ACC802 Tutorial Questions: Topic 9
Question 1
Consider the following independent situations found during audit testing of CD Ltd, which has a
balance date of 30 June 20X7. Assume that all the situations are material.
(i) Recent industrial action has seen trade unions win a pay increase of 4% for all their
members. Under the terms of the agreement, the pay increase will be backdated to 1
January 20X7. Management have agreed to the pay increase, however, they have not
made any adjustments to the 30 June 20X7 financial report.
(ii) A large order from an overseas supplier was shipped FOB (free on board) from its port
of origin on 1 June 20X7. The order arrived on 20 July 20X7. The purchase is not
reflected in the 30 June 20X7 financial report.
(iii) The draft chairman’s report to go with the financial report states that the profits of a
particular segment of the company’s operations increased by 70% during the period. On
checking the figures, you found profits increased by only 4%.
(iv) Your New Zealand branch office disclaimed responsibility for the inventory figures in the
New Zealand division’s reporting package. This is because sudden flooding prevented
the auditors from attending the stocktake, and destroyed documentation which would
have enabled them to substantiate inventory by other means. The New Zealand division
represents about 10% of CD Ltd’s operations.
(v) The entire Queensland operations of the company are under investigation by the Tax
Office for alleged failure to pay the appropriate amount of PAYG tax. Your preliminary
investigations reveal that the Tax Office has a strong case against the company. No
mention of the dispute is made in the financial report.
Required:
Assume that no adjustments are made. For each situation, identify the type of audit opinion
required and explain the basis of your answers
Question 2
Skyblue Pty Ltd is a large private company that manufactures special reinforced concrete and
other products used in the construction of airport runways and heavy use motor vehicle freeways.
During the course of the audit for the year ended 30 June 20X7, the government announced that
it intends to scrap its proposed third runway project. You know that Skyblue Pty Ltd’s
projections include a major share of the work expected to flow from this project.
The company has been experiencing some cash flow difficulties, although this is not unusual in
the industry. Management has recently fully extended their overdraft facility in order to pay day-
to-day expenses such as wages and salaries. The audit partner is concerned that the company
may be facing going concern problems, but the managing director maintains that future capital
expenditure can be cut back to alleviate the going concern issue. In addition, surplus assets can
be sold to the growing Asian market and long-term debt can be rescheduled if necessary.
Required:
(a) Give examples of three other possible mitigating factors that have not yet been mentioned.
(b) What evidence should you obtain with respect to management’s representation about the
various mitigating factors presented in question 2 and identified in part (a) above?
(c) The engagement partner has decided to qualify the financial report on the basis of
uncertainty as to going concern. However, the managing director argues that, as the
company is privately held and all the shareholders are involved in the business, going
concern problems should not be viewed as seriously as if the company was publicly listed
and, therefore, an unqualified report should be signed. How would you respond to the
managing director’s comments?
(d) What would be the impact on the audit of a comfort letter from a related company
promising to provide financial support in the event that Skyblue Pty Ltd was unable to
meet its debts
