MATTERS TO CONSIDER:

SALE AND LEASE BACK:

Sale proceeds of $35m represents 23% of the total assets. Profit on disposal recognized in the
income statement represents 5% of the assets. Therefore, transaction is material to financial
statements.
In case of sale and lease back transactions IFRS16 requires entities to evaluate whether the sale
is executed or not according to IFRS15. According to IFRS15 revenue should be recognized if
buyer is able to obtain major economic benefits.
Adder group has leased back the leisure center complex for major of the economic life which
means right to obtain major economic befit from the asset is retained by Adder group. The
option to purchase asset at end of useful life is also retained by adder group. These
circumstances indicate that major risk and reward are not transferred therefore sale should not
be recognized.
Management of Adder group has derecognized the asset and recorded profit on disposal in the
income statement. This treatment is not appropriate. As the sale is not made adder group
should treat the transaction as loan. The asset should not be derecognized and it should be
continued to be depreciated.
Following correcting entry is required:
DR: PPE $27m
DR: PNL $8m
CR: FL $35m
Evidences:

 Copy of lease agreement to review the major clauses of the lease term.
 Copy of minutes of discussions with management about the treatment of lease and
auditor’s request of changing the treatment.
 Extracts of NCA register to verify that asset is recorded.
BALDRICK CO.
Assets of $18m of Baldrick co represents 12% of the group total assets. The loss before tax of
$5m represents 3% of the total assets. Therefore, material to financial statements.
Generally, at shareholding of more than 50% control exists but this is not mandatory. Control
can be achieved through agreement with shareholders of acquiring co. therefore, Baldrick can
be considered as subsidiary of Adder group. Statement of profit and loss should be consolidated
for 3 months while statement of financial position will be consolidated wholly.
Finance director’s argument of not consolidating due to non-integration is not correct.
Management may deliberately not consolidated Baldrick co because it is loss making entity.
This treatment has understated assets and overstated profit by material amount.
EVIDENCES:
Copy of share purchase agreement to verify that 52% of share capital is acquired.
Minutes of board meeting about the approval of acquisition of Baldrick co.

PART B:

1. Opinion paragraph should be separated form Basis of opinion paragraph. In the draft
report auditor has used single paragraph for both opinion and basis of opinion. Where
opinion is modified auditor should use basis for opinion paragraph for describing the
reason for opinion. The heading should be according to opinion like ‘Basis of Qualified
opinion’ ‘Basis of Adverse opinion’ ‘Basis of Disclaimer of opinion’
2. Auditor should not use names of specific employees in the report. Reference of the
name of finance director ‘Rita Gilmour’ seems unprofessional because not only one
personnel is responsible for the preparation of financial statement.
3. The use of words ‘Proven conclusively’ should be avoided. Use of these word gives
misrepresentation that every transaction is checked but in reality audit is cinducting on
samples.
4. The misstatement of receivables is material but is not likely to be pervasive. Appropriate
opinion would be qualified opinion. Auditor should state that financial statements are
true and fair except for the matter discussed in the basis of qualified opinion paragraph.
Disclaimer of opinion is suitable where auditor is not able to obtain sufficient and
appropriate audit evidences regarding matter which is pervasive to financial statements.
5. Matter discussed in the Emphasis of matter paragraph is not correct. This paragraph
should include matters which are already disclosed in the financial statements. As the
provision is not recorded by management therefore this matter cannot be part of EOM
para.