Audit, Assurance & Related Services
Suggested Answers
Class Test 1 Winter 2021
Ans. 1
Key Audit Matter
Impact of COVID-19 (Corona virus)
(Refer note 45 to the annexed financial Our audit procedures included the following:
statements)
Due to the COVID-19 situation and lockdown
in the country since March 2020, business
activity has been adversely affected. The
Company‟s factory and offices were closed
that resulted in a decline in the Company‟s
sales from March 2020. Further, due to this
closure, various year end activities relating to
close of financial books including but not
limited to carrying out of physical stock check
were impacted.
Many of the functions and operations were
carried out remotely. This affected the overall
audit strategy, the allocation of resources in the
audit and directing the efforts of the
engagement team. (3 marks)
In relation to the accounting and reporting
obligations, management assessed the vii.
following significant areas for incorporating
COVID-19 impact in the financial statements:
 expected credit losses under IFRS 9,
„Financial Instruments‟
 the impairment of tangible and intangible
assets under IAS 36, „Impairment of non-
financial assets‟
 the net realisable value of inventory under
IAS 2 „Inventories‟
 deferred tax assets in accordance with IAS
12, „Income taxes‟
 provisions and contingent liabilities under xii.
IAS 37, including onerous contracts and
 going concern assumption used for the
preparation of these financial statements.
The COVID-19 pandemic is a significant
development during the year having the most
significant impact on audit strategy and its
execution and involved assessment of xiv.
significant management judgments in the
preparation of financial statements. Therefore,
we considered it to be a key audit matter.
(3 marks)
How the matter was addressed in our audit
(Total marks for procedures=7, 0.5 mark for each procedure )
i. Obtained an overall understanding of the changes in
financial reporting process and underlying controls in
order to determine the appropriate audit strategy
ii. Utilised technology for communication and evidence
gathering
iii. Utilised audit software for review and supervision of
audit work
iv. Obtained management‟s plan regarding execution of
physical inventory check at a date subsequent to the
year-end
v. Observed physical inventory check carried out by
management subsequent to year-end and tested the
roll-back of the inventory quantities prepared by
management on a sample basis
vi. For information/record provided by management in
scanned form, the original record was checked
subsequently when the lockdown was relaxed
For confirmation received through email, the
authenticity of the confirmations was ensured by
performing alternate procedure such as making
telephone calls to confirming parties
viii. Assessed the reasonableness of forward-looking
factors under the COVID-19 situation used by
management in preparing ECL model
ix. Evaluated whether any impairment indicators exist
that could trigger impairment for tangible and
intangible assets
x. Obtained the computation of NRV and checked its
reasonableness
xi. Checked the recoverability of deferred tax asset
Evaluated management‟s assessment as to whether
any provisions were required to be recorded as a result
of COVID-19
xiii. Evaluated management‟s going concern assessment
by reviewing the approved budget/ future cash flow
forecast and assessed whether going concern
assumption is appropriate
Reviewed the adequacy of the disclosures made by the
Company under applicable accounting and reporting
standards.
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 Audit, Assurance & Related Services
Suggested Answers
Class Test 1 Winter 2021
Ans. 2
KL (2 marks)
The firm should issue a modified report/opinion due to a material misstatement.
If the lack of disclosure is considered material but not pervasive a qualified opinion should be issued.
If the lack of disclosure is considered pervasive an adverse opinion should be issued.
The basis for qualified/adverse opinion paragraph should state that a material uncertainty related to going concern
exists.
OL (4 marks)
i. A key audit matters (KAM) section is mandatory for listed entities.
ii. OL becoming listed should be included as a KAM.
iii. Statement from the auditor that it has provided those charged with governance with a statement that the
auditor has complied with relevant ethical requirements regarding independence and communicate with
them all relationships and other matters that may reasonably be thougNL to bear on the auditor‟s
independence, and where applicable, related safeguards;
iv. Statement that from the matters communicated with those charged with governance, the auditor determines
those matters that were of most significance in the audit of the financial statements of the current period
and are therefore presented as the key audit matters.
v. The name of engagement partner.
vi. Further in the audit report of listed companies the auditor is supposed to include a separate section named
“other information” if at the date of audit report the auditor has obtained or expects to obtain other
information whereas in the case of unlisted company this paragraph is only given if the auditor has obtained
any such information.
Ans. 3
Fire
A fire has occurred at the largest of the company‟s distribution depots and property, plant and equipment in excess
of Rs.650,000 has been damaged as well as inventory of Rs.25,000. The company has contacted its insurance
company and they have begun to investigate the likelihood and level of any payment. This event occurred after the
reporting period and is not an event which provides evidence of a condition at the year end and hence this is a non-
adjusting event.

Normally as the company is insured, only uninsured losses suffered by Kellogg. Kellogg would need to be
accounted for, which in the normal course of events would be an immaterial amount. However, the insurance
company is investigating, as there is a possibility the fire was started deliberately, and this would invalidate the
insurance policy. If this is the case, the total damaged assets of Rs.675,000 (650 + 25) would be material as they
represent 8·5% (675/7,900) of profit before tax. Therefore as a material non-adjusting event, the assets should not
be written down to their scrap value in the current year financial statements; however, the directors should include a
disclosure note detailing the fire and the total value of assets which may be impacted due to the possibility of a lack
of an insurance settlement.

The following audit procedures should be applied to form a conclusion on any amendment:
– Obtain a schedule showing the damaged property, plant and equipment and agree the net book value to the non-
current assets register to confirm the total value of affected assets.
– Obtain a breakdown of the inventory stored at the distribution centre on 15 February 2016 and compare to earlier
records or despatch documents to ascertain the likely level of inventory at the time of the fire.
– Review any correspondence from the insurance company confirming the amount of the claim, and the current
status of their investigation into the fire and any likely payments to assess the extent of any uninsured amounts.
– Discuss with the directors whether they will disclose the effect of the fire, as a non-adjusting event, in the year-
end financial statements.

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 Audit, Assurance & Related Services
Suggested Answers
Class Test 1 Winter 2021
Inventory

Kellogg has identified that inventory at the year end with a cost of Rs.915,000 is defective, due to an excessive
amount of food colouring; the scrap value of this inventory is Rs.50,000. This information was obtained after the
year end but provides further evidence of the net realisable value of inventory at the year end and hence is an
adjusting event.

IAS 2 Inventories requires that inventory is valued at the lower of cost and net realisable value. The inventory of
Rs.915,000 must be written down to its net realisable value of Rs.50,000. The write down of Rs. 865,000 (915 – 50)
is material as it represents 10·9%
(865/7,900) of profit before tax. Hence, the directors should amend the financial statements by writing down the
inventory to Rs.50,000.

The following audit procedures should be applied to form a conclusion on the adjustment:
– Discuss the matter with the directors and enquire if they are prepared to write down the cost of the inventory to
net realizable value.
– Review the board minutes to assess whether this event was the only case of defective inventory as there could
potentially be other inventory which requires writing down.
– Obtain a schedule showing the defective inventory and agree to supporting production documentation that it was
produced prior to 31 December, as otherwise it would not require a write down at the year end.
– Discuss with management how they have assessed the scrap value of Rs.50,000 and agree this amount to any
supporting documentation to confirm the value.

Ans. 4
Matter identified
An amount of Rs. 2 million is owed by a customer in liquidation. Liquidator expects dividend of no more than
20paisa in rupee. Client claims half inventory supplied on a sale or return basis. Rs. 1 million is currently included
in inventory and the 20paisa in the rupee in receivables.
Proposed adjustment to the financial statements
The client‟s proposed treatment of this transaction is clearly not appropriate.
Depending on how much assurance the liquidator can provide about the dividend to be paid at the end of the
liquidation it may be appropriate to include the Rs. 400,000 in receivables.
We will need to update the position closer to sign-off date to finalise this.
However, including the Rs. 1 million for goods allegedly supplied on a sale or return basis in inventory is clearly
not appropriate. There is insufficient certainty (in fact no certainty at all) that there goods will be returned and so
they should be written off.
There is also an element of double counting in the Rs. 400,000 included in receivables and the Rs. 1 million in
inventory. .Therefore, the following adjustment is proposed:
Dr: Bad Debts (Income Statement)
Rs. 1,000,000
Cr: Inventory (closing) Rs. 1,000,000
Audit Report implications
The amount in dispute here is, in effect, Rs. 1 million which is 2% of Revenue and is clearly material. If the client
refuses to make the adjustment it will lead to a modified audit report incorporating a qualified audit opinion. The
matter on its own would not appear to be fundamental or pervasive to the financial statements so it would lead to an
“except for” qualification.

(The End)

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