Financial Statements – Page 11

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

AAA – Dec 2019 – L3 – Q54 – Audit Reporting

Explain types of modified audit opinions with examples for each type.

Question

54 Eunice Pharmacies

(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 Evidence, Audit reporting, Financial Statements, Materiality, Modified audit opinions
Level: Level 3

Topic: Reporting

AA – L2 – Q59 – Audit Evidence

Describe four matters in a bank confirmation letter and explain their importance to the auditor.

Question

(a) Describe four matters which would be included in a bank confirmation letter and explain why they are important to the auditor.

(b) State the audit evidence you would seek in respect of the following:
(i) Cash at bank and bank loan.
(ii) Cash (comprised of floats, unbanked cash and travellers’ cheques).

Answer:

Answer

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Tags: Audit Evidence, Bank Balances, Bank Confirmation, Financial Statements, Third-Party Evidence
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q40 – Group audits

Planning considerations for Pinnacle Holdings and Viper audits, including group restructuring and disposals.

Question

The following diagram shows the structure of the Pinnacle Holdings group, a listed company with subsidiaries both locally and overseas. All subsidiaries are wholly-owned. All of Pinnacle Holdings’ overseas operations are run via Falcon.
During the year ended 31 December 20X8 the board of Pinnacle Holdings decided to restructure the group and the following events took place:
(1) Robin was sold on 1 August 20X8 to an East African competitor, Hawk. The consideration was in the form of shares in Hawk, such that Falcon now owns 30% of Hawk.
(2) Heron was sold on 30 November 20X8 to Viper. The consideration was C100 million settled in cash.
(3) To stimulate the operations of Viper and Heron, 26% of the Viper group was sold to Innovative Ventures on 1 December 20X8.
You are the audit manager on the Pinnacle Holdings audit. In addition to the main group financial statements, Viper is also required by Innovative Ventures to prepare group financial statements. Your office audits the Pinnacle Holdings group, Viper and Heron. Your Asian associate audits Falcon. Ibis (which is not material to the group) is not audited, and Hawk and Robin are audited by a small East African practice. With the exception of Ibis, all members of the group are components at which audit work will be performed.

Required
(a) Prepare notes for a planning meeting with the engagement partner setting out the significant matters which need to be considered at this stage in respect of the Viper audit.
(b) Prepare notes for a planning meeting with the engagement partner setting out the significant matters which need to be considered at this stage in respect of the Pinnacle Holdings audit.

Answer

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Tags: Audit Planning, Disposals, Financial Statements, Group audits, Subsidiary audits
Level: Level 3

Topic: Group audits

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

Question

You are the manager in charge of the audit of Benson Manufacturing. Your subsequent events review for the year ended 30 June 20X8 has identified the following events, all of which took place after the date of the financial statements:
(1) A third of the sales force was made redundant. Provision has been made in the financial statements for the year ended 30 June 20X8 for redundancy payments of C500,000.
(2) One of Benson Manufacturing’s largest customers, Venture Retail, notified its intention to go into liquidation with an outstanding receivable of C250,000. The directors consider that the current general provision for irrecoverable receivables will cover any potential loss.
(3) A writ has been issued against the company by a former sales director who is claiming C120,000 for breach of his service agreement following his dismissal during the year ended 30 June 20X8. No provision has been made in the financial statements for the year ended 30 June 20X8 in respect of this claim.
(4) A fire at the company’s warehouse destroyed its entire inventory. The inventories had a book value of C2 million. This loss has not been included in the financial statements for the year ended 30 June 20X8.

Required
State the enquiries you would make and the evidence you would seek in order to reach a conclusion on the accounting treatment of the above in the financial statements for the year ended 30 June 20X8.

Answer

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Tags: Audit Evidence, Contingencies, Financial Statements, Inventory, Provisions, Receivables, Subsequent events
Level: Level 3

Topic: Evaluation and review

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

Question

Elisa Medical Co

Elisa Medical Co has a significant number of cash transactions and recent non-current asset purchases have been financed by a bank loan. This loan is repayable in equal annual instalments for the next five years.

Required:
(a) Explain the procedures to obtain a bank report for audit purposes from Elisa Medical Co’s bank and the substantive procedures that should be carried out on that report.
(5 marks)

(b) List the further substantive procedures that should be carried out on the bank balances in Elisa Medical Co’s financial statements.

Answer

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Tags: ank Balances, Audit Evidence, Cash Transactions, Financial Statements, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q35 – Group Audits

Plan and manage the group audit of the Saffron Group, considering subsidiaries with separate auditors.

Question

The Saffron Group is an international business, made up of ten subsidiaries and a head office. You are the manager in charge at the firm undertaking the group audit, but there are separate local auditors for the Cinnamon subsidiary in Japan, the Fennel subsidiary in Thailand, and the Cardamom subsidiary in Greece. You are aware of the following information:

(1) Cardamom is a loss-making subsidiary, with losses at the current year end totalling C2.7 million. There are significant control problems, high levels of irrecoverable receivables, and 25% staff turnover. The local auditors have already stated their intention to give a qualified opinion for the year just ended because of the material issues found.

(2) Cinnamon is operating to a different financial year to that of the group as a whole, being October 20X8 rather than December 20X8.

(3) Shortly after the year end, in January 20X5, the Saffron Group announced the sale of Fennel for $25 million, and this disposal is currently underway.

(4) The Saffron Group is guaranteeing loans of approximately $10 million for its subsidiaries.

Required:

(a) Set out how you would plan and manage the group audit of the Saffron Group. (b) Consider the impact of each of the above issues on the group audit. (c) Explain the nature of the relationship between your firm and the auditors of the subsidiaries, making particular reference to the extent to which your firm may rely on the component auditors’ work and to the considerations involved where joint audits are conducted.

Answer

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Tags: Audit Planning, Component auditors, Consolidation, Financial Statements, Group audits
Level: Level 3

Topic: Audit Evidence, Group audits, Planning

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

Question

You are the external auditor of Tandem Logistics, a public limited company (TL). The company’s year-end is 31 March. You have been the auditor since the company was formed 19 years ago to take advantage of the increase in goods being transported by road. Many companies needed to transport their products but did not always have sufficient vehicles to move them. TL therefore purchased ten vehicles and hired these to haulage companies for amounts of time ranging from three days to six months.

The business has grown in size and profitability and now has over 550 vehicles on hire to many different companies. At any one time, between five and 20 vehicles are located at the company premises where they are being repaired; the rest could be anywhere on the extensive road network of the country it operates in. Full details of all vehicles are maintained in a non-current asset register.

Bookings for hire of vehicles are received either over the telephone or via e-mail in TL’s offices. A booking clerk checks the customer’s credit status on the receivables ledger and then the availability of vehicles using the Transport Management System (TMS) software on TL’s computer network. E-mails are filed electronically by customer name in the e-mail program used by TL. If the customer’s credit rating is acceptable and a vehicle is available, the booking is entered into the TMS and confirmed to the customer using the telephone or e-mail. Booking information is then transferred within the network from the TMS to the receivables ledger programme, where a sales invoice is raised. Standard rental amounts are allocated to each booking depending on the amount of time the vehicle is being hired for. Hard copy invoices are sent in the post for telephone orders or via e-mail for e-mail orders.

The main class of asset on TL’s statement of financial position is the vehicles. The net book value of the vehicles is $6 million out of total shareholders’ funds of $15 million as at 30 June 20X8.

Required:
(a) List and explain the reason for the audit tests you should perform to check the completeness and accuracy of the revenue figure in Tandem Logistics’ financial statements.

(b) List and describe the audit work you should perform on the statement of financial position figure for vehicles in Tandem Logistics’ financial statements for the year ended 30 June 20X8.

Answer

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Tags: Audit Procedures, Completeness, Depreciation, Existence, Financial Statements, Non-current Assets, Substantive Procedures, Transport Industry, Valuation, Vehicles
Level: Level 2

Topic: Audit Evidence

Tag (SQ): Financial Statements

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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.

AAA – Dec 2019 – L3 – Q54 – Audit Reporting

Explain types of modified audit opinions with examples for each type.

AA – L2 – Q59 – Audit Evidence

Describe four matters in a bank confirmation letter and explain their importance to the auditor.

AAA – L3 – Q40 – Group audits

Planning considerations for Pinnacle Holdings and Viper audits, including group restructuring and disposals.

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

AAA – L3 – Q35 – Group Audits

Plan and manage the group audit of the Saffron Group, considering subsidiaries with separate auditors.

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

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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"

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"

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"

Explain types of modified audit opinions with examples for each type.

You're reporting an error for "AAA – Dec 2019 – L3 – Q54 – Audit Reporting"

Describe four matters in a bank confirmation letter and explain their importance to the auditor.

You're reporting an error for "AA – L2 – Q59 – Audit Evidence"

Planning considerations for Pinnacle Holdings and Viper audits, including group restructuring and disposals.

You're reporting an error for "AAA – L3 – Q40 – Group audits"

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

You're reporting an error for "AAA – L3 – Q37 – Evaluation and review"

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

You're reporting an error for "AA – L2 – Q50 – Audit Evidence"

Plan and manage the group audit of the Saffron Group, considering subsidiaries with separate auditors.

You're reporting an error for "AAA – L3 – Q35 – Group Audits"

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

You're reporting an error for "AA – L2 – Q44 – Audit Evidence"

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