Tag (SQ): Revenue Understatement

(A)  ISA 700 Forming an Opinion and Reporting on Financial Statements indicates the main elements that will ordinarily be included in an unmodified auditor’s report.

Required:
List SIX basic elements of an unmodified auditor’s report. Briefly explain why each element is included in the report.

(B). You are the audit manager in charge of the audit of Seaside Ventures Co for the year ended 28 February 20X7. Seaside Ventures Co is based in a seaside town and hires motor boats and yachts to individuals for amounts of time between one day and one week. The majority of receipts are in cash, with a few customers paying by debit card. Consequently, there are no trade receivables in the statement of financial position. The main non-current assets are the motor boats and yachts. The company is run by four directors who are also the major shareholders. Total income for the year was about $50 million.

The following issues have been identified during the audit:

Issue 1
Audit tests on revenue indicate a deficiency in the system of internal control, with a potential understatement of revenue in the region of $2.5 million. The weakness occurred because sales invoices are not sequentially numbered, allowing one of the directors to remove cash sales prior to recording in the sales day book. This was identified during analytical procedures of revenue, when the audit senior noted that on the days when this director was working, revenue was always lower than on the days when the director was not working.

Issue 2
During testing of non-current assets, one yacht was found to be located at the property of one of the directors. This yacht has not been hired out during the year and enquiries indicate that the director makes personal use of it. The yacht is included in the non-current assets balance in the financial statements.

Required:
For each of the issues above:
(i) List the audit procedures you should conduct to reach a conclusion on these issues. (8 marks for Issue 1, 6 marks for Issue 2)

For each of the issues above:

(ii) Assuming that you have performed all the audit procedures that you can, but the issues are still unresolved, explain the potential effect (if any) on the audit report. (8 marks for Issue 1, 6 marks for Issue 2)