WW Development – Engagement Quality Control Review Memo

The engagement quality control reviewer shall perform an objective evaluation of the significant
judgments made by the engagement team, and the conclusions reached in formulating the auditor's
report. This evaluation shall involve:

a) Discussion of significant matters with the engagement partner;

o The engagement partner discussed significant matters include:
 The piece of land held for development that the bank says has no resale value,
but Peter and David have the intention to provide personal guarantees to obtain
the loan to finance this project (risky plan)
 WW’s poor relationship with its tenants (lost its anchor tenant in Rosdell
shopping centre, and the other tenants want to leave as well).
 Bank demands an interest coverage ratio of 0.5, WW has an interest coverage
ratio of 0.6  close to violating
 Mortgage receivable: the developers have been unable to make payments

b) Review of the financial statements and the proposed auditor's report;

o Issues:
 Statement of operating expenses for various revenue-producing properties not
audited
 Statement of CF, changes in equity, and notes are not provided

c) Review of selected audit documentation relating to the significant judgments the

engagement team made and the conclusions it reached; and
o Risk associated with this audit engagement was assessed as low based on prior year
audits  not a valid base for judgment
o Possible going concern issue due to various factors:
 net loss in 2 years, hard to find replacement anchor tenant, development land
has no resale value  the team didn’t look at the forecasted earnings but relied
on WW’s promise that they will do well in the next 5 years. Lack of professional
skepticism
 Operating indicator: loss of an anchor tenant not likely to be replaced in the
near future
 Financial indicators:
 Shareholder deficit  negative RE
 Poor financial ratios, D/E ratio is negative due to negative shareholder’s
equity. No cash account under assets, looks like WW doesn’t have any
current assets.
 Close to violating interest coverage ratio  there’s a chance that the
bank may call the loan

d) Evaluation of the conclusions reached in formulating the auditor's report and

consideration of whether the proposed auditor's report is appropriate
o Not appropriate for the following reasons:
  Audit was performed with lack of integrity and due care: Engagement partner
said that they left the client’s office and then realize that they had to issue an
audit opinion on the statements of operating expenses. Their solution was to
rely on their audit work on the expenses for the regular audited f/s. This is not
professional behaviour
 Glass Tower Joint venture f/s have not been audited by the team. This is
currently being accounted for using the equity method, but the engagement
team determined that it would be a Jointly controlled enterprise, which is a
concept in ASPE. Since WW is a listed entity, it must follow IFRS. Professional
competence of the auditors is in doubt

e) The engagement team's evaluation of the firm's independence in relation to the

audit engagement;
o Familiarity threat: the engagement partner has been doing the audit of WW for 10
years, and he considers the Wang brothers amongst his closest friends. This long
association and close relationship make it difficult for him to maintain professional
skepticism. The firm itself, S&S, has been doing the audit for 30 years. No safeguards to
reduce the threat to an appropriate level; recommend another engagement partner
should take over. The auditors’ objectivity is impaired

f) Whether appropriate consultation has taken place on matters involving differences

of opinion or other difficult or contentious matters, and the conclusions arising
from those consultations; and
o No appropriate consultation has taken place on issues for the following reasons:
 A formal appraisal of the development land should be done to see if the bank is
correct about the land having no resale value. If that is correct, the carrying
value of land should be written down on the b/s
 Rosdell shopping centre had negative CFs from operations due to loss of anchor
tenant. Outside expert (rental agency) said it will take 8-10 months to find a
replacement anchor tenant if lucky. This suggests a write-down on the value is
necessary. Similarly, VW building has had negative CF from operations for the
past 2 years due to vacancy. Outside expert should be consulted to see if a
write-down is necessary

g) Whether audit documentation selected for review reflects the work performed in
relation to the significant judgments and supports the conclusions reached.
o The audit documentation selected for review doesn’t reflect the work performed nor
the conclusion reached for the following reasons:
 Sufficient and appropriate audit evidence was not gathered
 Mortgage receivable confirmations should be sent to the developers.
The valuation of mortgage A is in doubt, because the developers appear
to not have the ability to repay. The existence of mortgage B is in doubt
because no payments have been made since 2018. The value of the
mortgage is based on the Wangs’ assessment
*Steps e) – g) need to be performed because VW is a listed entity

Differences of Opinion
The auditors lacked professional skepticism when performing the audit because they reached the
opinion by relying on the client’s words (didn’t look at the 5-year forecasted earnings, didn’t confirm
mortgage receivable B, didn’t consult outside expert for the value of the land held for development).

The engagement team also lacked independence because the long-time association of the firm with the
Wang’s family and the close relationship between the engagement partner with the Wangs, suggesting
familiarity threat.

The auditors lacked integrity and due care when performing the audit because they did not perform the
audit on the statement of operating expenses but relied on the previous audit work to provide an
opinion. Moreover, in the initial planning phase, the risk was set at low based on prior year work,
suggesting lack of integrity and due care as well. The auditors did not exhibit professional behaviour
when performing this audit. Therefore, there is doubt in the audit opinion given.

Management’s integrity is in question because they did not provide the 5-year forecasted earnings to
the auditors.

QC Review

Compliance with CPC, CAS, CSQC, ASPE?

From Exhibit I:

1. Independence – CPC – familiarity threat.

2. Professional Skepticism – CAS. Forecast (assumption)
3. Should be high risk - SAAE. Need to do more work to get the assurance you need.
4. Vacant. LCNRV - $1.3m or NRV – 0 per bank, might need a write-down. No sufficient evidence
gathered
5. The shopping mall – asset needs to have future benefit, but this looks like it’s impaired. From
Exhibit 2, CF from Rosdell is negative – impaired.
6. Scope issue because the JV has not been audited
7. 805- Special report – planning memo; work. Need a much lower materiality when you audit
special reports
8.