题目内容
Section B – TWO questions ONLY to be attempted
(a) According to ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements:
‘When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.’
Required:
Discuss why the auditor should presume that there are risks of fraud in revenue recognition and why ISA 240 requires specific auditor responses in relation to the risks identified. (7 marks)
(b) You are the manager responsible for the audit of York Co, a chain of health and leisure clubs owned and managed by entrepreneur Phil Smith. The audit for the year ended 30 November 2015 is nearing completion and the draft financial statements recognise total assets of $27 million and profit before tax of $2·2 million. The audit senior has left the following file notes for your consideration during your review of the audit working papers:
(i) Cash transfers
During a review of the cash book, a receipt of $350,000 was identified which was accompanied by the description ‘BD’. Bank statements showed that the following day a nearly identical amount was transferred into a bank account held in a foreign country. When I asked the financial controller about this, she requested that I speak to Mr Smith, as he has sole responsibility for cash management. According to Mr Smith, an old friend of his, Brian Davies, has loaned the money to the company to fund further expansion and the money has been invested until it is needed. Documentary evidence concerning the transaction has been requested from Mr Smith but has not yet been received. (7 marks)
(ii) Legal dispute
At the year end York Co reversed a provision relating to an ongoing legal dispute with an ex-employee who was claiming $150,000 for unfair dismissal. This amount was provided in full in the financial statements for the year ended 30 November 2014 but has now been reversed because Mr Smith believes it is now likely that York Co will successfully defend the legal case. Mr Smith has not been available to discuss this matter and no additional documentary evidence has been made available since the end of the previous year’s audit. The audit report was unmodified in the previous year. (6 marks)
Required:
Evaluate the implications for the completion of the audit, recommending any further actions which should be taken by your audit firm.
Note: The split of the mark allocation is shown against each of the issues above.
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You are the manager responsible for the audit of Boston Co, a producer of chocolate and confectionery. The audit of the financial statements for the year ended 31 December 2015 is nearly complete and you are reviewing the audit working papers. The financial statements recognise revenue of $76 million, profit before tax for the year of $6·4 million and total assets of $104 million.
The summary of uncorrected misstatements included in Boston Co’s audit working papers, including notes, is shown below. The audit engagement partner is holding a meeting with the management team of Boston Co next week, at which the uncorrected misstatements will be discussed.
(i) During the year Boston Co impaired one of its factories. The carrying value of the assets attributable to the factory as a single, cash-generating unit totalled $3·6 million at the year end. The fair value less costs of disposal and the value in use were estimated to be $3 million and $3·5 million respectively and accordingly the asset was written down by $100,000 to reflect the impairment. Audit procedures revealed that management used growth rates attributable to the company as a whole to estimate value in use. Using growth rates attributable to the factory specifically, the audit team estimated the value in use to be $3·1 million.
(ii) Interest charges of $75,000 relating to a loan taken out during the year to finance the construction of a new manufacturing plant were included in finance charges recognised in profit for the year. The manufacturing plant is due for completion in November 2016.
(iii) One of Boston Co’s largest customers, Cleveland Co, is experiencing financial difficulties. At the year end Cleveland Co owed Boston Co $100,000, against which Boston Co made a 5% specific allowance. Shortly after the year end Cleveland Co paid $30,000 of the outstanding amount due but has since experienced further problems, leading to their primary lender presenting a formal request that Cleveland Co be liquidated. If successful, only secured creditors are likely to receive any reimbursement.
(iv) During the year Boston Co purchased 150,000 shares in Nebraska Co for $4·00 per share. Boston Co classified the investment as a financial asset held at fair value through profit or loss. On 31 December 2015, the shares of Nebraska Co were trading for $4·29. At the year end the carrying value of the investment in Boston Co’s financial statements was $600,000.
Required:
(a) Explain the matters which should be discussed with management in relation to each of the uncorrected misstatements, including an assessment of their individual impact on the financial statements; and
(b) Assuming that management does not adjust any of the misstatements, discuss the effect on the audit opinion and auditor’s report.
The following mark allocation is provided as guidance for this question:
(a) 14 marks
(b) 6 marks
Section A – BOTH questions are compulsory and MUST be attempted
You are an audit manager in Montreal & Co, a firm of Chartered Certified Accountants, and you are responsible for the audit of the Vancouver Group (the Group). The Group operates in the supply chain management sector, offering distribution, warehousing and container handling services.
The Group comprises a parent company, Vancouver Co, and two subsidiaries, Toronto Co and Calgary Co. Both of the subsidiaries were acquired as wholly owned subsidiaries many years ago. Montreal & Co audits all of the individual company financial statements as well as the Group consolidated financial statements.
You are beginning to plan the Group audit for the financial year ending 31 July 2016, and the audit engagement partner has sent you the following email:
Notes from meeting with the Group finance director and audit committee representative
The Group has not changed its operations significantly this year. However, it has completed a modernisation programme of its warehousing facilities at a cost of $25 million. The programme was financed with cash raised from two sources: $5 million was raised from a debenture issue, and $20 million from the sale of 5% of the share capital of Calgary Co, with the shares being purchased by an institutional investor.
An investigation into the Group’s tax affairs started in January 2016. The tax authorities are investigating the possible underpayment of taxes by each of the companies in the Group, claiming that tax laws have been breached. The Group’s tax planning was performed by another firm of accountants, Victoria & Co, but the Group’s audit committee has asked if our firm will support the Group by looking into its tax position and liaising with the tax authorities in respect of the tax investigation on its behalf. Victoria & Co has resigned from their engagement to provide tax advice to the Group. The matter is to be resolved by a tribunal which is scheduled to take place in September 2016.
The Group audit committee has also asked whether one of Montreal & Co’s audit partners can be appointed as a non-executive director and serve on the audit committee. The audit committee lacks a financial reporting expert, and the appointment of an audit partner would bring much needed knowledge and experience.
Financial information provided by the Group finance director
Consolidated statement of financial position
Consolidated statement of profit or loss for the year to 31 July
Notes:
1. Several old warehouses were modernised during the year. The modernisation involved the redesign of the layout of each warehouse, the installation of new computer systems, and the replacement of electrical systems.
2. The deferred tax asset is in respect of unused tax losses (tax credits) which accumulated when Toronto Co was loss making for a period of three years from 2009 to 2012.
3. The non-controlling interest has arisen on the disposal of shares in Calgary Co. On 1 January 2016, a 5% equity shareholding in Calgary Co was sold, raising cash of $20 million. The profit made on the disposal is separately recognised in the Group statement of profit or loss.
4. The provisions relate to onerous leases in respect of vacant properties which are surplus to the Group’s requirements.
Required:
Respond to the instructions in the partner’s email. (31 marks)
Note: The split of the mark allocation is shown within the email.
Professional marks will be awarded for presentation, logical flow, and clarity of explanations provided. (4 marks)
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