ACCA AAA ^INT Syllabus E. Completion, Review and Reporting - EOM and Other Matter Compared - Past Papers ^{4 / 5}

Daley Co is a family owned, unlisted company which imports motor cars. The company buys cars from a variety of car manufacturers for sale to car dealerships and vehicle leasing companies within its own domestic market. Daley Co has been a client of your firm for the last three years and you are the newly appointed audit manager on the audit for the year ended 31 August 20X8. The audit for the current reporting period is nearing completion and you are reviewing the working papers of the going concern section of the audit file.

Extracts from the draft financial statements and other relevant information are given below.

Statement of financial position

You have also ascertained the following information during your review:

1. Daley Co has undergone a period of rapid expansion in recent years and is intending to buy new warehousing facilities in January 20X9 at a cost of $4·3 million.

2. In order to finance the new warehousing facilities, the company is in the process of negotiating new finance from its bankers. The loan application is for an amount of $5 million and is to be repaid over a period of four years.

3. The provision of $3·5 million in this year’s statement of financial position relates to legal actions from five of Daley Co’s largest customers. The actions relate to the claim that the company has sold cars which did not comply with domestic regulations.

4. A major new competitor has moved in to Daley Co’s market in October 20X8.

5. The going concern working papers include a cash flow forecast for the 12 months ending 31 August 20X9.

The cash flow forecast assumes that Daley Co’s revenue will increase by 25% next year and that following the reorganisation of its credit control facility, its customers will pay on average after 60 days. The forecast also assumes that the bank will provide the new finance in January 20X9 and that the company will have a positive cash balance of $1·7 million by 31 August 20X9.

6. The financial statements have been prepared on a going concern basis and make no reference to any significant uncertainties in relation to going concern.

You have established through discussions with Daley Co’s directors that they do not wish to disclose uncertainties over the going concern status of the company in the notes to the financial statements.

Required:
(c) Explain the possible reasons why the directors may wish to exclude these disclosures and evaluate the possible implications for the auditor’s report. (6 marks)

You are a manager in the audit department of Nidge & Co, a firm of Chartered Certified Accountants, responsible for the audit of Darren Co, a new audit client operating in the construction industry. Darren Co’s financial year ended on 31 January 2015, and the draft financial statements recognise profit before tax of $22·5 million (2014 – $20 million) and total assets of $370 million, including cash of $3 million. The company typically works on three construction contracts at a time.

The audit is nearly complete and you are reviewing the audit working papers. The audit senior has brought several matters to your attention:

(a) Darren Co is working on a major contract relating to the construction of a bridge for Flyover Co. Work started in July 2014, and it is estimated that the contract will be completed in September 2015. The contract price is $20 million, and it is estimated that a profit of $5 million will be made on completion of the contract. The full amount of this profit has been included in the statement of profit or loss for the year ended 31 January 2015.

Darren Co’s management believes that this accounting treatment is appropriate given that the contract was signed during the financial year, and no problems have arisen in the work carried out so far. (8 marks)

Required:
Discuss the implications of the matters described above on the completion of the audit and on the auditor’s report, recommending any further actions which should be taken by the auditor.

Note: The mark allocation is shown next to each of the matters above.

You are a manager in Newman & Co, a global firm of Chartered Certified Accountants. You are responsible for evaluating proposed engagements and for recommending to a team of partners whether or not an engagement should be accepted by your firm.

Eastwood Co, a listed company, is an existing audit client and is an international mail services operator, with a global network including 220 countries and 300,000 employees. The company offers mail and freight services to individual and corporate customers, as well as storage and logistical services.

Eastwood Co takes its corporate social responsibility seriously, and publishes social and environmental key performance indicators (KPIs) in a Sustainability Report, which is published with the financial statements in the annual report.

Partly in response to requests from shareholders and pressure groups, Eastwood Co’s management has decided that in the forthcoming annual report, the KPIs should be accompanied by an independent assurance report. An approach has been made to your firm to provide this report in addition to the audit.

To help in your evaluation of this potential engagement, you have been given an extract from the draft Sustainability Report, containing some of the KPIs published by Eastwood Co. In total, 25 environmental KPIs, and 50 social KPIs are disclosed.

You have also had a meeting with Ali Monroe, the manager responsible for the audit of Eastwood Co, and notes of the meeting are given below.

Notes from meeting with audit manager, Ali Monroe

Newman & Co has audited Eastwood Co for three years, and it is a major audit client of our firm, due to its global presence and recent listing on two major stock exchanges. The audit is managed from our office in Oldtown, which is also the location of the global headquarters of Eastwood Co.

We have not done any work on the KPIs, other than review them for consistency, as we would with any ‘other information’ issued with the financial statements. The KPIs are produced by Eastwood Co’s Sustainability Department, located in Fartown. We have not visited Eastwood Co’s offices in Fartown as it is in a remote location overseas, and the departments based there are not relevant to the audit.

We have performed audit procedures on the charitable donations, as this is disclosed in a note to the financial statements, and our evidence indicates that there have been donations of $9 million this year, which is the amount disclosed in the note. However, the draft KPI is a different figure – $10•5 million, and this is the figure highlighted in the draft Chairman’s Statement as well as the draft Sustainability Report. $9 million is material to the financial statements.

The audit work is nearly complete, and the annual report is to be published in about four weeks, in time for the company meeting, scheduled for 31 January 2011.

Your firm has recently established a sustainability reporting assurance team based in Oldtown, and if the engagement to report on the Sustainability Report is accepted, it would be performed by members of that team, who would not be involved with the audit.

You have a trainee accountant assigned to you, who has read the notes taken at your meeting with Ali Monroe. She is unsure of the implications of the charitable donations being disclosed as a different figure in the financial statements compared with the other information published in the annual report.

Required:

Prepare briefing notes to be used in a discussion with the trainee accountant, in which you:

(i) Explain the responsibility of the auditor in relation to other information published with the financial statements; and

(ii) Recommend the action to be taken by Newman & Co if the fi gure relating to charitable donations in the other information is not amended. (8 marks)

Professional marks will be awarded in part (c) for the format and clarity of your answer. (2 marks)

You are the partner responsible for the audit of Grimes Co, for the year ended 30 April 2010. The final audit has been completed and you have asked the audit manager to draft the audit report. The manager is aware that there is guidance for auditors relating to audit reports in ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager has asked for your assistance in this matter.

Required:

(i) Define an ‘Emphasis of Matter paragraph’ and explain, providing examples, the use of such a 
paragraph; (6 marks)

(ii) Define an ‘Other Matter paragraph’ and explain, providing examples, the use of such a paragraph.

Note: You are not required to produce draft paragraphs. (4 marks)