ACCA AA Syllabus E. Review And Reporting - EOM and Other Matter Compared - Past Papers ^{3 / 3}

An emphasis of matter paragraph is used in an audit report to draw attention to a matter affecting the financial statements.

Which TWO of the following are correct in relation to an Emphasis of Matter Paragraph in the Auditor’s Report?

1 It is used when there is a significant uncertainty
2 It constitutes a qualified audit opinion
3 The audit report is referred to as an unmodified report
4 The matter is deemed to be fundamental to the users understanding of the financial statements

A. 1 and 2
B. 1 and 4
C. 1 and 3
D. 2 and 4

Describe the content of an emphasis of matter paragraph. (2 marks)

Panda Co manufactures chemicals and has a factory and four offsite storage locations for finished goods.  Panda Co’s year end was 30 April 2013. The final audit is almost complete and the financial statements and audit report are due to be signed next week. Revenue for the year is $55 million and profit before taxation is $5•6 million.

The following two events have occurred subsequent to the year end. No amendments or disclosures have been made in the financial statements.

Event 1 – Defective chemicals

Panda Co undertakes extensive quality control checks prior to despatch of any chemicals. Testing on 3 May 2013 found that a batch of chemicals produced in April was defective.

The cost of this batch was $0•85 million. In its current condition it can be sold at a scrap value of $0•1 million. The costs of correcting the defect are too significant for Panda Co’s management to consider this an alternative option.

Event 2 – Explosion

An explosion occurred at the smallest of the four offsite storage locations on 20 May 2013. This resulted in some damage to inventory and property, plant and equipment. Panda Co’s management have investigated the cause of the explosion and believe that they are unlikely to be able to claim on their insurance.

Management of Panda Co has estimated that the value of damaged inventory and property, plant and equipment was $0•9 million and it now has no scrap value.

The directors do not wish to make any amendments or disclosures to the financial statements for the explosion (event 2).

Required:

Explain the impact on the audit report should this issue remain unresolved. (3 marks)

Describe the three types of modified audit opinions. (3 marks)

You are the audit manager of Kiwi & Co and you have been provided with financial statements extracts and the following information about your client, Strawberry Kitchen Designs Co (Strawberry), who is a kitchen manufacturer. The company’s year end is 30 April 2012.

Strawberry has recently been experiencing trading difficulties, as its major customer who owes $0•6m to Strawberry has ceased trading, and it is unlikely any of this will be received. However the balance is included within the financial statements extracts below. The sales director has recently left Strawberry and has yet to be replaced.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year. As a result of this, the company has been slow in paying its suppliers and some are threatening legal action to recover the sums owing.

Due to its financial difficulties, Strawberry missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4•8m be repaid in full within six months. The directors have decided that in order to conserve cash, no final dividend will be paid in 2012.

Financial statements extracts for year ended 30 April:

Having performed the going concern audit procedures, you have serious concerns in relation to the going concern status of Strawberry. The finance director has informed you that as the cash flow issues are short term he does not propose to make any amendments to the financial statements.

Required

If the directors refuse to amend the financial statements, describe the impact on the audit report. (3 marks)

You are the audit manager of Daffy & Co and you are briefing your team on the approach to adopt in undertaking the review and finalisation stage of the audit. In particular, your audit senior is unsure about the steps to take in relation to uncorrected misstatements.

During the audit of Minnie Co the following uncorrected misstatement has been noted.

The property balance was revalued during the year by an independent expert valuer and an error was made in relation to the assumptions provided to the valuer.

The following additional issues have arisen during the course of the audit of Minnie Co. Profit before tax is $10m.

(i) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is $2•5m and the element charged to land only is $0•7m. (4 marks)

(ii) Minnie Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1•1m. (4 marks)

(iii) Minnie Co’s main competitor has filed a lawsuit for $5m against them alleging a breach of copyright; this case is ongoing and will not be resolved prior to the audit report being signed. The matter is correctly disclosed as a contingent liability. (4 marks)

Required:

Discuss each of these issues and describe the impact on the audit report if the above issues remain
unresolved.

Note: The mark allocation is shown against each of the three issues above. Audit report extracts are NOT required.

In terms of audit reports, explain the term ‘modified’. (2 marks)

ISA 700 The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements explains the form and content of audit reports.

Required:

State three ways in which an auditor’s report may be modified and briefly explain the use of each 
modification. (3 marks)