You are the manager responsible for the audit of Willis Co, a large client of your audit firm, operating in the pharmaceutical industry. The audit work for the year ended 30 August 2010 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior.

You are aware that Willis Co is developing a new drug and has incurred significant research and development costs during the year, most of which have been capitalised as an intangible asset. The asset is recognised at a value of $4•4 million, the total assets recognised on the draft statement of financial position are $55 million, and Willis Co has a draft profit before tax of $3•1 million.

Having reviewed the audit working papers, you are also aware that management has not allowed the audit team access to the results of scientific tests and trials performed on the new drug being developed.

An extract from the draft audit report is shown below.

Basis of opinion (extract)

Evidence available to us in respect of the intangible asset capitalised was limited, because of restrictions imposed on our work by management. As a result of this we have been unable to verify the appropriateness of the amount capitalised, and we are worried that the asset may be overvalued. Because of the significance of the item, and the lack of integrity shown by management, we have been unable to form a view on the financial statements as a whole.

Opinion (extract): Disclaimer on view given by financial statements

Because of the lack of evidence that we could gain over the intangible asset, we are unable to form an opinion as to whether the financial statements are properly prepared in accordance with the relevant financial reporting framework.

Required:

(i) Critically appraise the draft audit report of Willis Co for the year ended 30 August 2010, prepared by the audit senior;

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

(ii) Identify and explain any other matters to be considered, and the actions to be taken by the auditor, in respect of the management-imposed limitation on scope. (5 marks)