⇒

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-0
•
2 The audit of Bradley Co’s financial statements for the year ended 31 August 20X5 is nearly complete, and the
auditor’s report is due to be issued next week. Bradley Co operates steel processing plants at 20 locations and sells
its output to manufacturers and engineering companies. You are performing an engagement quality control review on
-
the audit of Bradley Co, as it is a significant new client of your firm. The financial statements recognise revenue of
$2·5 million, and total assets of $35 million.

too
(a) One of the audit assistants who has been working on the audit of Bradley Co made the following comments when
discussing the completion of the audit with you:
‘I was assigned to the audit of provisions. One of the provisions, amounting to $10,000, relates to a legal claim
made against the company after an employee was injured in an accident at one of the steel processing plants. I
read all of the correspondence relating to this, and tried to speak to Bradley Co’s legal advisers, but was told by
the finance director that I must not approach them and should only speak to him about the matter. He said that

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he is confident that only $10,000 needs to be recognised and that the legal advisers had confirmed this amount
to him in a discussion of the matter. I noted in the audit working papers that I could not perform all of the planned

ease
audit procedures because I could not speak to the legal advisers. The audit manager told me to conclude that
provisions are correctly recognised in the financial statements based on the evidence obtained, and to move on
to my next piece of work. He said it didn’t matter that I hadn’t spoken to the legal advisers because the matter
is immaterial to the financial statements.

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‘We received the final version of the financial statements and the chairman’s statement to be published with the
financial statements yesterday. I have quickly looked at the financial statements but the audit manager said we
need not perform a final detailed analytical review on the financial statements as the audit was relatively low risk.
The manager also said that he had discussed the chairman’s statement with the finance director, so no further

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work on it is needed. The audit has been quite time-pressured and I know that the client wants the auditor’s
report to be issued as soon as possible.’

Required:
Explain the quality control and other professional issues raised by the audit assistant’s comments, discussing
any implications for the completion of the audit. (10 marks)

(b) The schedule of uncorrected misstatements included in Bradley Co’s audit working papers is shown below,
of - -

including notes to explain each matter included in the schedule. The audit engagement partner is holding a
meeting with management tomorrow, at which the uncorrected misstatements will be discussed.
Statement of profit or loss Statement of financial position

instatement Debit
$
Credit
$
Debit
$
Credit
$ -
1. Share-based payment scheme 300,000 300,000
2. Restructuring provision 50,000 50,000
3. Estimate of additional allowance
eye
required for slow-moving inventory 10,000
––––––––or ––––––– –––––––
O
10,000
––––––––
Totals 310,000 50,000
I –––––––
= k¥00 50,000 -
310,000 =$aoaE
.
it–––––––– –––––––
-
––––––––
-

µF¥¥hs
Notes:
1. A share-based payment scheme was established in January 20X5. Management has not recognised any
#

amount in the financial statements in relation to the scheme, arguing that due to the decline in Bradley Co’s
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To
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share price, the share options granted are unlikely to be exercised. The audit conclusion is that an expense
and related equity figure should be included in the financial statements.
-

2.
-
-

processing plants. Management approved the closure at a board meeting in August 20X5, but only
•
£
A provision has been recognised in respect of a restructuring involving the closure of one of the steel
e

announced the closure to employees in September 20X5. The audit conclusion is that the provision should
.

② be recognised.
not
T⇐¥e
③ 3. The allowance relates to slow-moving inventory in respect of a particular type of steel alloy for which demand
'

has fallen. Management has already recognised an ==allowance

# of $35,000, which is considered insufficient
a-
by the audit team.
,

8
 E-
Required:
(i) Explain the matters which should be discussed with management in relation to each of the uncorrected

I
Is
misstatements; and
(ii) Assuming that management does not adjust the misstatements, justify an appropriate audit opinion and
explain the impact on the auditor’s report.
The following mark allocation is provided as guidance for this requirement:
(i) 10 marks W

long 33£

99%1
=

(ii) 5 marks
(15 marks)

aitaidfaet
-

(25 marks)
.

9 [P.T.O.
 As material to FS : misstatement As issue material to Fb :
Bradley Co. CBI issue is is o
o

it lead to audit auditor opinion

Share Based payment
in will
modified will
modified
give
Adjustment Share based opinion due to this issue
.

required for
.

worth $300,000 represents Restructuring Provision Slow

payment mooing inventory
087 $50.000
127 .

of
revenue G .

of
assets o
:
Restructuring provision worth
Adjustment required in allowance
of
material to income statement but represents 27 and 0.141 slow
inventory worth $10.000
of
revenue
of moving
.

immaterial to SOFP assets : material to Income statement

represents 0.41 revenue 9 002T
of of
.
o .

Co did not record but immaterial to sort assets oi immaterial to Fs

Braddy management
.
.

Share based the basis that G had not made Slow should be
plan on
Braddy .

public moving inventory

market has declined which announcement at end valued at lower Cost
share
price ,
of restructuring year of
ER

not oi Ins Net value

means condition share plan is as
per -37 constructive realizable Management has
of
no
.

This because booked allowance 435000

satisfied
.

argument
is
wrong obligation exist
for restructuring
at
year already of
in settled share
plan market end Provision cannot be recorded : slow stock This needs
Equity against moving
.
o .

conditions ignored es
plan valued has to be discussed because per
by
are is as

recording provision ,
management
at Fu date G Ols audit team NRU still $10000
on
grant
.

uls profits liability .

,
is

Co should record It be considered that closure below current valuation

Braddy management can
Insufficient
.
.

announcement made subsequent allowance

this period result Ols
in will
plan over
vesting using
was in
of profile
Fu date Share 9 closure 3
period as
plant is
inventory
of option of a
on
grant
.
.

announced in
January event do as
per Ins to As this issue immaterial to
plan was x5
significant
a is
-

end disclosure Fs It As audit

should be
opinion
x5 we will
whereas is 31
August given
in

year
.

with should event because remain due to this

i.
expense along Equity will be a non
adjusting unmodified
-

be recorded Emon the at end existed it alone

for of
no issue
year obligation
.
. .

,
 !

Overall Lastly sub para added

impact a will be

If all misstatements are considered in basis opinion para

of modified
then Income statement to misstatements which
aggregate explain detail
on

of
$260000
is misstated by which resulted in
modification of opinion
.

represents 10.41 revenue ? material

of
.

to FS . SOFP is also misstated

by 4260.000 which
represents 0.7 't

assets do immaterial to soft

of
.

As issues are material to Is o :

considered material
they be as
will

to Fs because material to one

,
any
statement is considered as material

to whole As .

As misstatements are material

aggregate
to Fs , .
auditor will
express modified

audit opinion i.e

.
he will state that

true G
.

Fs
presents fair
view
except
misstatements discussed
for in basis
of
modified opinion para .

Further auditor will

change headings of
9 basis
opinion para of opinion para

to G basis modified
Modified opinion of
opinion , respectively .
 Section B – BOTH questions are compulsory and MUST be attempted
SEI OSI
2 (a) You are an audit manager in Coram & Co, a firm of Chartered Certified Accountants. The audit of one of your

-@I
clients, Clark Co, for the year ended 31 May 20X8 is nearly complete and the auditor’s report is due to be issued
-

next week. Clark Co is an unlisted, family owned business which specialises in the service and repair of both
commercial and privately owned motor vehicles. The company operates from seven geographically distinct sites,
each of which is considered a separate cash generating unit for impairment review purposes. The draft financial
statements recognise profit before taxation for the year of $2·3 million and total assets of $22 million.

IIT
The schedule of uncorrected misstatements included in Clark Co’s audit working papers and prepared by the audit
F-
--

supervisor is shown below. You are due to attend a meeting with the finance director of Clark Co tomorrow, at
which the uncorrected misstatements will be discussed.

Adjustment Statement of profit or loss Statement of financial position

Q
Schedule of uncorrected misstatements Debit E- Credit Debit Credit
$ $ $ $
(i) Lease of testing equipment
– lease assets 475,000
– lease liabilities 475,000

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(ii) Legal claim

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-
– contingent assets 1,200,000
– provision for liabilities 1,200,000

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(iii) Asset impairment
– assets 85,000

EINE
– expenses 85,000
––––––– ––––––– –––––––––– ––––––––––
Totals 85,000
––––––– 0–
–––––––
1,675,000 1,760,000
–––––––––– ––––––––––
(i)- Lease of testing
To
equipment 885¥
In the jurisdiction in which Clark Co operates, all motor vehicles over three years old are required to undergo
an annual test of vehicle safety and roadworthiness. The annual test requires specialist testing equipment
-

to
which is inspected by government officials on a regular basis. Following inspection visits in May 20X8, the

II⇒
-

government inspection report required Clark Co to replace the testing equipment at three of its sites. In order
to comply with this requirement, Clark Co has agreed to lease new testing equipment from a leasing company
on six-month leases. Under the terms of the leases, the company has no option to purchase the equipment.

us The testing equipment was made available for use by Clark Co at each of the three sites on 31 May 20X8.
The client has capitalised leases with a total carrying amount of $625,000 at two of the sites but has elected
to take advantage of the IFRS 16 Leases exemption not to capitalise short-term leases at the largest of the
-

A
=
-

three sites. As a result, the present value of the lease payments of $475,000 relating to this site has not been
recognised on the company’s statement of financial position. (7 marks)

(ii) Legal claim

uringlhegear
A customer of Clark Co successfully sued the company for negligence in April 20X8 after suffering a personal
injury at one of its sites. The court awarded the customer $1·2 million in damages and this had not yet
,

been paid as at 31 May 20X8. The audit working papers include a copy of a verified letter dated 25 May
- I f- To

20X8 from an insurance company confirming that the claim is fully covered under Clark Co’s public liability
insurance policy. On the basis that the company has no net liabilityTae
-

-7
-

.
as a result of the claim, the finance .
.

director has not recognised any amounts in the financial statements and has not made any disclosures in
If TT

relation to the matter. (5 marks)

f

(iii) Asset impairment

-

During the year, a significant new competitor entered the market place at one of Clark Co’s seven sites. As a
egg -
-

result, the site has experienced a decline in market share and revenue. The company has therefore conducted
an impairment test on the site’s assets. The company’s working Ipapers for the impairment test have been
- -

audited and the following figures have been agreed by the audit team:
e
- -

8
 of
←I
Recoverable

is :Yat:*o÷%
" Site assets

amout=3a5I5③
.gs?iMIIgCV--$3&m
⇒
$
Carrying amount on statement of financial position as at 31 May 20X8 3·6 million
Value in use 2·9 million
Fair value - 3·9 million

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Related costs of selling the assets:

:¥
– legal costs 126,000
is
¥
– transaction taxes 174,000
– costs of removing the assets a
85,000
– costs of reorganising the business following the asset disposals 96,000
On the basis of the results of these figures, the client has calculated the recoverable amount of the assets as
⑦ $3·6 million and concluded that the site has not suffered an impairment. No adjustments have therefore been
-

-8
-

made to the financial statements in this regard. (5 marks)

⇐
Required:
-

Recommend and explain the matters which should be discussed with management in relation to each of the

E-
proposed adjustments, including an assessment of their individual impact on the financial statements and on
the auditor’s opinion if management does not make the proposed adjustments.
Note: The split of the mark allocation is shown against each of the issues above.

(b) Your client portfolio as an audit manager at Coram & Co also includes Turner Co which is a listed financial
institution offering loans and credit facilities to both commercial and retail customers. You have received an email
from the audit supervisor who is currently supervising interim testing on systems and controls in relation to the
audit for the year ending 31 October 20X8. The email gives the following details for your consideration:
One of the audit team members, Janette Stott, has provisionally agreed to take out a loan with Turner Co to finance
the purchase of a domestic residence. The loan will be secured on the property and the client’s business manager
has promised Janette that he will ensure that she gets ‘the very best deal which the bank can offer.’
The payroll manager at Turner Co has asked the audit supervisor if it would be possible for Coram & Co to provide
a member of staff on secondment to work in the payroll department. The payroll manager has struggled to recruit
a new supervisor for the organisation’s main payroll system and wants to assign a qualified member of the audit
firm’s staff for an initial period of six months.

Required:
Comment on the ethical and professional issues raised in respect of the audit of Turner Co and recommend
any actions to be taken by the audit firm. (8 marks)

(25 marks)

9 [P.T.O.
Clark Co . Ca) I assets G liabilities .

Testing equipment not capitalized in Fs If lease is

regarded as short lease

worth $475,000
represents 21 assets then Clark Co should reverse lease
of
.

at material to FS the other capitalized $625,000 If exemption to

of
.
On .

hand leases capitalized worth

capitalize lease is claimed on one asset

assets then it should assets

represents
$625
281
similar
apply
ooo

of
. on .

material to Fs And Clark Co is not to

willing
to
if reverse
. .

It needs to be considered that lease capitalised $625.000 then it should

of ,

lease short lease

months
capitalize $475 As exemption
six lease also
of
is a ,
ooo .

do Short lease exemption IFRS 16 is not available in such way that

of
a one

is available . However it is
important asset is
exempted but other similar assets

to evaluate that this

testing equipment are capitalized .

requirement 9 Clark Co IF lease $475.000 is not capitalized such

of
is a
legal ,
.

doriot hold to it that leases capitalised then

option purchase other two are
.

This it assets 4
means is
highly probable liabilities are Us
by $475.000

that will renewed G

lease be
single
in not available
as exemption is on

that case it will not be Asset

regarded
.

as short lease .

As misstatement is material to Fs So

If Short auditor
it is not
regarded
as will
give qualified opinion on Fs .

lease then will not

exemption
be available G Clark Co .
Should

lease $475,000 also

Capitalize of .

Failure to do so will understate

 Clark Co Ca ) 5 marks also misstated as disclosure this event
of
-

Claim 812am 5.4T is not

of represents of given
.

assets oi material to Fb .
As misstatement is material to Fb o :

Clark Co cannot set to auditor will express opinion

off payable modified
. .

with receivable
injured person from
insurance G. as two separate parties
,

involved do no to set
are legal right off
exist has not recorded
.

Management
receivable insurance Co 9
from payable
.

to person
? understatement is
injured
o

done .

Further is not disclosure

management giving
this event in rs which is also
of
a misstatement It should a
give
.

disclosure about detail claim lost 9 a

of
.

that it insured
fact was .

Due to these misstatements is

profit
as
expense due to lost
unaffected
claim will net with insurance income
off
.

However liabilities G assets are Uls

because has not recorded

management
to person G
payable injured receivable

insurance
Co Further notes to Fb are
from
.
 Clark Co (a) ii Overall
impact
.

loss If misstatements considered

Additional impairment required is $85000 all are on

then Income
9041of
37 't PBT statement
which represents of aggregate
is

assets do immaterial to Fs misstated $85.000 SOFP is also

q
by
.

discussed misstated $85.000 represents

by
It should be with which
management

3.64
PBT assets

Fair
that value less cost to sell will be G 0.3 %
of of
$ 3515M FU asset is 43.9in
whereas of immaterial to FS
of
.
.

cost to sell include cost $126.000 As all misstatements is

legal of ,
aggregate of
transaction tax immaterial to FS do audit opinion will

$174
G cost
of of
. ooo

asset $85.000 IE auditor will state

removing of
remain
unmodified
.

FV true 9
fair
cost to that rs
Considering less sell
of $3 .si5m presents view in

recoverable amount should also be 43515M all material aspects .

it than value As audit so

unmodified
as is
greater
in use
opinion is

$85.000 audit impact doe

loss
report have
will will
of
42.9M .

Impairment of
no

be booked as a is 436M 9 to these misstatements .

recoverable amount is 43.515M .

has not recorded impairment

Management
loss result a assets
profit
as a

overstated $85.000
by
are .

Auditor opinion
will remain
unmodified
doe to this issue as matter is immaterial

to Fs However it material
get
.

may
when combined with other issues .