a) Under the terms of IAS 37, there are three conditions for a provision to be recognised:

• A present obligation due to a past event
• Probable likelihood of financial outflow
• A reliable estimate of the outflow Given that previous leaks have been fined, it seems likely that a financial estimate can be made in the event of any future leaks and that Aluco will be liable. Consequently, the only uncertainty over the provision is the probability of any future leaks actually occurring, and that leads back to the concerns about the new filter discussed. As it stands, removing the provision altogether appears less than prudent and would not be advised. (4 marks)

b) Work required to determine the appropriate accounting treatment There are a number of procedures that Konamoah & Associates can perform to ensure that the filter is treated satisfactorily in the financial statements. The following are a number of suggestions:

• Agreeing the value of the new filter to purchase invoices from Adamah Enterprises, taking into account capitalization of any installation costs
• Agree the lifetime and associated depreciation policy in line with Adamah’s expectations and any warranty (if supplied)
• Agree Board minutes approving the capital expenditure
• Discuss treatment of provisions with Frank Afful in line with any points raised in part (a) above
• Recalculate any provisions made to ensure realistic estimate (if provided)
• Undertake any new year review of actual leaks in old year to establish accurate treatment.

In the event of worst case scenario emerging, where the new filter is inappropriately recorded in the financial statements and the provision is not made when it should be. These would require correction for the financial statements to be true and fair. There do not appear to be any going concern issues as the company seems to have survived after paying fines in previous years, so the likely audit report that would be produced if the directors refuse to correct the financial statements would need to be modified by providing a paragraph with a qualified opinion due to material misstatement (on the grounds of disagreement with the accounting treatment used) stating that …. except for the inappropriate treatment of the new filter and the provision for toxic leak fines, that financial statements show a true and fair view. The auditor’s report would include a paragraph before the opinion paragraph describing the basis for this qualified opinion and any indications of the likely provision that should be charged as well as the appropriate value for the filter. (10 marks)

c) Concerns in providing assurance There are a number of constraints that make it difficult for Konamoah & Associates to act in this particular capacity:

• Adding income from this engagement to the existing audit fee (which we know to be ‘lucrative’ already) might breach the limits that any one client can make up of the firm’s ongoing revenue (i.e. 15% of firm income)
• The firm may not be technically competent to act on such an engagement
• There may not be enough staff to complete this engagement satisfactorily
• There may be a perceived lack of independence in our assurance opinion if we also complete that audit unless we can demonstrate the ability to treat them as separate engagements
• We may find it difficult to measure the data required for the licence if Aluco does not have the systems for measurement of its own
• The assurance work could result in increased liability if there was found to be an error in the measured data or the engagement require a higher profile audience and our reputation could be sullied by and further involvement with this client
• Would the financial resources committed to this engagement be better deployed elsewhere? (Any 6 relevant points for 6 marks)