Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:
- Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
- Current liability position: The company’s current liabilities exceeded its current assets.
- Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.
Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.
The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).
The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.
At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.
After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.
Required:
(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)
(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)
(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)
(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)
