You are the audit manager of Violet & Co and you are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The audit seniors have raised the following issues:

Daisy Designs Co (Daisy)

Daisy’s year end is 30 September, however, subsequent to the year end the company’s sales ledger has been corrupted by a computer virus. Daisy’s finance director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables.

All other accounting records are unaffected and there are no backups available for the sales ledger. Daisy’s revenue is $15•6m, its receivables are $3•4m and profit before tax is $2m.

Fuchsia Enterprises Co (Fuchsia)

Fuchsia has experienced difficult trading conditions and as a result it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork and it shows a significant net cash outflow.

Management are confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the audit senior is highly sceptical about this.

The prior year financial statements showed a profit before tax of $1•2m; however, the current year loss before tax is $4•4m and the forecast net cash outflow for the next 12 months is $3•2m.

Required:

For each of the two issues:

(i) Discuss the issue, including an assessment of whether it is material;

(ii) Recommend procedures the audit team should undertake at the completion stage to try to resolve the issue; and

(iii) Describe the impact on the audit report if the issue remains unresolved.

Notes: 1 The total marks will be split equally between each issue. 
             2 Audit report extracts are NOT required. (12 marks)