- 15 Marks
AAA – L3 – Q60 – Evaluation and review
Question
Jemila Foods has been in existence, importing foodstuffs such as rice, for a number of years. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of food which is manufactured exclusively by one company which is based in Bharat. The food is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this minimum annual payment of $10,000 per store.
The audit is nearing completion but you have just heard that the Bharat manufacturer is facing serious financial difficulties and that supplies have ceased.
Required:
(a) Set out the further information the auditor would require before reaching his audit opinion. (b) Set out the possible forms of report that the auditor may issue.
Answer
A) Whether the supplier difficulties are temporary or permanent.
Whether the supplier is taking action to overcome its problems (and whether Jemila Foods is considering offering financial support to the supplier).
Legal advice taken with regards to the possibility of negotiating a break clause in the agreement with the store.
Any costs/penalties arising from the above.
Legal advice taken with regards to the possibility of altering the agreement to cover an alternative acceptable product or sub-leasing to a competitor to mitigate costs.
The nature and extent of Jemila Foods’ other activities and its ability to expand trade in those areas.
What the current level of inventories is and whether it is sufficient to tide over the company until supplies are resumed or an alternative product is found.
Willingness of Jemila Foods’ bankers to extend/grant any overdraft facility. (B)
Where the going concern basis of accounting is appropriate but a material uncertainty exists the auditor must consider whether the financial statements:
- adequately disclose the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with those events or conditions, and
- disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
If there is adequate disclosure then the auditor should express an unmodified opinion but should include a Material Uncertainty Relating to Going Concern paragraph after the Basis for Opinion paragraph. This draws attention to the relevant note in the financial statements and states that a material uncertainty exists but the auditor’s opinion is not modified in respect of the matter.
If there is not adequate disclosure then the auditor should express a qualified or adverse opinion.
Where the going concern basis of accounting is inappropriate the auditor should express: - an adverse opinion if the financial statements have been prepared on a going concern basis
- an unmodified opinion if the financial statements have been prepared on an alternative acceptable basis (e.g. break-up basis) and there is adequate disclosure of this basis. An emphasis of matter paragraph may be required.
- Topic: Evaluation and review
- Uploader: Salamat Hamid