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Question 5b

You are an audit manager working for Raven & Co, a firm of Chartered Certified Accountants. You specialise in the audits of companies in the information technology industry. Issues have recently arisen in relation to two different clients which require your attention.

(b) The audit of Crow Co, a designer and manufacturer of mobile information technologies, for the year ended 30 June 2016 is nearly complete and the auditor’s report is to be signed imminently. The following outstanding matters still require your consideration. The draft reported profit before tax and total assets for the year are $65 million (2015 – $111 million) and $650 million (2015 – $910 million) respectively. Crow Co is not a listed company.

Military research project
During the year $7 million of expenses relating to a new military research project were recorded in the statement of profit or loss. The audit team was given brief summaries of the costs incurred but when asked for further corroborating evidence, management stated that they had signed a confidentiality agreement with the military and were unable to provide any further details. The only additional information provided was that they anticipated the project to last for three years and that it may lead to a highly lucrative contract.

Fire
During the year a major catastrophe took place when a fire caused significant damage to the operations of the company, leading to production ceasing for several months. While operations have resumed, repairs are ongoing and it is anticipated that full production will not resume for at least another six months. Audit procedures revealed that the matter has been fully and satisfactorily reflected and disclosed in the financial statements and that it does not pose a significant risk to the going concern status of Crow Co.

Required:
In respect of each of the matters described above, discuss the implications for the auditor’s report and recommend any further actions necessary.

Note: The total marks will be split equally between each matter. (10 marks)