Auditor’s Report

AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

Question

A company prepares its financial statements on a going concern basis, but a material uncertainty exists about the ability of the company to continue as a going concern which is fully disclosed by management in the financial statements. In this situation, what shall the auditor do?

A The auditor’s report shall contain a ‘Material Uncertainty Related to Going Concern’ paragraph

B The auditor’s report shall state an adverse opinion

C The auditor’s report shall state a disclaimer of opinion

D The auditor’s report shall contain an ’emphasis of matter’ paragraph

Answer

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Tags: Auditor’s Report, Disclosure, Financial Statements, Going Concern, Material Uncertainty
Level: Level 3

Topic: Reporting

AAA – L3 – SA – Q3.10 – Auditor’s Responsibilities Section

Non-allowable position for responsibilities section.

Question

Which of the following is NOT an allowable position for the Auditor’s Responsibilities for the Financial Statements section of the auditor’s report?

A On a website of an appropriate authority and this website is referenced within the auditor’s report

B Within the body of the auditor’s report

C In an appendix to the auditor’s report that is referenced within the report itself

D In an introductory paragraph at the start of the report

Answer

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Tags: Audit Standards, Auditor’s Report, ICAG, Responsibilities Section
Level: Level 3

Topic: Reporting

AA – L2 – SA – Q4.10 – Auditor’s Report

Section of auditor’s report for ISA statement.

Question

Which section of the auditor’s report should include a statement that the audit has been carried out in accordance with ISAs?

A Auditor’s opinion paragraph

B Auditor’s responsibilities for the audit of the financial statements C Responsibilities for the financial statements paragraph

D Basis for opinion paragraph

Answer

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Tags: Audit reporting, Auditor’s Report, ICAG, ISA Compliance
Level: Level 2

Topic: Completion Procedures and Reporting

AAA – L3 – Q66 – Reporting

Define and explain the use of Emphasis of Matter and Other Matter paragraphs in an auditor's report for Kweku Medical Co.

Question

You are the partner responsible for the audit of Kweku Medical Co, for the year ended 30th April 2014. The final audit has been completed and you have asked the audit manager to draft the auditor’s report. The manager is aware that there is guidance for auditors relating to the auditor’s report in ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager has asked for your assistance in this matter.

Required:
(i) Define an “Emphasis of Matter paragraph” and explain, providing examples, the use of such a paragraph.
(ii) Define an “Other Matter paragraph” and explain, providing examples, the use of such a paragraph.

Note: You are not required to produce draft paragraphs.

Answer

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Tags: Audit opinion, Auditor’s Report, Emphasis of Matter, Financial Statements, ISA 706, Other Matter
Level: Level 3

Topic: Reporting

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

Question

You are the manager responsible for the audit of two, unrelated, audit clients. In each case you are currently reviewing the audit working papers and the audit seniors’ recommendations for the type of auditor’s report to be issued. Details are as follows:

(1) PrimeTech Laptops is a subsidiary of CoreTech Computers. Serious going concern problems have been noted during this year’s audit. PrimeTech Laptops will be unable to trade for the foreseeable future unless it continues to receive financial support from CoreTech Computers. A letter of support has been received and a copy is filed on the current audit file.
The audit senior has suggested that, due to the seriousness of the situation, the audit opinion should be modified.

(2) During the year, Rania Textiles has made a small loan to one of its directors but this has not been disclosed in the financial statements. Such disclosure is required by local legislation. Your auditor’s report gives an opinion on compliance with such legislation.
The audit senior has suggested that, as the amount involved is small, an unmodified opinion should be issued.

Required:
For each client, comment on the suitability or otherwise of the seniors’ proposals for the auditor’s reports. Where you disagree, indicate what kind of modification (if any) should be given instead

Answer

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Tags: Audit opinion, Auditor’s Report, Compliance, Financial support, Going Concern, Local legislation, Material Misstatement, Non-disclosure
Level: Level 3

Topic: Audit-Related Services

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

Question

Yams Co
The directors of Yams Co have decided that this year, motor vehicles should be depreciated on a reducing balance basis. Previously this has been done on a straight line basis. Profits have fallen by GH₵18,000 as a result.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

Answer:
The relevant figure in terms of materiality is GH₵18,000. This represents 12% of profit before tax, which is above 5%, so the amount is material.

Depreciation of non-current assets is described in IAS 16. A change from one method of depreciation to another is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position. Such a change does not, however, constitute a change of accounting policy (IAS 8); it is a change in accounting estimate.

In Yams Co there is nothing to suggest that such a change in accounting estimate is warranted. Furthermore, motor vehicles are a normal class of non-current asset, so it would be highly unusual to change the method of depreciation.

If the directors are unable to give a satisfactory explanation for the change, a modified audit opinion on the grounds of material misstatement would be appropriate. The qualification is only material (and not pervasive) and an ‘except for’ opinion is correct

(b) Plantain Co
A competitor of Plantain Co wrote a damaging article about one of its products. Having consulted its lawyers, Plantain Co has decided to take legal action and is suing the competitor for GH₵500,000. The court case will be heard in September of this year and Plantain Co’s lawyers have informed them that there is an 80% chance of success. As a result, Plantain Co has adjusted its profits upwards by GH₵100,000.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

(c) Papaya Co
On 10 February 20X5, Papaya Co were informed that one of their leading customers had gone into liquidation. At 31 December 20X8, the balance owed was GH₵45,000. The directors thought they had better reflect this in the financial statements so they disclosed this in the notes to the financial statements.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

(d) Melon Co
During the valuation of inventory it was discovered that a line of inventory had been valued under LIFO. This had resulted in a misstatement of GH₵8,000. A further line of inventory was clearly obsolete and should not have been included at all. In the financial statements, this had been included at a valuation of GH₵4,000.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

Answer

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Tags: Adjusting Events, Auditor’s Report, IAS 10, Liquidation, Material Misstatement, Receivables
Level: Level 3

Topic: Reporting

AAA – L3 – Q56 – Reporting

Discuss materiality, true and fair concepts, and auditor's report effects for Gifty Goods and Cecilia's Contracts.

Question

56 GG and CC

Described below are situations which have arisen in two unrelated audits and which are considered material.

(1) Gifty Goods

Although you are satisfied that closing inventories this year are fairly stated, the auditor’s report on the previous year’s financial statements was modified due to a restriction on the scope of the audit work in respect of the closing inventory figure. This led to a qualified opinion.

(2) Cecilia’s Contracts

The financial statements disclose the fact that a provision may be required to reduce inventories to their net realisable value if a contract with a major customer, representing 60% of the company’s revenue, is not renewed. A decision on this by the customer is not expected until after the financial statements are due to be signed.

Required

(a) State what is meant by, and explain the relationship between, the concepts of materiality and true and fair.

(b) State, with reasons, the effect on the auditor’s reports of the situations described above.

Answer

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Tags: Auditor’s Report, Financial Statements, Going Concern, Inventory, Materiality
Level: Level 3

Topic: Reporting

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

Question

55 Richmond Computers

Richmond Computers sells personal computers (PCs) to independent shops. You are the external auditor of Richmond Computers. Your interim audit revealed the following issues:

(1) The half year physical inventory count revealed that some PCs supposed to be in inventory were missing and that other machines which had been returned by customers were in inventory but had not been recorded as having been returned. A few of the missing PCs have been traced to directors who borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new customers in the last year had not been allocated credit limits.

Required

Draft the section of your report to management dealing with the above deficiencies in internal control. Set out the deficiencies, their implications and your recommendations for improvement.

Answer

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Tags: Auditor’s Report, Credit Limits, Financial Statements, Internal controls, Inventory
Level: Level 3

Topic: Reporting

AAA – L3 – Q54 – Audit Reporting

Discuss modified audit opinions and outline the auditor's report for a material inventory issue at Eunice Pharmacies.

Question

54 Eunice Pharmacies

During the course of your audit of Eunice Pharmacies for the year ended 30 April, you establish that the company did not carry out a year end physical inventory count at one of its retail branches and there are no alternative procedures that can be applied to confirm the quantities. The directors have estimated the branch inventory value.

At the conclusion of your audit you decide that the problem is material, but not pervasive, to the view given by the financial statements.

Required

(a) Explain the different types of modified audit opinions, giving an example of situations which may give rise to each type.

(b) Set out the main elements of the auditor’s report for the situation set out above.

Answer

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Tags: Audit Opinions, Auditor’s Report, Financial Statements, Inventory, Modified Opinions
Level: Level 3

Topic: Reporting

AA – L2 – Q56 – Audit Evidence

Explain advantages of perpetual inventory systems for Nsiah Co, a crime fiction supplier with high inventory turnover.

Question

56 Nsoah

You are an audit manager in David & Co. One of your audit clients, Nsoah, is a specialist supplier of crime fiction with over 120,000 customers. The company owns one large warehouse, which contains at any one time about 1 million books of up to 80,000 different titles. Customers place orders for books either over the Internet or by mail order. Books are despatched on the day of receipt of the order. Returns are allowed up to 30 days from the despatch date provided the books look new and unread.

Due to the high inventory turnover, Nsoah maintains a perpetual inventory system using standard ‘off the shelf software. David & Co has audited the system for the last five years and has found no errors within the software.

Continuous inventory checking is carried out by Nsoah’s internal audit function.

You are currently reviewing the continuous inventory checking system with an audit junior. The junior needs experience in auditing continuous inventory checking systems and some basic knowledge on IESBA’s International Code of Ethics for Professional Accountants.

Required

(a) Explain the advantages of using a perpetual inventory system. (4 marks)

(b) List the audit procedures you should perform to confirm the accuracy of the continuous inventory checking at Nsoah. For each procedure, explain the reason for carrying out that procedure. (6 marks)

(c) Explain the fundamental principles set out in IESBA’s International Code of Ethics for Professional Accountants of integrity, objectivity and independence to accountants. (6 marks)

(d) During your preliminary audit planning you note that the engagement letter has been returned un-signed by the directors of Nsoah. When asked to explain their action, the directors indicate that they cannot allow you access to information on the company’s new website development as this contains various trade secrets. You will not, therefore, be able to perform audit procedures on the research and development expenditure incurred on the website and included in non-current assets.

Briefly explain the actions you should take as a result of the directors not signing the engagement letter. (4 marks)

Answer

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Tags: Audit Scope, Auditor’s Report, Engagement Letter, Non-current Assets
Level: Level 2

Topic: Audit Documentation

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AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

AAA – L3 – SA – Q3.10 – Auditor’s Responsibilities Section

Non-allowable position for responsibilities section.

AA – L2 – SA – Q4.10 – Auditor’s Report

Section of auditor’s report for ISA statement.

AAA – L3 – Q66 – Reporting

Define and explain the use of Emphasis of Matter and Other Matter paragraphs in an auditor's report for Kweku Medical Co.

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

AAA – L3 – Q56 – Reporting

Discuss materiality, true and fair concepts, and auditor's report effects for Gifty Goods and Cecilia's Contracts.

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

AAA – L3 – Q54 – Audit Reporting

Discuss modified audit opinions and outline the auditor's report for a material inventory issue at Eunice Pharmacies.

AA – L2 – Q56 – Audit Evidence

Explain advantages of perpetual inventory systems for Nsiah Co, a crime fiction supplier with high inventory turnover.

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AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

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AAA – L3 – SA – Q3.10 – Auditor’s Responsibilities Section

Non-allowable position for responsibilities section.

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AA – L2 – SA – Q4.10 – Auditor’s Report

Section of auditor’s report for ISA statement.

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AAA – L3 – Q66 – Reporting

Define and explain the use of Emphasis of Matter and Other Matter paragraphs in an auditor's report for Kweku Medical Co.

You're reporting an error for "AAA – L3 – Q66 – Reporting"

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

You're reporting an error for "AAA – L3 – Q62 – Audit-related services"

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

You're reporting an error for "AAA – L3 – Q58- Reporting"

AAA – L3 – Q56 – Reporting

Discuss materiality, true and fair concepts, and auditor's report effects for Gifty Goods and Cecilia's Contracts.

You're reporting an error for "AAA – L3 – Q56 – Reporting"

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

You're reporting an error for "AAA – L3 – Q55 – Reporting"

AAA – L3 – Q54 – Audit Reporting

Discuss modified audit opinions and outline the auditor's report for a material inventory issue at Eunice Pharmacies.

You're reporting an error for "AAA – L3 – Q54 – Audit Reporting"

AA – L2 – Q56 – Audit Evidence

Explain advantages of perpetual inventory systems for Nsiah Co, a crime fiction supplier with high inventory turnover.

You're reporting an error for "AA – L2 – Q56 – Audit Evidence"

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