ACCT 3044: Graded Activity 3 Case Study

Sem # 1 2223

Case Study 1 and 2 (40%); Individual Assignment

Case Study 1

You are appointed audit senior of Banga & Co for the audit of Cari Appa, a manufacturer of
men’s coveralls with its year end of 31 July 2019. The following are some of the notes in
respect of independent scenarios A, B, and C:

A.
1) A planning meeting between Banga and Cari Appa revealed profit before tax
of $2·4m and total assets of $16m, as per the draft financial statements.
2) You have been requested to audit the material balance of receivables,
requiring a positive receivables circularisation to be done.
3) The finance director of Cari Appa informed you that the company was closing
an assembly site resulting in redundancy of employees. A redundancy
provision of $100,000 is included in the draft financial statements.
4) Three months later, your team’s audit fieldwork examines the audit procedures
in respect of the redundancy provision. The team has calculated that the
necessary provision should amount to $300,000. The finance director is not
willing to adjust the draft financial statements.
B. Cari Appa changed from the straight-line method to the declining balance method of
depreciation for all newly acquired assets. This change has no material effect on the
current year’s financial statements, but is reasonably certain to have a substantial
effect in later years.
C. Banga & Co includes a separate paragraph in an otherwise unqualified report to
emphasize that Cari Appa had significant transactions with related parties.

Required:
1) Discuss the issue in scenario A and describe the impact on the auditor’s report, if any,
should this issue remain unresolved. (20 marks)
2) Discuss the proper reporting option in scenario B. (10 marks)
3) Discuss the inclusion of this separate paragraph in scenario C. (10 marks)
Case Study 2

You are appointed audit senior of Ponga & Co for the audit of Going Away Ltd, an appliance
manufacturer with its year end of 31 July 2019. The following are some of the notes in
respect of a meeting between Ponga and Going Away:

1) One of Going Away’s significant customer has stopped trading. This customer owes
$0.7 m to Going Away with an unlikely chance of payment; however the balance is
included within the financial statements extracts below.
2) The sales director has recently left Going Away and has yet to be replaced.
3) The monthly cash flow has shown a net cash outflow for the last two months of the
financial year and is forecast as negative for the forthcoming financial year. As a
result of this, the company has been slow in paying its suppliers and some are
threatening legal action to recover the sums owing.
4) Due to its financial difficulties, Going Away missed a loan repayment and, as a result
of this breach in the loan covenants, the bank has asked that the loan of $4.8 be repaid
in full within six months. The directors have decided that in order to conserve cash,
no final dividend will be paid in 2019.
5) Financial statements extracts for year ended 31 July 2019:

Draft Actual

2019 2018
$m $m
Current assets
Inventory 3.5 1.7
Receivables 1.3 2.1
Cash ---- 1.2

Current liabilities
Trade payables 1.8 0.8
Overdraft 0.8 ----
Loans 4.8 0.2
Required:

a) Referring to the data above, describe the audit procedures that you should perform in
assessing whether or not Going Away is a going concern. (20 marks)

b) Having performed the going concern audit procedures, you have serious concerns in
relation to the going concern status of Going Away. The finance director has informed you
that as the cash flow issues are short term he does not propose to make any amendments to
the financial statements. State Ponga & Co’s responsibility for reporting on going concern to
the directors of Going Away Ltd. (20 marks)