C2: AUDITING AND ASSURANCE REVIEW CASES

Illustration case on Auditors Report (ACCA Adopted)

You are responsible for the audit of Wazo Hill Co (WHC), a large, listed package delivery company. The audit of the
financial statements for the year ended 31 July 2017 is nearly complete and you are reviewing the audit working
papers. The financial statements recognise revenue of TZS56,360 million (2016 – TZS56,245 million), profit for the
year of TZS2,550 million (2016 – TZS2,630 million) and total assets of TZS37,546 million (2016 – TZS38,765
million).
The uncorrected misstatements identified during the audit of Wazo Hill Co are described below. The audit engagement
partner is holding a meeting with the management team of Wazo Hill Co next week, at which the uncorrected
misstatements will be discussed.

1. The accuracy of the depreciation charge was investigated for a sample of motor vehicles with a carrying
value of TZS4·5 million. The investigation revealed that the accounting system had failed to correctly
depreciate vehicles acquired during the year. Consequently, depreciation in the sample had been understated,
and the carrying value of the vehicles overstated, by TZS350,000. The total value of all motor vehicles at
the year end was TZS125 million (2016 – TZS131 million).

2. In January 2017, the board of Wazo Hill Co approved a loan to, Mrs C Angel, who is a key member of the senior
management team of the company. The total amount of the loan was TZS75,000. Following a review of the board
minutes, it was discovered that the directors agreed that the amount was clearly trivial and have, therefore, not
disclosed the loan in the notes to the financial statements.

3. During the year Wazo Hill Co reduced the value of their provision for customer refunds which is recognised in
the financial statements. For the past five years the value of the provision has been calculated based on 7% of one
month’s sales, using an average monthly sales value. Management argued that due to improved internal processing
systems, such a high rate of provision was no longer necessary and reduced it to 4%. Audit procedures found that
refund levels were similar to previous years and there was insufficient evidence at this early stage to confirm whether
the new system was more effective or not.
Required:
For each of the matters described above:

i. Explain the matters which should be discussed with management in relation to each of the uncorrected
misstatements, and
ii. Assuming that management does not adjust the misstatements identified, evaluate the effect of each on the audit
opinion.

Review Case on Going Concern (NBAA Adopted)

You are planning the audit of Crash Bang Ltd, whose principal activities are motorcycle courier services, and the
repair and maintenance of commercial motorcycles. You have been provided with the summaries of financial
statements for the year ended 30th June 2018.

Draft 2018 Actual 2017

Summary statement of Profit or Loss
TZS.’000’ TZS.’000’
Revenue 109,710 115,600
Cost of sales (102,030) (104,740)
Gross profit 7,680 10,860
Administrative expenses (7,820) (7,790)
Interest payable and similar charges (2,350) (1,850)
Net (loss) profit (2,490) 1,220

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 C2: AUDITING AND ASSURANCE REVIEW CASES

Draft 2018 Actual 2017

Summary statement of financial position
TZS.’000’ TZS.’000’
Non-current assets 51,780 46,700
Current assets
Inventory (part and consumables) 950 610
Receivables 29,750 23,690
30,700 24,300
Current liabilities
Bank loan 2,500
Overdraft 12,450 9,130
Trade payable 15,130 12,450
Lease obligations 2,070 -
Other payables 2,030 1,490
Long –term liabilities -
Bank loan 7,500 10,000
Lease obligations 4,730 -
36,070 37,930

Net assets
You have been informed by the Managing Director of crash Bang that the fall in revenue is due to:
(1) The loss of longstanding customer who shifted to a competitor, in July, 2018
(2) A decline in trade in the repair and maintenance of commercial motorcycles
Due to the reduction in the repairs business, the company has decided to close the workshop and sell the equipment
and spares inventory. No entries resulting from this decision are reflected in the draft financial statements.

During the year, the company replaced a number of vehicles, funding them by a combination of leasing and increased
overdraft facility. The facility was to be reviewed in January 2019 when the audited financial statements will be
available.

The draft financial statements shown a loss year 2018 but the forecasts indicate a return to profitability in 2019 as the
Managing Director is optimistic about generating additional revenue from new contracts.

Required:
a) (i) State any five circumstances particular to Crash Bang Ltd. Which may indicate that the company is not a
going concern. (5 marks)
(ii) Explain why the circumstances in (i) above give cause for concern (10 marks)
b) Describe any five audit procedures to be performed in respect of going concern at Crash Bang (5
marks)

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