AUDIT REPORT

Sept/Dec 2017

The redundancy provision should amount to $305k instead of $110k which is

included in F/S. Provision is understated by $195k.

Error $195k represent 7.5% of PBT and 1.08% of Revenue. Therefore, auditor
will issue qualified ‘except for’ opinion on Dashing Co.

Basis for qualified except for opinion will be inserted after opinion paragraph to
explain the matter further to the shareholder.

Sept/Dec 2018

The decision on renewal of the overdraft facility will not be made until auditor’s
report is signed. Thus, there is a material uncertainty which may give significant
doubt on the company’s ability to continue as going concern.

The impact on auditor’s report depends on whether this uncertainty is

adequately disclosed in financial statements.

Disclosure adequate
If the disclosures are adequate, then the auditor’s report will need to include a
material uncertainty relating to going concern.

This will state that the audit opinion is not modified, indicating there is a
material uncertainty.

It would be included after opinion and basis for opinion paragraph.

Disclosure inadequate
If disclosures are inadequate, the audit opinion will need to be modified as there
is material misstatement relating to inadequate disclosure.

Failure to adequately disclose is material but not pervasive due to the ongoing
nature of the negotiations. Thus, a qualified opinion will be issued.

The opinion paragraph will state that ‘except for’ failure to adequately disclose
uncertainty, the F/S give a true and fair view.

The report will contain a basis for opinion paragraph, subsequent to opinion
paragraph explaining that material uncertainty exists and the F/S do not
adequately disclose this matter.
DEC 2011

5)
A)
AUDITOR’S RESPONSIBILITY FOR SUBSEQUENT EVENTS OCCURING BETWEEN:

i) Y/E DATE AND DATE AUDITOR’S REPORT IS SIGNED

The auditor should perform audit procedures to obtain sufficent appropriate

audit evidence that ALL EVENTS OCCURING BETWEEN THE DATE OF
FINANCIAL STATEMENTS AND THE DATE OF THE AUDITOR’S REPORT THAT
REQUIRE ADJUSTMENT.

The audit is not expected to perform additional audit procedures on matters

which previously applied audit procedures have provided satisfactory
conclusions.

ii)
DATE AUDITOR’S REPORT IS SIGNED AND THE DATE FINANCIAL STATEMENTS
ARE ISSUED

The auditor has no obligation to perform audit procedures on the financial

statements after the date of the auditor’s report.

However, if the auditor has realized that he needs to amend the auditor’s report
at the date of the auditor’s report, the auditor shall discuss the matter with
management, whether financial statements need amendment and inquire how
management intends to address this matter in F/S.

If mgmgt amends F/S, the auditor shall carry out necessary audit procedures,
extend the subsequent events testing to the date of new audit report and provide
a new auditor’s report on amended F/S.
B)

Humphries Co operates a chain of food wholesalers across the country and its
year end was 30 September 2011. The final audit is nearly complete and it is
proposed that the financial statements and audit report will be signed on 13
December. Revenue for the year is $78 million and profit before taxation is $7·5
million. The following events have occurred subsequent to the year end.

Receivables.

A customer of Humphries Co has been experiencing cash flow problems and its
year-end balance is $0·3 million. The company has just become aware that its
customer is experiencing significant going concern difficulties. Humphries
believe that as the company has been trading for many years, they will receive
some, if not full, payment from the customer; hence they have not adjusted the
receivable balance.

A customer is experiencing cash flow problems and has a year-end balance of

$0.3 million and experiencing significant going concern diffculties. There is
another information about the recoverability of receivable balance at the year
end and it was received after year-end. IAS 10 Eevents After Reporting Period
states that if a customer is experiencing cash flow problems after the year-end,
then it is unlikely that $0.3 million was recoverable at 30 September 2011.

Hence, receivables is overstated. If it is material, adjustment will be needed by

writing off the balance or provide allowance for receivables.

The receivable of $0.3 million is not material as it represents 0.38% of Revenue

and 4% of PBT. Althought overstated, it does not require adjustment.

The $0.3 million should be noted in the summary of unadjusted errors.

As the error is not material then no amendment is required to the audit opinion.

Audit procedures should be performed to form a conclusion on the amendment:

- Review the correspondence to assess whether payment is likely to
happen.
- Discuss with management why adjustment is not required.
- Review the post year-end period to see if any payments received from
customer.
Lawsuit

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit
was filed prior to the year end, and the sum claimed by them is $1 million. This
has been disclosed as a contingent liability in the notes to the financial
statements; however correspondence has just arrived from the supplier
indicating that they are willing to settle the case for a payment by Humphries Co
of $0·6 million. It is likely that the company will agree to this

A key supplier is suing Humphries Co for breach of contract and owing them $1
million. The lawsuit was filed before year-end and the sum claimed by the
supplier has been disclosed as a contingent liability. However, the supplier are
willing to settle for a payment of $0.6 million after the year end and it is likely
the company will agree.

Although the settlement was agreed after year-end, there is a further evidence
that the the company has a present obligation as at 30 September 2011.

The financial statements should be adjusted with contingent liability being

removed and provision of $0.6 million being recorded.

The payment of $0.6 million is material as it represents 8% of PBT. Hence,

management should provide for this amount.

If management refuses to provide for this amount then audit report will need to
be modified. As the error is material but not pervasive, then a qualified opinion is
necessary.

A basis for qualified opinion paragraph would be required and need to include a
paragraph explaining the material misstatement relating to the LACK OF
PROVISION and its EFFECT on F/S.

The opinion paragraph would be qualified ‘except for’.

Audit procedures should be performed to form a conclusion on the amendment:

- Auditor should enquire company’s lawyer whether the settlement is
probable.
- Review correspondence with the supplier to confirm that the amount
they are willing to settle is $0.6 million.
- Discuss with management whether it is probable they will settle this
payment and obtain a WRITTEN REPRESENTATION to confirm this.
Warehouse

Humphries Co has three warehouses; following extensive rain on 20 November

significant rain and river water flooded the warehouse located in Bass. All of the
inventory was damaged and has been disposed of. The insurance company has
already been contacted. No amendments or disclosures have been made in the
financial statements.

Significant rain and river water flooded one of Humpries Co’s warehouses and all
inventory was damaged and has been disposed of. No amendments or disclourse
have been made in F/S. This is a NON-ADJUSTING EVENT because the event
occurred after year-end.

If the impact of damaged inventory is material, then financial statements need to

be adjusted and then the NATURE OF THE EVENT needs to be disclosed and
estimates on FINANCIAL IMPACT is required. If it is not material then it is not
necessary to make any disclosures.

The amount of damaged inventory is likely to be material. However, the

company has insurance and only UNINSURED INVENTORY should be disclosed.

If disclosures are NOT REQUIRED, because the UNINSURED INVENTORY IS NOT

MATERIAL, then there will be no reporting implications for the audit report.

If disclosures are REQUIRED, because the UNINSURED INVENTORY IS

MATERIAL, and management is REFUSED to make the disclosures, then audit
report will need to be modified with the qualified ‘except for’ opinion.

If the uninsured inventory impact the company’s going concern, then company
should consider to modify the audit report opinion. This should include
EMPHASIS OF MATTER PARAGRAPH to draw the attetion to the possible risk
related to going concern.

Audit procedures should be performed to form a conclusion on the amendment:

- Review correspondence with insurer to confirm the amount of insurance
claim to assess the extent of uninsured amount.
- Discuss with management whether the company has sufficient inventory
to continue trading in short-term.
- Obtain written representation to confirm that company’s going concern is
not affected.
- Obtain a schedule of the damaged inventory and compare with average
inventory in the other two warehouses to see if amount claimed is
reasonable.