Sample

Question 5

ISA (UK) 701 Communicating Key Audit Matters in the Independent Auditor’s Report states ‘The purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed.’

Required:
Discuss this statement in relation to the benefits and difficulties of communicating key audit matters to users of the auditor’s report and the contribution of ISA (UK) 701 in addressing the audit expectation gap.  (8 marks)

(b) You are the manager responsible for the audit of the Blackmore Group (the Group), a listed manufacturer of high quality musical instruments, for the year ended 31 March 2018. The draft financial statements of the Group recognise a loss before tax of £2·2 million (2017 – loss of £1·5 million) and total assets of £14·1 million (2017 – £18·3 million). The audit is nearing completion and the audit senior has drafted the auditor’s report which contains the following extract:


Key audit matters

1. Valuation of financial instruments
The Group enters into structured forward contracts to purchase materials used in its manufacturing process. 
The valuation of these unquoted instruments involves guesswork and is based on internal models developed by the Group’s finance director, Thomas Bolin. Mr Bolin joined the Group in January 2018 and there is significant measurement uncertainty involved in his valuations as a result of his inexperience. As a result, the valuation of these contracts was significant to our audit.

2. Customer liquidation
Included in receivables shown on the consolidated statement of financial position is an amount of £287,253 from a customer which has ceased trading. On the basis that the Group has no security for this debt, we believe that the Group should make a full provision for impairment of £287,253 thereby reducing profit before taxation for the year and total assets as at 31 March 2018 by that amount.

Qualified opinion arising from disagreement about accounting treatment
In our opinion, except for the effect on the financial statements of the matter described above, the financial statements have been properly prepared in all material respects in accordance with IFRS Standards.

Emphasis of matter
We draw attention to the loss before tax of £2·2 million for the year ended 31 March 2018 and that the Group is in breach of loan covenants with its key finance providers. A material uncertainty therefore exists which may cast doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.


Required:
Critically appraise the extract from the auditor’s report on the consolidated financial statements of the Blackmore Group for the year ended 31 March 2018.

Note: You are NOT required to re-draft the extract from the auditor’s report. (12 marks)