125 million (2006 – $103 million), profit before tax of $5·6 million (2006 – $5·1 million) and totalassets of $95 million (2006 – $90 million). Your firm was appointed as auditor to Island Co for the first time in June2007.Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments: 50%is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successfulinstallation in the customer’s coal mine (stage three). Generally it takes six months from the order being finalised untilthe final installation.At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputedstage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, isrunning at 100% efficiency.One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages forinjuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. KateShannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally knownthat Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which wereplaced by Sawyer Co in October 2007 have been cancelled.Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of themajor components included in the coal extracting machinery is now being sourced from overseas. The new supplier,Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to LockeCo recorded within current liabilities.All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at$2·5 million (2006 – $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported bycustomers, and this estimate forms the basis of the provision.Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office toIsland Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the auditto be finished by that time.Required:(a) Using the information provided, identify and explain the principal audit risks, and any other matters to beconsidered when planning the final audit for Island Co for the year ended 30 November 2007.Note: your answer should be presented in the format of briefing notes to be used at a planning meeting.Requirement (a) includes 2 professional marks. (13 marks) ” 相关考题
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(b) Ambush loaned $200,000 to Bromwich on 1 December 2003. The effective and stated interest rate for thisloan was 8 per cent. Interest is payable by Bromwich at the end of each year and the loan is repayable on30 November 2007. At 30 November 2005, the directors of Ambush have heard that Bromwich is in financialdifficulties and is undergoing a financial reorganisation. The directors feel that it is likely that they will onlyreceive $100,000 on 30 November 2007 and no future interest payment. Interest for the year ended30 November 2005 had been received. The financial year end of Ambush is 30 November 2005.Required:(i) Outline the requirements of IAS 39 as regards the impairment of financial assets. (6 marks)
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(ii) Explain the accounting treatment under IAS39 of the loan to Bromwich in the financial statements ofAmbush for the year ended 30 November 2005. (4 marks)
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(b) Describe with suitable calculations how the goodwill arising on the acquisition of Briars will be dealt with inthe group financial statements and how the loan to Briars should be treated in the financial statements ofBriars for the year ended 31 May 2006. (9 marks)
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4 (a) Router, a public limited company operates in the entertainment industry. It recently agreed with a televisioncompany to make a film which will be broadcast on the television company’s network. The fee agreed for thefilm was $5 million with a further $100,000 to be paid every time the film is shown on the television company’schannels. It is hoped that it will be shown on four occasions. The film was completed at a cost of $4 million anddelivered to the television company on 1 April 2007. The television company paid the fee of $5 million on30 April 2007 but indicated that the film needed substantial editing before they were prepared to broadcast it,the costs of which would be deducted from any future payments to Router. The directors of Router wish torecognise the anticipated future income of $400,000 in the financial statements for the year ended 31 May2007. (5 marks)Required:Discuss how the above items should be dealt with in the group financial statements of Router for the year ended31 May 2007.
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3 You are the manager responsible for the audit of Albreda Co, a limited liability company, and its subsidiaries. Thegroup mainly operates a chain of national restaurants and provides vending and other catering services to corporateclients. All restaurants offer ‘eat-in’, ‘take-away’ and ‘home delivery’ services. The draft consolidated financialstatements for the year ended 30 September 2005 show revenue of $42·2 million (2004 – $41·8 million), profitbefore taxation of $1·8 million (2004 – $2·2 million) and total assets of $30·7 million (2004 – $23·4 million).The following issues arising during the final audit have been noted on a schedule of points for your attention:(a) In September 2005 the management board announced plans to cease offering ‘home delivery’ services from theend of the month. These sales amounted to $0·6 million for the year to 30 September 2005 (2004 – $0·8million). A provision of $0·2 million has been made as at 30 September 2005 for the compensation of redundantemployees (mainly drivers). Delivery vehicles have been classified as non-current assets held for sale as at 30September 2005 and measured at fair value less costs to sell, $0·8 million (carrying amount,$0·5 million). (8 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Albreda Co for the year ended30 September 2005.NOTE: The mark allocation is shown against each of the three issues.
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(b) Historically, all owned premises have been measured at cost depreciated over 10 to 50 years. The managementboard has decided to revalue these premises for the year ended 30 September 2005. At the balance sheet datetwo properties had been revalued by a total of $1·7 million. Another 15 properties have since been revalued by$5·4 million and there remain a further three properties which are expected to be revalued during 2006. Arevaluation surplus of $7·1 million has been credited to equity. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Albreda Co for the year ended30 September 2005.NOTE: The mark allocation is shown against each of the three issues.
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(c) During the year Albreda paid $0·1 million (2004 – $0·3 million) in fines and penalties relating to breaches ofhealth and safety regulations. These amounts have not been separately disclosed but included in cost of sales.(5 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Albreda Co for the year ended30 September 2005.NOTE: The mark allocation is shown against each of the three issues.
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3 You are the manager responsible for the audit of Volcan, a long-established limited liability company. Volcan operatesa national supermarket chain of 23 stores, five of which are in the capital city, Urvina. All the stores are managed inthe same way with purchases being made through Volcan’s central buying department and product pricing, marketing,advertising and human resources policies being decided centrally. The draft financial statements for the year ended31 March 2005 show revenue of $303 million (2004 – $282 million), profit before taxation of $9·5 million (2004– $7·3 million) and total assets of $178 million (2004 – $173 million).The following issues arising during the final audit have been noted on a schedule of points for your attention:(a) On 1 May 2005, Volcan announced its intention to downsize one of the stores in Urvina from a supermarket toa ‘City Metro’ in response to a significant decline in the demand for supermarket-style. shopping in the capital.The store will be closed throughout June, re-opening on 1 July 2005. Goodwill of $5·5 million was recognisedthree years ago when this store, together with two others, was bought from a national competitor. It is Volcan’spolicy to write off goodwill over five years. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Volcan for the year ended31 March 2005.NOTE: The mark allocation is shown against each of the three issues.
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3 You are the manager responsible for the audit of Keffler Co, a private limited company engaged in the manufacture ofplastic products. The draft financial statements for the year ended 31 March 2006 show revenue of $47·4 million(2005 – $43·9 million), profit before taxation of $2 million (2005 – $2·4 million) and total assets of $33·8 million(2005 – $25·7 million).The following issues arising during the final audit have been noted on a schedule of points for your attention:(a) In April 2005, Keffler bought the right to use a landfill site for a period of 15 years for $1·1 million. Kefflerexpects that the amount of waste that it will need to dump will increase annually and that the site will becompletely filled after just ten years. Keffler has charged the following amounts to the income statement for theyear to 31 March 2006:– $20,000 licence amortisation calculated on a sum-of-digits basis to increase the charge over the useful lifeof the site; and– $100,000 annual provision for restoring the land in 15 years’ time. (9 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Keffler Co for the year ended31 March 2006.NOTE: The mark allocation is shown against each of the three issues.
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(b) A sale of industrial equipment to Deakin Co in May 2005 resulted in a loss on disposal of $0·3 million that hasbeen separately disclosed on the face of the income statement. The equipment cost $1·2 million when it waspurchased in April 1996 and was being depreciated on a straight-line basis over 20 years. (6 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Keffler Co for the year ended31 March 2006.NOTE: The mark allocation is shown against each of the three issues.
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(b) You are the audit manager of Johnston Co, a private company. The draft consolidated financial statements forthe year ended 31 March 2006 show profit before taxation of $10·5 million (2005 – $9·4 million) and totalassets of $55·2 million (2005 – $50·7 million).Your firm was appointed auditor of Tiltman Co when Johnston Co acquired all the shares of Tiltman Co in March2006. Tiltman’s draft financial statements for the year ended 31 March 2006 show profit before taxation of$0·7 million (2005 – $1·7 million) and total assets of $16·1 million (2005 – $16·6 million). The auditor’sreport on the financial statements for the year ended 31 March 2005 was unmodified.You are currently reviewing two matters that have been left for your attention on the audit working paper files forthe year ended 31 March 2006:(i) In December 2004 Tiltman installed a new computer system that properly quantified an overvaluation ofinventory amounting to $2·7 million. This is being written off over three years.(ii) In May 2006, Tiltman’s head office was relocated to Johnston’s premises as part of a restructuring.Provisions for the resulting redundancies and non-cancellable lease payments amounting to $2·3 millionhave been made in the financial statements of Tiltman for the year ended 31 March 2006.Required:Identify and comment on the implications of these two matters for your auditor’s reports on the financialstatements of Johnston Co and Tiltman Co for the year ended 31 March 2006. (10 marks)
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5 You are an audit manager in Fox Steeple, a firm of Chartered Certified Accountants, responsible for allocating staffto the following three audits of financial statements for the year ending 31 December 2006:(a) Blythe Co is a new audit client. This private company is a local manufacturer and distributor of sportswear. Thecompany’s finance director, Peter, sees little value in the audit and put it out to tender last year as a cost-cuttingexercise. In accordance with the requirements of the invitation to tender your firm indicated that there would notbe an interim audit.(b) Huggins Co, a long-standing client, operates a national supermarket chain. Your firm provided Huggins Co withcorporate financial advice on obtaining a listing on a recognised stock exchange in 2005. Senior managementexpects a thorough examination of the company’s computerised systems, and are also seeking assurance thatthe annual report will not attract adverse criticism.(c) Gray Co has been an audit client since 1999 after your firm advised management on a successful buyout. Grayprovides communication services and software solutions. Your firm provides Gray with technical advice onfinancial reporting and tax services. Most recently you have been asked to conduct due diligence reviews onpotential acquisitions.Required:For these assignments, compare and contrast:(i) the threats to independence;(ii) the other professional and practical matters that arise; and(iii) the implications for allocating staff.(15 marks)
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3 You are the manager responsible for the audit of Seymour Co. The company offers information, proprietary foods andmedical innovations designed to improve the quality of life. (Proprietary foods are marketed under and protected byregistered names.) The draft consolidated financial statements for the year ended 30 September 2006 show revenueof $74·4 million (2005 – $69·2 million), profit before taxation of $13·2 million (2005 – $15·8 million) and totalassets of $53·3 million (2005 – $40·5 million).The following issues arising during the final audit have been noted on a schedule of points for your attention:(a) In 2001, Seymour had been awarded a 20-year patent on a new drug, Tournose, that was also approved forfood use. The drug had been developed at a cost of $4 million which is being amortised over the life of thepatent. The patent cost $11,600. In September 2006 a competitor announced the successful completion ofpreliminary trials on an alternative drug with the same beneficial properties as Tournose. The alternative drug isexpected to be readily available in two years time. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended30 September 2006.NOTE: The mark allocation is shown against each of the three issues.
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(b) Seymour offers health-related information services through a wholly-owned subsidiary, Aragon Co. Goodwill of$1·8 million recognised on the purchase of Aragon in October 2004 is not amortised but included at cost in theconsolidated balance sheet. At 30 September 2006 Seymour’s investment in Aragon is shown at cost,$4·5 million, in its separate financial statements.Aragon’s draft financial statements for the year ended 30 September 2006 show a loss before taxation of$0·6 million (2005 – $0·5 million loss) and total assets of $4·9 million (2005 – $5·7 million). The notes toAragon’s financial statements disclose that they have been prepared on a going concern basis that assumes thatSeymour will continue to provide financial support. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended30 September 2006.NOTE: The mark allocation is shown against each of the three issues.
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(c) In November 2006 Seymour announced the recall and discontinuation of a range of petcare products. Theproduct recall was prompted by the high level of customer returns due to claims of poor quality. For the year to30 September 2006, the product range represented $8·9 million of consolidated revenue (2005 – $9·6 million)and $1·3 million loss before tax (2005 – $0·4 million profit before tax). The results of the ‘petcare’ operationsare disclosed separately on the face of the income statement. (6 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended30 September 2006.NOTE: The mark allocation is shown against each of the three issues.
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(b) You are an audit manager in a firm of Chartered Certified Accountants currently assigned to the audit of CleevesCo for the year ended 30 September 2006. During the year Cleeves acquired a 100% interest in Howard Co.Howard is material to Cleeves and audited by another firm, Parr Co. You have just received Parr’s draftauditor’s report for the year ended 30 September 2006. The wording is that of an unmodified report except forthe opinion paragraph which is as follows:Audit opinionAs more fully explained in notes 11 and 15 impairment losses on non-current assets have not beenrecognised in profit or loss as the directors are unable to quantify the amounts.In our opinion, provision should be made for these as required by International Accounting Standard 36(Impairment). If the provision had been so recognised the effect would have been to increase the loss beforeand after tax for the year and to reduce the value of tangible and intangible non-current assets. However,as the directors are unable to quantify the amounts we are unable to indicate the financial effect of suchomissions.In view of the failure to provide for the impairments referred to above, in our opinion the financial statementsdo not present fairly in all material respects the financial position of Howard Co as of 30 September 2006and of its loss and its cash flows for the year then ended in accordance with International Financial ReportingStandards.Your review of the prior year auditor’s report shows that the 2005 audit opinion was worded identically.Required:(i) Critically appraise the appropriateness of the audit opinion given by Parr Co on the financialstatements of Howard Co, for the years ended 30 September 2006 and 2005. (7 marks)
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(ii) Briefly explain the implications of Parr Co’s audit opinion for your audit opinion on the consolidatedfinancial statements of Cleeves Co for the year ended 30 September 2006. (3 marks)
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3 You are the manager responsible for the audit of Lamont Co. The company’s principal activity is wholesaling frozenfish. The draft consolidated financial statements for the year ended 31 March 2007 show revenue of $67·0 million(2006 – $62·3 million), profit before taxation of $11·9 million (2006 – $14·2 million) and total assets of$48·0 million (2006 – $36·4 million).The following issues arising during the final audit have been noted on a schedule of points for your attention:(a) In early 2007 a chemical leakage from refrigeration units owned by Lamont caused contamination of some of itsproperty. Lamont has incurred $0·3 million in clean up costs, $0·6 million in modernisation of the units toprevent future leakage and a $30,000 fine to a regulatory agency. Apart from the fine, which has been expensed,these costs have been capitalised as improvements. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Lamont Co for the year ended31 March 2007.NOTE: The mark allocation is shown against each of the three issues.
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(b) While the refrigeration units were undergoing modernisation Lamont outsourced all its cold storage requirementsto Hogg Warehousing Services. At 31 March 2007 it was not possible to physically inspect Lamont’s inventoryheld by Hogg due to health and safety requirements preventing unauthorised access to cold storage areas.Lamont’s management has provided written representation that inventory held at 31 March 2007 was$10·1 million (2006 – $6·7 million). This amount has been agreed to a costing of Hogg’s monthly return ofquantities held at 31 March 2007. (7 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Lamont Co for the year ended31 March 2007.NOTE: The mark allocation is shown against each of the three issues.
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(b) You are the audit manager of Petrie Co, a private company, that retails kitchen utensils. The draft financialstatements for the year ended 31 March 2007 show revenue $42·2 million (2006 – $41·8 million), profit beforetaxation of $1·8 million (2006 – $2·2 million) and total assets of $30·7 million (2006 – $23·4 million).You are currently reviewing two matters that have been left for your attention on Petrie’s audit working paper filefor the year ended 31 March 2007:(i) Petrie’s management board decided to revalue properties for the year ended 31 March 2007 that hadpreviously all been measured at depreciated cost. At the balance sheet date three properties had beenrevalued by a total of $1·7 million. Another nine properties have since been revalued by $5·4 million. Theremaining three properties are expected to be revalued later in 2007. (5 marks)Required:Identify and comment on the implications of these two matters for your auditor’s report on the financialstatements of Petrie Co for the year ended 31 March 2007.NOTE: The mark allocation is shown against each of the matters above.
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(ii) On 1 July 2006 Petrie introduced a 10-year warranty on all sales of its entire range of stainless steelcookware. Sales of stainless steel cookware for the year ended 31 March 2007 totalled $18·2 million. Thenotes to the financial statements disclose the following:‘Since 1 July 2006, the company’s stainless steel cookware is guaranteed to be free from defects inmaterials and workmanship under normal household use within a 10-year guarantee period. No provisionhas been recognised as the amount of the obligation cannot be measured with sufficient reliability.’(4 marks)Your auditor’s report on the financial statements for the year ended 31 March 2006 was unmodified.Required:Identify and comment on the implications of these two matters for your auditor’s report on the financialstatements of Petrie Co for the year ended 31 March 2007.NOTE: The mark allocation is shown against each of the matters above.
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5 You are the audit manager for three clients of Bertie Co, a firm of Chartered Certified Accountants. The financialyear end for each client is 30 September 2007.You are reviewing the audit senior’s proposed audit reports for two clients, Alpha Co and Deema Co.Alpha Co, a listed company, permanently closed several factories in May 2007, with all costs of closure finalised andpaid in August 2007. The factories all produced the same item, which contributed 10% of Alpha Co’s total revenuefor the year ended 30 September 2007 (2006 – 23%). The closure has been discussed accurately and fully in thechairman’s statement and Directors’ Report. However, the closure is not mentioned in the notes to the financialstatements, nor separately disclosed on the financial statements.The audit senior has proposed an unmodified audit opinion for Alpha Co as the matter has been fully addressed inthe chairman’s statement and Directors’ Report.In October 2007 a legal claim was filed against Deema Co, a retailer of toys. The claim is from a customer who slippedon a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liabilityin the notes to the financial statements, and audit working papers provide sufficient evidence that no provision isnecessary as Deema Co’s lawyers have stated in writing that the likelihood of the claim succeeding is only possible.The amount of the claim is fixed and is adequately covered by cash resources.The audit senior proposes that the audit opinion for Deema Co should not be qualified, but that an emphasis of matterparagraph should be included after the audit opinion to highlight the situation.Hugh Co was incorporated in October 2006, using a bank loan for finance. Revenue for the first year of trading is$750,000, and there are hopes of rapid growth in the next few years. The business retails luxury hand made woodentoys, currently in a single retail outlet. The two directors (who also own all of the shares in Hugh Co) are aware thatdue to the small size of the company, the financial statements do not have to be subject to annual external audit, butthey are unsure whether there would be any benefit in a voluntary audit of the first year financial statements. Thedirectors are also aware that a review of the financial statements could be performed as an alternative to a full audit.Hugh Co currently employs a part-time, part-qualified accountant, Monty Parkes, who has prepared a year endbalance sheet and income statement, and who produces summary management accounts every three months.Required:(a) Evaluate whether the audit senior’s proposed audit report is appropriate, and where you disagree with theproposed report, recommend the amendment necessary to the audit report of:(i) Alpha Co; (6 marks)
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You are the manager responsible for performing hot reviews on audit files where there is a potential disagreementbetween your firm and the client regarding a material issue. You are reviewing the going concern section of the auditfile of Dexter Co, a client with considerable cash flow difficulties, and other, less significant operational indicators ofgoing concern problems. The working papers indicate that Dexter Co is currently trying to raise finance to fundoperating cash flows, and state that if the finance is not received, there is significant doubt over the going concernstatus of the company. The working papers conclude that the going concern assumption is appropriate, but it isrecommended that the financial statements should contain a note explaining the cash flow problems faced by thecompany, along with a description of the finance being sought, and an evaluation of the going concern status of thecompany. The directors do not wish to include the note in the financial statements.Required:(b) Consider and comment on the possible reasons why the directors of Dexter Co are reluctant to provide thenote to the financial statements. (5 marks)
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You are an audit manager responsible for providing hot reviews on selected audit clients within your firm of CharteredCertified Accountants. You are currently reviewing the audit working papers for Pulp Co, a long standing audit client,for the year ended 31 January 2008. The draft statement of financial position (balance sheet) of Pulp Co shows totalassets of $12 million (2007 – $11·5 million).The audit senior has made the following comment in a summary ofissues for your review:‘Pulp Co’s statement of financial position (balance sheet) shows a receivable classified as a current asset with a valueof $25,000. The only audit evidence we have requested and obtained is a management representation stating thefollowing:(1) that the amount is owed to Pulp Co from Jarvis Co,(2) that Jarvis Co is controlled by Pulp Co’s chairman, Peter Sheffield, and(3) that the balance is likely to be received six months after Pulp Co’s year end.The receivable was also outstanding at the last year end when an identical management representation was provided,and our working papers noted that because the balance was immaterial no further work was considered necessary.No disclosure has been made in the financial statements regarding the balance. Jarvis Co is not audited by our firmand we have verified that Pulp Co does not own any shares in Jarvis Co.’Required:(b) In relation to the receivable recognised on the statement of financial position (balance sheet) of Pulp Co asat 31 January 2008:(i) Comment on the matters you should consider. (5 marks)
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5 You are the manager responsible for the audit of Blod Co, a listed company, for the year ended 31 March 2008. Yourfirm was appointed as auditors of Blod Co in September 2007. The audit work has been completed, and you arereviewing the working papers in order to draft a report to those charged with governance. The statement of financialposition (balance sheet) shows total assets of $78 million (2007 – $66 million). The main business activity of BlodCo is the manufacture of farm machinery.During the audit of property, plant and equipment it was discovered that controls over capital expenditure transactionshad deteriorated during the year. Authorisation had not been gained for the purchase of office equipment with a costof $225,000. No material errors in the financial statements were revealed by audit procedures performed on property,plant and equipment.An internally generated brand name has been included in the statement of financial position (balance sheet) at a fairvalue of $10 million. Audit working papers show that the matter was discussed with the financial controller, whostated that the $10 million represents the present value of future cash flows estimated to be generated by the brandname. The member of the audit team who completed the work programme on intangible assets has noted that thistreatment appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognise theasset.Problems were experienced in the audit of inventories. Due to an oversight by the internal auditors of Blod Co, theexternal audit team did not receive a copy of inventory counting procedures prior to attending the count. This causeda delay at the beginning of the inventory count, when the audit team had to quickly familiarise themselves with theprocedures. In addition, on the final audit, when the audit senior requested documentation to support the finalinventory valuation, it took two weeks for the information to be received because the accountant who had preparedthe schedules had mislaid them.Required:(a) (i) Identify the main purpose of including ‘findings from the audit’ (management letter points) in a reportto those charged with governance. (2 marks)
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You are an audit manager at Rockwell Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:Basis of modified opinion (extract)In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.Emphasis of Matter ParagraphWe draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.Required:(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.Required:Comment on the actions which Rockwell Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)(c) Discuss the quality control procedures which should be carried out by Rockwell Co prior to the audit report on the Hopper Group being issued. (4 marks)
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You are the audit manager of Chestnut Co and are reviewing the key issues identified in the files of two audit clients.Palm Industries Co (Palm)Palm’s year end was 31 March 2015 and the draft financial statements show revenue of $28·2 million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for this audit has been completed.A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.Ash Trading Co (Ash)Ash is a new client of Chestnut Co, its year end was 31 January 2015 and the firm was only appointed auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen by the company’s internal audit department. Neither Chestnut Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.Required:For each of the two issues:(i) Discuss the issue, including an assessment of whether it is material;(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and(iii) Describe the impact on the audit report if the issue remains UNRESOLVED.Notes:1 The total marks will be split equally between each of the two issues.2 Audit report extracts are NOT required.
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