Week – 6
Q. What is the CONCEPT GOING CONCERN?
According to this concept, there is an assumption that the business is capable of
continuing its business in the future over a longer period of time.
The business records all transaction in its books of accounts on the assumption that the
business of the organization is a continuing venture.
The concept requires recording of the fixed assets at their conventional cost and allow
charging depreciation of assets without taking into account the market value of these
assets.
Without the concept of going concern, the current and fixed assets along with the short-
and long-term liabilities is difficult to classify, and it is also quite difficult to justify such
classification.
After discussions with the management of KAL and reviewing the preliminary information
provided, there are several issues that have been recognized that may have implications for
company's ability to continue as a going concern.
Reasons for KAL'S appropriateness of going concern and some factors that might mitigate
such risk: -
Appropriateness of Going Concern (5 Mitigating Factors (5 marks)
marks)
Net cash outflow from operating activities. Controlling unnecessary operating expenses.
Negotiating a better payment cycle with
clients.
Default on compliance of loan terms which Providing cash flow forecasts after assessing
might lead to the withdrawal of funding. future revenues from potential clients.
Substantial refund of the contract price by the Negotiating terms with the hotel's
hotel. management and providing them with an
alternative without affecting the liquidity of
the business.
Realization of assets, Dose forecast, deals Leasing assets rather than purchasing them
with asset realization, including whether these outright.
realizations are practicable and realistic in the
amount.
Losing competitive edge and customers Introduction of new economically efficient
installing their own systems. systems and prompt completion of contracts.
Efficient customer service.
Week – 7
(a) Explain the normal process an auditor would expect to find in the client's systems governing
changes to computer programs. Why is an auditor concerned about program changes?
Auditors should expect to find the correct documentation of changes to the program.
Documentation will detail what improvements are made, what documentation the program would
produce, and who created the modifications, who reviewed the change before implementation,
and who approved the change in such a manner that the author is not the approver, and the
approver will not have access to the system's production environment. Auditors are expected to
allow clients to review company issues at strategy sessions with clients regarding improvements
in the IT environment. That allows the auditor to plan their audit properly.
(b) Wares kings' financial year-end is 31 December. Does the auditor need to obtain evidence
about the performance of the inventory control system from every month in the year or from a
sample of months? Explain.
Test of controls should only cover 9 months, from April to December, because IT controls for
the first 3 months are not reliable, unless there were changes from the prior year that would lead
the auditors to believe they it is appropriate to test the IT controls from January to March. For the
test of controls from April to December, though not required, auditors should test every month to
gather more reliable evidence, given the history with the client's accounting records and given
the significant risks associated with the application of a new system by the entity.
(c) If the auditor conducts a test of the inventory controls at an interim date, is it appropriate to
conclude that the controls also relate to the end of the period date? Why?
Auditors are required to update their IT control assessment at year-end, as well as their
documentation, as significant changes that are unknown to the team might be made. Inquiry
alone about changes is not enough. Before deciding that they are accurate, the auditors must
check and confirm the operational effectiveness of the IT controls. The results of the interim
testing up to inventory balance at the end of the year are appropriate if the testing was carried out
during the period following the installation of the new inventory control system. As noted above,
however, the overall sales and purchase transactions do contain pre-April transactions that were
processed via the old system. The verification of those accounts should provide pre-April dates
of proof.
Week – 8
(a) Key account (b) Key assertion at (c) Explanation: (d) Substantive test
balance at risk: risk: of detail/ Audit
Process
Debtors and Sales are Debtors- Valuation Sales- i. Obtain independent
two accounts which and presentation & confirmation from
are at material disclosure Considering that debtors
misstatement risk. customer is facing
increasing difficulty ii. verify subsequent
in financial side and collection of invoices
hence, realization before approval of
remains a challenge. audit report
In such
circumstances, iii. Request
valuation & management to
completeness of sales access financial
gets affected because statement of the
sales cannot be customer
recorded as per
GAAP if realization iv. Discuss with
is under question. management on
course of action
Debtors-
Considering that
customer is facing
increasing difficulty
in financial side and
hence, realization
remains a challenge.
In such
circumstances,
provision for bad
debt allowances
leading to
presentation &
disclosure and
valuation assertion
remains under
question.
Week – 9
Answer:
Part – A:
Key Audit Matters:
Matters or events that are according to the professional judgement of the auditor are of most
significance and important in execution of the audit of the current year financial statements are
known as Key Audit Matters. These matters are extracted from the matter that are being
communicated to the those charged with governance.
A further description is required to be added by the auditor on each of the key audit matters in
his audit report by stating that:
Why the given matter has been considered as highly important and of more significance
in the audit.
How the auditor has addressed the matter during the performance of the audit.
Needs to provide related disclosure references.
The Key Audit Matters paragraph or section is usually placed right after the basis for opinion
paragraph of the audit report and before the Management Responsibility Paragraph.
Part – B:
Issues Event/Accounting Explanation
Treatment
a) On August 15th, the It’s a type 2 event, needs a Since, the issuance of share
board is planning to disclosure in the financial and evidence for it arises after
issue its shares in the statements of the company. the year end or date of the
private placement. financial statements because
the private offerings would
occur after the year end at
June 30th, therefore, this event
needs a disclosure in the
financial statements and
would not affect the financial
statements before year end.
b) Issuing shares to Type 2 event, needs to give Since, the contract is not yet
finance the purchase disclosure in the financial signed and it will be signed
of 60% stake in statements. on 15th August; therefore, the
another company. issuance of share would have
no implications on the year-
end financial statement that
are being closed at June 30.
Hence, needs a disclosure in
the financial statements of the
company instead of adjusting.
c) A legal case has been This is a Type 1 event and Since, there is sufficient
lodged against the needs to be adjusted. evidence that is existed at the
company for damages. date of the financial
statements because the event
that gives rise to the law suit
occurred before the ear end
June 30.
d) Doubtful trade This is a Type 1 event and Here the auditor has to check
receivable has now needs to be adjusted. whether it is a bogus receipt.
been paid. Since it is in cash, there might
be chances of manipulation of
debtor’s balances by entering
bogus receipts in their
account. Moreover, one of the
large debtors and other debt
amounts that could have a
material impact on the
financial statements;
therefore, this event needs to
be adjusted and disclosed.
Week – 10
Answer:
Issues Audit Opinion Explanation
e) Missing Vouchers of Qualified Opinion Since more than 55% of the
55% of expenses expenses are not substantiated
with vouchers / receipts,
authenticity of the expenses
booked in the financial
statement is in doubt. As an
auditor, the report should be
disclaimed saying that we
could not verify an expense to
the extent of XX value (55%
of the expenses excluding
salary and allowance) due to
lack of evidence in the form
of receipt or voucher.
f) Suspected Disclaimer of Opinion The difference in valuation
Overvaluation of the method and cost allocation
unsold properties method may arise during
review. The auditor can
disclaim saying what
valuation method followed
for the purpose of valuation
of unsold unit of houses and
management assertion on its
valuation..
g) Misstatement in the Unqualified Audit opinion Since the overstatement /
financial report with emphasis of matter misstatement of $6 million is
amounting to $6 paragraph. within the materiality set for
million. the audit, an auditor cannot
qualify the report. Thus,
giving unqualified report with
emphasis on the fact that the
value of Gold coast was
overstated to the tune of $6
million giving reference to
the applicable method of
valuation adopted by the
auditor as per IFRS / US
GAAP.
h) Subsequent event loss Unqualified Audit Opinion Information about
detected due to with other matter paragraph contingency liability needs to
currency fluctuation. be stated in the notes to
accounts (below Financial
statement) about possible
dispute or claim which may
arise in future from Eclipse
band due to violation of
contract terms. This is an
event occurred during the
year which will have dispute
and liability on the company
at later year through suit in
the court of law.
