Question 4a-d
You are the manager responsible for four audit clients of Axis & Co, a firm of Chartered Certified Accountants. The year end in each case is 30 June 2006.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports. Details are as follows:
(a) Mantis Co is a subsidiary of Cube Co. Serious going concern problems have been noted during this year’s audit. Mantis will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. Mantis has received a letter of support (‘comfort letter’) from Cube Co.
The audit senior has suggested that, due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’. (5 marks)
(b) Lorenze Co has changed its accounting policy for goodwill during the year from amortisation over its estimated useful life to annual impairment testing. No disclosure of this change has been given in the financial statements. The carrying amount of goodwill in the balance sheet as at 30 June 2006 is the same as at 30 June 2005 as management’s impairment test show that it is not impaired.
The audit senior has concluded that a qualification is not required but suggests that attention can be drawn to the change by way of an emphasis of matter paragraph. (6 marks)
(c) The directors’ report of Abrupt Co states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1•6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unqualified opinion should be given as the audit opinion does not extend to the directors’ report. (4 marks)
(d) Audit work on the after-date bank transactions of Jingle Co has identified a transfer of cash from Bell Co. The audit senior assigned to the audit of Jingle has documented that Jingle’s finance director explained that Bell commenced trading on 7 July 2006, after being set up as a wholly-owned foreign subsidiary of Jingle.
The audit senior has noted that although no other evidence has been obtained an unmodified opinion is appropriate because the matter does not impact on the current year’s financial statements. (5 marks)
Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the auditors’ reports. Where you disagree, indicate what audit modification (if any) should be given instead.
Note: The mark allocation is shown against each of the four issues. (20 marks)