You are the manager responsible for the audit of Alpha Ltd, a listed company specializing in the manufacture and installation of sound-proof partitions for domestic and industrial buildings. You are currently reviewing the draft auditor’s report on the company’s financial statements for the year ended 31 March 2022. Extracts from the draft auditor’s report are shown below:
Independent auditor’s report to the shareholders and directors of Alpha Ltd
Basis for opinion
We conducted our audit of Alpha Ltd (the Company) in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Company in accordance with the ethical requirements which are relevant to our audit of the financial statements in the jurisdiction in which the Company operates, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
We have audited the financial statements of Alpha Ltd, which comprises the statement of financial position as at 31 March 2022, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at 31 March 2022, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Material uncertainty regarding going concern
The Company is financed by a long-term loan from its bankers which is due for redemption in August 2022. At the date of this auditor’s report, the Company is in the process of renegotiating the loan but has not yet reached a final agreement with its bankers. It is our view that the loan finance is essential to the continued survival of the Company and that at the time of reporting, therefore, the absence of a finalized agreement represents a material uncertainty regarding going concern. The financial statements have been prepared on a going concern basis but do not make any reference to the loan redemption or the ongoing negotiations with the bank. As the external auditor, therefore, we are fulfilling our duty by bringing the matter to the attention of users of the financial statements.
Other information
The Company’s principal activity is the manufacture and installation of sound-proof partitions for domestic and industrial buildings. The Company, therefore, engages in long-term contracts which are incomplete at the reporting date and which are material to its revenue figure. The installation process is complex and significant judgment is applied in assessing the percentage of completeness which is applied to calculate the revenue for the year. The significance of this judgment requires us to disclose the issue as other information which is relevant to the users of the financial statements.
Required:
Comment on the issues raised in the extract from the draft auditor’s report for the year ended 31 March 2022. (Note: You are NOT required to re-draft the extracts from the auditor’s report.)
(10 marks)
AAA – March 2023 – L3 – Q3a – Reporting, Current issues
Comment on the issues raised in the draft auditor’s report for Alpha Ltd.
You are the manager responsible for the audit of Alpha Ltd, a listed company specializing in the manufacture and installation of sound-proof partitions for domestic and industrial buildings. You are currently reviewing the draft auditor’s report on the company’s financial statements for the year ended 31 March 2022. Extracts from the draft auditor’s report are shown below:
Independent auditor’s report to the shareholders and directors of Alpha Ltd
Basis for opinion
We conducted our audit of Alpha Ltd (the Company) in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Company in accordance with the ethical requirements which are relevant to our audit of the financial statements in the jurisdiction in which the Company operates, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
We have audited the financial statements of Alpha Ltd, which comprises the statement of financial position as at 31 March 2022, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at 31 March 2022, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Material uncertainty regarding going concern
The Company is financed by a long-term loan from its bankers which is due for redemption in August 2022. At the date of this auditor’s report, the Company is in the process of renegotiating the loan but has not yet reached a final agreement with its bankers. It is our view that the loan finance is essential to the continued survival of the Company and that at the time of reporting, therefore, the absence of a finalized agreement represents a material uncertainty regarding going concern. The financial statements have been prepared on a going concern basis but do not make any reference to the loan redemption or the ongoing negotiations with the bank. As the external auditor, therefore, we are fulfilling our duty by bringing the matter to the attention of users of the financial statements.
Other information
The Company’s principal activity is the manufacture and installation of sound-proof partitions for domestic and industrial buildings. The Company, therefore, engages in long-term contracts which are incomplete at the reporting date and which are material to its revenue figure. The installation process is complex and significant judgment is applied in assessing the percentage of completeness which is applied to calculate the revenue for the year. The significance of this judgment requires us to disclose the issue as other information which is relevant to the users of the financial statements.
Required:
Comment on the issues raised in the extract from the draft auditor’s report for the year ended 31 March 2022. (Note: You are NOT required to re-draft the extracts from the auditor’s report.)
(10 marks)
Alpha Ltd – Critical appraisal of extract from draft auditor’s report: