Question 5b

You are the partner responsible for performing an engagement quality control review on the audit of Snipe Co. You are currently reviewing the audit working papers and draft audit report on the financial statements of Snipe Co for the year ended 31 January 2012. The draft financial statements recognise revenue of $8•5 million, profit before tax of $1 million, and total assets of $175 million.

Snipe Co has in place a defined benefit pension plan for its employees. An actuarial valuation on 31 January 2012 indicated that the plan is in deficit by $10•5 million. The deficit is not recognised in the statement of financial position. An extract from the draft audit report is given below:

Auditor’s opinion

In our opinion, because of the significance of the matter discussed below, the financial statements do not give a true and fair view of the financial position of Snipe Co as at 31 January 2012, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Explanation of adverse opinion in relation to pension

The financial statements do not include the company’s pension plan. This deliberate omission contravenes accepted accounting practice and means that the accounts are not properly prepared. 

Required:

Critically appraise the extract from the proposed audit report of Snipe Co for the year ended 31 January 2012.

Note: you are NOT required to re-draft the extract of the audit report. (7 marks)