ACCA AAA ^INT Syllabus E. Completion, Review and Reporting - Structure of an Unmodified Audit Report - Past Papers ^{1 / 5}

You are a manager at Thyme & Co, a firm of Chartered Certified Accountants. You are currently involved in the completion stage of two engagements relating to different clients. Both engagements have raised issues that require your attention.

(a) Rocket Co is a listed client operating in the engineering industry. The company manufactures machinery for use in the aircraft, defence and marine sectors. The audit for the year ended 30 April 2017 is almost complete. The revenue and profit before tax figures recognised in the draft financial statements are $1,437 million and $139 million, respectively (2016 – $1,489 million and $175 million respectively).

Audit procedures identified two sales transactions in the final quarter of the year that related to two different customers but where the goods were delivered to the same location. Further investigations revealed that the goods were delivered to a third party, who agreed to store them until the customers were ready to receive delivery. The goods have yet to be delivered to the customers because they are both building new facilities and neither is sufficiently progressed to receive the new machinery. The contract terms explicitly state that Rocket Co is obliged to deliver the goods to the customers for final inspection and acceptance and the client has not agreed to any consequent amendments to these terms. The sales invoices were raised and the revenue recognised upon despatch of the goods to the storage facility. During discussions with the audit team, the finance director stated that the company had fulfilled its contractual obligations to provide the goods by a specified date. The revenue attributable to the two transactions totalled $17 million.

Required:
(ii) Discuss the implications for the auditor’s report if no adjustments are made to the financial statements. (5 marks)

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)

You are an audit manager at Rockwell & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.

The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:

Basis of modified opinion (extract)
In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.

We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Emphasis of Matter Paragraph
We draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.

Required:
(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.

Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)