Assignment 1 : Audit Case Studies (Chapter # 4 Auditor’s Report)

Q.1 What will be responsibility of the auditor in the following situations:

(a) company changes policy for revenue recognition but the new policy is not in accordance with the
requirements of International Accounting Standards. (03 marks)

(b) there are doubts about the ability of the company to continue operating as a going concern but this
issue is properly disclosed in the financial statements. (04 marks)
(CA Inter, Spring 2002)

Q.2 Your firm is the external auditor of Treble for the year ended 31 August 2014.Treble has included in its
year-end inventory valuation items which your firm considers to be obsolete and, consequently, should
be written off. The value of the obsolete inventory included in the financial statements at 31 August
2014 is £250,000. The directors refuse to amend the financial statements as they believe they can sell
the items.
The draft financial statements for the year ended 31 August 2014 show total assets of
£10.5 million and a profit before taxation of £1.8 million.
Requirement
State whether you would modify the audit opinion. Give reasons for your conclusion and describe the
modifications, if any, to the audit report. (04 marks)
(ICAEW – September 2014)

Q.3 Your firm is the external auditor of Peacock Energy plc (Peacock) for the year ended30 November 2014.
Peacock is a company engaged in the extraction of oil and gas. On 29 September 2014 an oil rig exploded
causing extensive damage to the surrounding environment. The legal issues are complex and could take
many years to resolve. Expert lawyers acting for Peacock have advised that the possible range of
outcomes in respect of compensation payable by Peacock could be a liability between zero and £30
billion. The total assets of Peacock at 30 November 2014 are £291 billion.

State, with reasons, the implications for the auditor’s report on Peacock’s financial statements for the
year ended 30 November 2014 if the directors of Peacock:
(i) adequately disclose; or
(ii) do not disclose this issue in the notes to the financial statements. (04 marks)
(ICAEW – December 2014)