ACCA AA Syllabus E. Review And Reporting - Structure of an Unmodified Audit Report - Past Papers ^{1 / 3}

You are an audit manager at Blenkin & Co and are approaching the end of the audit of Sampson Co, which is a large listed retailer. The draft financial statements currently show a profit before tax of $6·5m and revenue of $66m for the financial year ended 30 June 20X6. You have been informed that the finance director left Sampson Co on 31 May 20X6.

As part of the subsequent events audit procedures, you reviewed post year-end board meeting minutes and discovered that a legal case for unfair dismissal has been brought against Sampson Co by the finance director. During a discussion with the Human Resources (HR) director of Sampson Co, you established that the company received notice of the proposed legal claim on 10 July 20X6.

The HR director told you that Sampson Co’s lawyers believe that the finance director’s claim is likely to be successful, but estimate that $150,000 is the maximum amount of compensation which would be paid. However, management does not intend to make any adjustments or disclosures in the financial statements.

You are drafting the auditor’s report for Sampson Co and the audit engagement partner has reminded you that the report will need to reflect the requirements of ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.

According to ISA 701, which of the following should be included in the ‘Key Audit Matters’ paragraph in the auditor’s report?

A. Matters which required significant auditor attention
B. Matters which result in a modification to the audit opinion
C. All matters which were communicated to those charged with governance
D. All matters which are considered to be material to the financial statements

Cannavaro.com is a website design company whose year end was 31 December 20X4. The audit is almost complete and the financial statements are due to be signed shortly. Profit before tax for the year is $3·8 million and revenue is $11·2 million.

The company has only required an audit for the last two years and the board of directors has asked your firm to provide more detail in relation to the form and content of the auditor’s report.

During the audit it has come to light that a key customer, Pirlo Co, with a receivables balance at the year end of $285,000, has just notified Cannavaro.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the audit team that he will write this balance off as an irrecoverable debt in the 20X5 financial statements.

To explain to the board the content of the audit report, the audit partner has asked you to provide details as to why certain elements are included within an unmodified report.

Which of the following explains the purpose of the ADDRESSEE element of the unmodified audit report in line with ISA 700 Forming an Opinion and Reporting on Financial Statements?

A. It demonstrates the point at which sufficient appropriate evidence has been obtained
B. It clarifies who may rely on the opinion included within the report
C. It explains the role and remit of the audit
D. It sets out the location where the auditor practises

Andromeda Industries Co (Andromeda) develops and manufactures a wide range of fast moving consumer goods. The company’s year end is 31 December 2015 and the forecast profit before tax is $8·3 million. You are the audit manager of Neptune & Co and the year-end audit is due to commence in January. The following information has been gathered during the planning process:

Inventory count
Andromeda’s raw materials and finished goods inventory are stored in 12 warehouses across the country. Each of these warehouses is expected to contain material levels of inventory at the year end. It is expected that there will be no significant work in progress held at any of the sites. Each count will be supervised by a member of Andromeda’s internal audit department and the counts will all take place on 31 December, when all movements of goods in and out of the warehouses will cease.

Research and development
Andromeda spends over $2 million annually on developing new product lines. This year it incurred expenditure on five projects, all of which are at different stages of development. Once they meet the recognition criteria under IAS 38 Intangible Assets for development expenditure, Andromeda includes the costs incurred within intangible assets. Once production commences, the intangible assets are amortised on a straight line basis over five years.

During the audit, the team discovers that one of the five development projects, valued at $980,000 and included within intangible assets, does not meet the criteria for capitalisation. The finance director does not intend to change the accounting treatment adopted as she considers this an immaterial amount.

Required:
Discuss the issue and describe the impact on the audit report, if any, if the issue remains unresolved. (4 marks)

ISA 700 Forming an Opinion and Reporting on Financial Statements requires auditors to produce an audit report.

This report should contain a number of consistent elements so that users are able to understand what the audit report means.

Required:
Describe FOUR elements of an unmodified auditor’s report and for each explain why they are included. (4 marks)

You are an audit manager in Brown & Co and you are nearing completion of the audit of Paprika & Co (Paprika). The audit senior has produced extracts below from the draft audit report for Paprika.

Auditor’s responsibility

(1) Our responsibility is to express an opinion on all pages of the financial statements based on our audit. We conducted our audit in accordance with most of the International Standards on Auditing.

(2) Those standards require that we comply with ethical requirements and plan and perform the audit to obtain maximum assurance as to whether the financial statements are free from all misstatements whether caused by fraud or error.

(3) We have a responsibility to prevent and detect fraud and error and to prepare the financial statements in accordance with International Financial Reporting Standards.

(4) An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the availability and experience of audit team members. We considered internal controls relevant to the entity; and express an opinion on the effectiveness of these internal controls.

(5) We did not evaluate the overall presentation of the financial statements, as this is management’s responsibility. We considered the reasonableness of any new accounting estimates made by management. We did not review the appropriateness of accounting policies as these are the same as last year. In order to confirm raw material inventory quantities, we relied on the work undertaken by an independent expert.

The extracts are numbered to help you refer to them in your answer.

Required:

For the above audit report extracts, identify and explain SIX elements of this report which require amendment.

Note: Redrafted audit report extracts are not required. (12 marks)

ISA 700 Forming an Opinion and Reporting on Financial Statements provides guidance on the form and content of the auditor’s report and should contain a number of elements.

Required:

Describe FIVE elements of an unmodified auditor’s report. (5 marks)