(a)

Moosewood Hospital involve in medicine industry, is likely to be high regulated company, which certain
regulations need to be comply in order to run. Hence, auditor gain understanding on the law and
regulations of the industry and should approach with high skepticism.
Audit team requested to look at the inventory spreadsheet but finance controller refused. This indicate
that financial controller impose limitation for auditor to obtain sufficient appropriate evidence regarding
the inventory. This is suspicious and auditor should be aware of potential non-compliance with law and
regulations activities. Auditor should explain to management on their responsibilities to provide full
access of information which might affect figures in financial statement as per engagement letter. If mgt
refuse to give, auditor should report to TCWG on the inventory issue as it will affect to the financial
statement
This indicate that financial controller lack of integrity. Hence auditor should approach with high
skepticism.

During a review of the valuation of medical inventories, it was noted that a number of items had
passed their recommended use by dates. The audit team requested to look at the inventory
spreadsheet again but he refused. This is a threat to the financial controller' integrity as he refused to
provide the inventory spreadsheet as requested by the audit team. He should be straightforward
and honest in providing any information requested by the audit team. This should be
communicated to those charged with gorvernance discussing the limitation imposed by the
financial controller will affect the auditor to inability to obtain sufficient appropriate audit evidence.
The impact will be the audit opinion will be modified.

It seems that the financial controller has impose the limitation to audit team in gathering audit
evidence. This matter should be brought to attention to those charged with governance since this is a
significant matter which can be resulted to bad consequences to patients.

The auditor should explain the reason and consequences of this matter to the member of to those
charged with governance and they should disclose this matter to relevant authorities and take an
appropriate action.

If to those charged with governance failed to report this matter to relevant authorities, the audit team
should take action by report this to the next level of independent function. But before that, the auditor
need to ask for legal advice as this will breach duty of confidentiality.

The financial controller also threatened to remove them from the premises if they continued to ask
questions which were not relevant to the audit of the hospital’s financial statements. This can creates an
intimidation threat where the auditor put an aggressive actions which can affect the audit work to
obtain further audit evidence.

This attitude should be reported to those charged with governance by explaining the significance of this
matter and reason for the enquiries made by the audit team of the important of obtaining these
procedures.

After considering the effect of this matter, the firm might consider to withdraw from this engagement if
the audit team believes that the management is involved with illegal activity which could jeopardize the
reputation of audit firm.

But before consider this decision, this matter should be discussed in details with senior partners and
appropriate legal advisor.

Impact to financial statement

Finance director argued that the investigation of the expired medicine is irrelevant to the audit work of
Moosewood’s financial statement.
This is incorrect as according to IAS 2, inventory should be written off when the net realizable value is
lower than the cost.
From the case, the expired medicine does not have realizable value anymore thus should be written off.
It will cause overstatement of assets if the expired medicine is not being write off from inventory.
Plus, Moosewood may be fined for breaching law and regulation if it is proven that the hospital indeed
gives their patients the expired medicine. As per IAS 37, provision should be recognised when there is
present obligation due to past event, probable outflow, amount can be measured reliably.
Thus, causing liabilities to be understated if provision should have been recognised.
This also may affect audit opinion as auditors can modify their opinion on the ground that auditor
unable to obtain sufficient audit evidence

There is intimidation threat as the financial controller threatened to remove the audit team from the
premises if they ask irrelevant questions. This is contradicting with the client acceptance procedure
done at initial stage where management and auditor has agreed upon each other’s responsibilities and
that includes management must be fully cooperative to auditor’s request.

(c)

Rocket Co has a sale transaction in which the goods have yet to be received by the customers as it is
held by third party while revenue has been recognized. The value of the transaction is $17 million which
represents 1.18% of revenue and 12.2% of profit before tax which is material.

According to IFRS 15, revenue should only be recognized when performance obligation has been
performed. The statement by finance director that states Rocket has performed their obligation is
inappropriate as Rocket has yet to deliver goods to customers for final inspection and acceptance as
stated in the contract.
There is thus an overstatement of revenue by $17 million.
There is risk that this had been performed in order to provide a better revenue and profit figure
considering both of the figure has decreased from prior year.
The auditor should request the management to amend the misstatement. Auditor may also raise the
issue to those charged with governance.
If no adjustments are made, the auditor’s report would be modified on the grounds that it contains
material misstatement. The issue is likely to be material but not pervasive as it affect a single
component in the financial statement and does not immediately turn profit into loss. Therefore, a
qualified except for opinion should be issued.
A Qualified paragraph should be inserted which explains that the financial statement is qualified except
for misstatement related to revenue recognition. It would be followed by Basis for Qualified Opinion
paragraph will be inserted after QO para, which explains the issues that leads to forming the qualified
opinion.