The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.

The first audit client is Palm Industries Co (Palm), a listed company. Palm's year end was 31 March 20X5 and the draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. The fieldwork stage for this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

The second audit client is Ash Trading Co (Ash). Ash is a new client of Chestnut & Co, its year end was 31 January 20X5 and the firm was only appointed as auditor in February 20X5, as the previous auditor was suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Ash's warehouse was undertaken on 31 January 20X5 and was overseen by the company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and inventory of $510,000.

QUESTION

Alternative procedures, performed as a result of Chestnut & Co being unable to attend the inventory count of Ash, did not provide sufficient appropriate audit evidence regarding the inventory balance in the statement of financial position.

Indicate the audit opinion which would be given in these circumstances and the appropriate disclosure in the auditor's report.

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.

The first audit client is Palm Industries Co (Palm), a listed company. Palm's year end was 31 March 20X5 and the draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. The fieldwork stage for this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

The second audit client is Ash Trading Co (Ash). Ash is a new client of Chestnut & Co, its year end was 31 January 20X5 and the firm was only appointed as auditor in February 20X5, as the previous auditor was suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Ash's warehouse was undertaken on 31 January 20X5 and was overseen by the company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and inventory of $510,000.

QUESTION

Following the inability to attend the inventory count of Ash, an engagement quality control reviewer has been appointed to the audit.

Indicate which of the following should be included within the engagement quality control review?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.

The first audit client is Palm Industries Co (Palm), a listed company. Palm's year end was 31 March 20X5 and the draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. The fieldwork stage for this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

The second audit client is Ash Trading Co (Ash). Ash is a new client of Chestnut & Co, its year end was 31 January 20X5 and the firm was only appointed as auditor in February 20X5, as the previous auditor was suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Ash's warehouse was undertaken on 31 January 20X5 and was overseen by the company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and inventory of $510,000.

QUESTION

The audit engagement partner for Ash has requested that additional audit procedures be performed in order to conclude on the level of adjustment needed in relation to the above inventory issue.

Which TWO of the following audit procedures should be performed in order to form a conclusion as to whether Ash's 20X5 financial statements require amendment?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.

The first audit client is Palm Industries Co (Palm), a listed company. Palm's year end was 31 March 20X5 and the draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. The fieldwork stage for this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

The second audit client is Ash Trading Co (Ash). Ash is a new client of Chestnut & Co, its year end was 31 January 20X5 and the firm was only appointed as auditor in February 20X5, as the previous auditor was suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Ash's warehouse was undertaken on 31 January 20X5 and was overseen by the company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and inventory of $510,000.

QUESTION

Indicate whether the issue relating to the inventory count of Ash at the year end is Material, and its Impact on financial statement?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.

The first audit client is Palm Industries Co (Palm), a listed company. Palm's year end was 31 March 20X5 and the draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. The fieldwork stage for this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

The second audit client is Ash Trading Co (Ash). Ash is a new client of Chestnut & Co, its year end was 31 January 20X5 and the firm was only appointed as auditor in February 20X5, as the previous auditor was suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Ash's warehouse was undertaken on 31 January 20X5 and was overseen by the company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and inventory of $510,000.

QUESTION

Which of the following audit procedures should be performed in order to form a conclusion on whether an amendment is required in Palm's 20X5 financial statements in respect of the disputed balance?

The following scenario relates to questions 1–5.

Scenario

Humphries Co, your audit client, operates a chain of food wholesalers across the country and its year end was 30 September 20X1. The final audit is nearly complete and it is proposed that the financial statements and auditor's report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million.

The following information comes to light:

Humphries Co has three warehouses; following extensive rain on 20 November, rain and river water flooded the warehouse located in Bass. All of the inventory in the warehouse was damaged and has been disposed of. The insurance company has been contacted. No amendments or disclosures have been made in the financial statements.

A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. The management of Humphries Co believes that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance.

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to the financial statements.

Correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Humphries Co of $0.6 million. It is likely that the company will agree to this.

QUESTION

It is now 13 December 20X1. The auditor's report has been signed. The financial statements are due to be issued on 25 December 20X1.

Which of the following statements correctly describes the auditor's responsibility in relation to subsequent events occurring between now and 25 December?

The following scenario relates to questions 1–5.

Scenario

Humphries Co, your audit client, operates a chain of food wholesalers across the country and its year end was 30 September 20X1. The final audit is nearly complete and it is proposed that the financial statements and auditor's report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million.

The following information comes to light:

Humphries Co has three warehouses; following extensive rain on 20 November, rain and river water flooded the warehouse located in Bass. All of the inventory in the warehouse was damaged and has been disposed of. The insurance company has been contacted. No amendments or disclosures have been made in the financial statements.

A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. The management of Humphries Co believes that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance.

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to the financial statements.

Correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Humphries Co of $0.6 million. It is likely that the company will agree to this.

QUESTION

Complete the following sentence regarding the auditor's report. Choose the appropriate Impact of breach of contract, and Auditor's Opinion.

The lawsuit relating to the breach of contract is considered to be _____________ and therefore if the financial statements are not revised in the light of the new information then the auditor's opinion will _______________ be.

♦ Choose 1 Impact of breach of contract, and 1 Auditor's opinion.

The following scenario relates to questions 1–5.

Scenario

Humphries Co, your audit client, operates a chain of food wholesalers across the country and its year end was 30 September 20X1. The final audit is nearly complete and it is proposed that the financial statements and auditor's report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million.

The following information comes to light:

Humphries Co has three warehouses; following extensive rain on 20 November, rain and river water flooded the warehouse located in Bass. All of the inventory in the warehouse was damaged and has been disposed of. The insurance company has been contacted. No amendments or disclosures have been made in the financial statements.

A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. The management of Humphries Co believes that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance.

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to the financial statements.

Correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Humphries Co of $0.6 million. It is likely that the company will agree to this.

QUESTION

Which TWO of the following audit procedures should be performed in order to form a conclusion on the amendment required to Humphries Co's 20X1 financial statements in respect of the $0.3 million owed by the customer experiencing financial difficulties?

The following scenario relates to questions 1–5.

Scenario

Humphries Co, your audit client, operates a chain of food wholesalers across the country and its year end was 30 September 20X1. The final audit is nearly complete and it is proposed that the financial statements and auditor's report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million.

The following information comes to light:

Humphries Co has three warehouses; following extensive rain on 20 November, rain and river water flooded the warehouse located in Bass. All of the inventory in the warehouse was damaged and has been disposed of. The insurance company has been contacted. No amendments or disclosures have been made in the financial statements.

A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. The management of Humphries Co believes that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance.

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to the financial statements.

Correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Humphries Co of $0.6 million. It is likely that the company will agree to this.

QUESTION

Which TWO of the following statements correctly describe the likely impact that the flooding of the warehouse will have on Humphries Co's financial statements for the year ended 30 September 20X1?

The following scenario relates to questions 1–5.

Scenario

Humphries Co, your audit client, operates a chain of food wholesalers across the country and its year end was 30 September 20X1. The final audit is nearly complete and it is proposed that the financial statements and auditor's report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million.

The following information comes to light:

Humphries Co has three warehouses; following extensive rain on 20 November, rain and river water flooded the warehouse located in Bass. All of the inventory in the warehouse was damaged and has been disposed of. The insurance company has been contacted. No amendments or disclosures have been made in the financial statements.

A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. The management of Humphries Co believes that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance.

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to the financial statements.

Correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Humphries Co of $0.6 million. It is likely that the company will agree to this.

QUESTION

Which of the following audit procedures would identify subsequent events occurring up to the date of the auditor's report?

1. Enquire of management whether there have been any unusual accounting adjustments
2. Enquire of management whether there have been any issues of shares/debentures, or changes in business structure
3. Review management procedures for identifying subsequent events to ensure that such events are identified
4. Obtain written representation that all subsequent events requiring adjustment or disclosure have been adjusted or disclosed

The following scenario relates to questions 1–5.

Scenario

Greenfields Co specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise in this period it undertakes to fix them, or to provide a replacement product.

You are the manager responsible for the audit of Greenfields Co. You are performing the final review stage of the audit and have come across the following issues.

Receivable balance owing from Yellowmix Co

Greenfields Co has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix Co for over six months, and Greenfields Co would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.

Other information

You have reviewed a financial summary which is to be included in the annual report and have found that the details are inconsistent with the financial statements. Your investigations have shown that the error is in the summary and not the financial statements.

QUESTION

You have notified the directors of the error in the summary financial statements.

Which of the following correctly summarises the impact on the auditor's report if the directors do not correct this error?

The following scenario relates to questions 1–5.

Scenario

Greenfields Co specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise in this period it undertakes to fix them, or to provide a replacement product.

You are the manager responsible for the audit of Greenfields Co. You are performing the final review stage of the audit and have come across the following issues.

Receivable balance owing from Yellowmix Co

Greenfields Co has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix Co for over six months, and Greenfields Co would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.

Other information

You have reviewed a financial summary which is to be included in the annual report and have found that the details are inconsistent with the financial statements. Your investigations have shown that the error is in the summary and not the financial statements.

QUESTION

You have discussed the matter with management but they are still not prepared to provide the representations you have requested.

What type of modified opinion would be issued and what would be the basis for this modification?

The following scenario relates to questions 1–5.

Scenario

Greenfields Co specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise in this period it undertakes to fix them, or to provide a replacement product.

You are the manager responsible for the audit of Greenfields Co. You are performing the final review stage of the audit and have come across the following issues.

Receivable balance owing from Yellowmix Co

Greenfields Co has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix Co for over six months, and Greenfields Co would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.

Other information

You have reviewed a financial summary which is to be included in the annual report and have found that the details are inconsistent with the financial statements. Your investigations have shown that the error is in the summary and not the financial statements.

QUESTION

Management has now stated that it is not prepared to confirm that the basis and amount of the warranty provision are reasonable.

Which of the following actions you must PERFORM in accordance with ISA 580 Written Representations?

The following scenario relates to questions 1–5.

Scenario

Greenfields Co specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise in this period it undertakes to fix them, or to provide a replacement product.

You are the manager responsible for the audit of Greenfields Co. You are performing the final review stage of the audit and have come across the following issues.

Receivable balance owing from Yellowmix Co

Greenfields Co has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix Co for over six months, and Greenfields Co would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.

Other information

You have reviewed a financial summary which is to be included in the annual report and have found that the details are inconsistent with the financial statements. Your investigations have shown that the error is in the summary and not the financial statements.

QUESTION

Which TWO of the following audit procedures could the audit team carry out to obtain independent evidence relating to the recoverability of the debt from Yellowmix Co?

The following scenario relates to questions 1–5.

Scenario

Greenfields Co specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise in this period it undertakes to fix them, or to provide a replacement product.

You are the manager responsible for the audit of Greenfields Co. You are performing the final review stage of the audit and have come across the following issues.

Receivable balance owing from Yellowmix Co

Greenfields Co has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix Co for over six months, and Greenfields Co would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.

Other information

You have reviewed a financial summary which is to be included in the annual report and have found that the details are inconsistent with the financial statements. Your investigations have shown that the error is in the summary and not the financial statements.

QUESTION

Assuming you received the written representations as described above for both the receivables balance and the warranty provision, in respect of which balances is the auditor most likely to conclude that sufficient appropriate evidence has been obtained?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Kiwi & Co. Your client is Strawberry Kitchen Designs Co (Strawberry), which is a kitchen manufacturer. The company's year-end is 30 April 20X2.

Strawberry has had a challenging year. Grape Co, a major customer of Strawberry which owes $0.6m, is experiencing financial difficulties. However, the balance is included within the financial statements. The sales director has recently left Strawberry and has yet to be replaced. As a result Strawberry has struggled to win any new business in the last six months.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year.

You have performed some analytical procedures on the draft financial statements and have calculated the following ratios:

Due to its poor cash flow, Strawberry missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within 6 months.

QUESTION

You have concluded that Strawberry is not a going concern.

If the directors refuse to amend the financial statements which of the following correctly describes the impact on the auditor's report?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Kiwi & Co. Your client is Strawberry Kitchen Designs Co (Strawberry), which is a kitchen manufacturer. The company's year-end is 30 April 20X2.

Strawberry has had a challenging year. Grape Co, a major customer of Strawberry which owes $0.6m, is experiencing financial difficulties. However, the balance is included within the financial statements. The sales director has recently left Strawberry and has yet to be replaced. As a result Strawberry has struggled to win any new business in the last six months.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year.

You have performed some analytical procedures on the draft financial statements and have calculated the following ratios:

Due to its poor cash flow, Strawberry missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within 6 months.

QUESTION

You have raised your concerns with management regarding the ability of Strawberry to repay the $0.6m loan in 6 months. The directors have assured you that this will be possible as they have a contingency plan.

Which of the following courses of action by the directors would provide you with the most assurance that Strawberry will be able to meet this commitment?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Kiwi & Co. Your client is Strawberry Kitchen Designs Co (Strawberry), which is a kitchen manufacturer. The company's year-end is 30 April 20X2.

Strawberry has had a challenging year. Grape Co, a major customer of Strawberry which owes $0.6m, is experiencing financial difficulties. However, the balance is included within the financial statements. The sales director has recently left Strawberry and has yet to be replaced. As a result Strawberry has struggled to win any new business in the last six months.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year.

You have performed some analytical procedures on the draft financial statements and have calculated the following ratios:

Due to its poor cash flow, Strawberry missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within 6 months.

QUESTION

You are concerned that the debt due from Grape Co may not be recoverable and believe that this would have a significant effect on the viability of Strawberry.

Which of the following would provide you with the most reliable evidence regarding the recoverability of this debt?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Kiwi & Co. Your client is Strawberry Kitchen Designs Co (Strawberry), which is a kitchen manufacturer. The company's year-end is 30 April 20X2.

Strawberry has had a challenging year. Grape Co, a major customer of Strawberry which owes $0.6m, is experiencing financial difficulties. However, the balance is included within the financial statements. The sales director has recently left Strawberry and has yet to be replaced. As a result Strawberry has struggled to win any new business in the last six months.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year.

You have performed some analytical procedures on the draft financial statements and have calculated the following ratios:

Due to its poor cash flow, Strawberry missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within 6 months.

QUESTION

You are reviewing the management's assessment of Strawberry's ability to continue as a going concern.

What period must management's assessment cover?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Kiwi & Co. Your client is Strawberry Kitchen Designs Co (Strawberry), which is a kitchen manufacturer. The company's year-end is 30 April 20X2.

Strawberry has had a challenging year. Grape Co, a major customer of Strawberry which owes $0.6m, is experiencing financial difficulties. However, the balance is included within the financial statements. The sales director has recently left Strawberry and has yet to be replaced. As a result Strawberry has struggled to win any new business in the last six months.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year.

You have performed some analytical procedures on the draft financial statements and have calculated the following ratios:

Due to its poor cash flow, Strawberry missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within 6 months.

QUESTION

Which of the following are potential indicators that Strawberry is not a going concern?

1. The breach of the loan covenants
2. The departure of the sales director
3. The fall in the inventory holding period
4. The negative cash flow figures

The following scenario relates to questions 1–5.

Scenario

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.

Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet including one of its largest customers. Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet's loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month and they believe it will be renewed.

The directors have produced a cash flow forecast which shows a significantly strengthening position over the coming 12 months. They are confident with the new products being developed and, in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet for the customers' online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work in progress is similarly affected and inventory should be written down by $375,000. The finance director believes that as this misstatement was identified after the year end, it can be amended in the 20X5 financial statements. Draft financial statements for the year ended 30 April 20X4 showed profit after tax of $2.5m.

QUESTION

The auditors have been informed that Clarinet's bankers will not make a decision on the overdraft facility until after the auditor's report is completed. The directors have now agreed to include some going concern disclosures and you believe these disclosures are adequate.

Which of the following correctly summarises the impact on the auditor's report of Clarinet if the auditor believes the company is a going concern but that this is subject to a material uncertainty?

The following scenario relates to questions 1–5.

Scenario

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.

Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet including one of its largest customers. Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet's loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month and they believe it will be renewed.

The directors have produced a cash flow forecast which shows a significantly strengthening position over the coming 12 months. They are confident with the new products being developed and, in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet for the customers' online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work in progress is similarly affected and inventory should be written down by $375,000. The finance director believes that as this misstatement was identified after the year end, it can be amended in the 20X5 financial statements. Draft financial statements for the year ended 30 April 20X4 showed profit after tax of $2.5m.

QUESTION

You have concluded that circumstances exist which cast significant doubt on Clarinet's ability to continue as a going concern.

Which of the following must you include in your communication with those charged with governance in accordance with ISA 570 Going Concern?

1. Whether the circumstances you have identified constitute a material uncertainty
2. Whether the use of the going concern basis of accounting is appropriate in the preparation and presentation of the financial statements
3. The adequacy of the related disclosures
4. The period of time your assessment has covered if less than 12 months from the date of the financial statements

The following scenario relates to questions 1–5.

Scenario

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.

Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet including one of its largest customers. Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet's loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month and they believe it will be renewed.

The directors have produced a cash flow forecast which shows a significantly strengthening position over the coming 12 months. They are confident with the new products being developed and, in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet for the customers' online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work in progress is similarly affected and inventory should be written down by $375,000. The finance director believes that as this misstatement was identified after the year end, it can be amended in the 20X5 financial statements. Draft financial statements for the year ended 30 April 20X4 showed profit after tax of $2.5m.

QUESTION

As part of your assessment of going concern you have reviewed the cash flow forecast. This is based on the assumption of significant increases in revenue.

Which of the following procedures would provide the most reliable evidence regarding the validity of this assumption?

The following scenario relates to questions 1–5.

Scenario

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.

Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet including one of its largest customers. Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet's loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month and they believe it will be renewed.

The directors have produced a cash flow forecast which shows a significantly strengthening position over the coming 12 months. They are confident with the new products being developed and, in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet for the customers' online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work in progress is similarly affected and inventory should be written down by $375,000. The finance director believes that as this misstatement was identified after the year end, it can be amended in the 20X5 financial statements. Draft financial statements for the year ended 30 April 20X4 showed profit after tax of $2.5m.

QUESTION

Which of the following factors are indicators that may cast doubt on Clarinet's ability to continue as a going concern?

1. The entry of the new competitor reducing Clarinet's market share
2. The significant increase in the overdraft
3. The company has a long-term loan
4. The reluctance of the shareholders to provide further investment in Clarinet

The following scenario relates to questions 1–5.

Scenario

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.

Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet including one of its largest customers. Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet's loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month and they believe it will be renewed.

The directors have produced a cash flow forecast which shows a significantly strengthening position over the coming 12 months. They are confident with the new products being developed and, in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet for the customers' online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work in progress is similarly affected and inventory should be written down by $375,000. The finance director believes that as this misstatement was identified after the year end, it can be amended in the 20X5 financial statements. Draft financial statements for the year ended 30 April 20X4 showed profit after tax of $2.5m.

QUESTION

Which of the following correctly summarises whether the uncorrected misstatement of inventory is material and its impact on the 20X4 financial statements?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Savage & Co. It is a busy time of year for you as you have several ongoing audit clients at the moment and you are in the process of dealing with a number of outstanding issues and queries from members of your audit teams.

Czech Co (Czech)

Czech is a pharmaceutical company. The fieldwork has been completed and you are currently reviewing the audit file. The audit senior is not sure how to deal with the following issue.

Czech has incurred $2.1m and development expenditure of $3.2m during the year, all of which has been capitalised as an intangible asset. Profit before tax is $26.3m.

Dawson Co (Dawson)

The fieldwork on this audit is also complete with the exception of the following issue which the audit senior has been unable to deal with.

Dawson's computerised wages program is backed up daily; however, for a period of two months the wages records and back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these 2 months are $1.1m. Profit before tax is $10m.

QUESTION

Based on the above information, which of the following options correctly summarises the impact of the wages and salaries issue on the auditor's report for Dawson?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Savage & Co. It is a busy time of year for you as you have several ongoing audit clients at the moment and you are in the process of dealing with a number of outstanding issues and queries from members of your audit teams.

Czech Co (Czech)

Czech is a pharmaceutical company. The fieldwork has been completed and you are currently reviewing the audit file. The audit senior is not sure how to deal with the following issue.

Czech has incurred $2.1m and development expenditure of $3.2m during the year, all of which has been capitalised as an intangible asset. Profit before tax is $26.3m.

Dawson Co (Dawson)

The fieldwork on this audit is also complete with the exception of the following issue which the audit senior has been unable to deal with.

Dawson's computerised wages program is backed up daily; however, for a period of two months the wages records and back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these 2 months are $1.1m. Profit before tax is $10m.

QUESTION

Which of the following correctly summarises the effect of the issue relating to the wages balance in the financial statements of Dawson?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Savage & Co. It is a busy time of year for you as you have several ongoing audit clients at the moment and you are in the process of dealing with a number of outstanding issues and queries from members of your audit teams.

Czech Co (Czech)

Czech is a pharmaceutical company. The fieldwork has been completed and you are currently reviewing the audit file. The audit senior is not sure how to deal with the following issue.

Czech has incurred $2.1m and development expenditure of $3.2m during the year, all of which has been capitalised as an intangible asset. Profit before tax is $26.3m.

Dawson Co (Dawson)

The fieldwork on this audit is also complete with the exception of the following issue which the audit senior has been unable to deal with.

Dawson's computerised wages program is backed up daily; however, for a period of two months the wages records and back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these 2 months are $1.1m. Profit before tax is $10m.

QUESTION

Which of the following options correctly summarises the impact on the auditor's report for Czech if the issue remains unresolved?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Savage & Co. It is a busy time of year for you as you have several ongoing audit clients at the moment and you are in the process of dealing with a number of outstanding issues and queries from members of your audit teams.

Czech Co (Czech)

Czech is a pharmaceutical company. The fieldwork has been completed and you are currently reviewing the audit file. The audit senior is not sure how to deal with the following issue.

Czech has incurred $2.1m and development expenditure of $3.2m during the year, all of which has been capitalised as an intangible asset. Profit before tax is $26.3m.

Dawson Co (Dawson)

The fieldwork on this audit is also complete with the exception of the following issue which the audit senior has been unable to deal with.

Dawson's computerised wages program is backed up daily; however, for a period of two months the wages records and back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these 2 months are $1.1m. Profit before tax is $10m.

QUESTION

Which TWO of the following audit procedures should be performed in order to form a conclusion on whether an amendment is required to Czech's financial statements in respect of the research and development expenditure?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager of Savage & Co. It is a busy time of year for you as you have several ongoing audit clients at the moment and you are in the process of dealing with a number of outstanding issues and queries from members of your audit teams.

Czech Co (Czech)

Czech is a pharmaceutical company. The fieldwork has been completed and you are currently reviewing the audit file. The audit senior is not sure how to deal with the following issue.

Czech has incurred $2.1m and development expenditure of $3.2m during the year, all of which has been capitalised as an intangible asset. Profit before tax is $26.3m.

Dawson Co (Dawson)

The fieldwork on this audit is also complete with the exception of the following issue which the audit senior has been unable to deal with.

Dawson's computerised wages program is backed up daily; however, for a period of two months the wages records and back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these 2 months are $1.1m. Profit before tax is $10m.

QUESTION

You have just received a phone call from one particular audit senior who is unsure about the steps to take in relation to uncorrected misstatements.

Which of the following statements correctly describe the auditor's responsibility in respect of misstatements?

The following scenario relates to questions 1–5.

Scenario

Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Medimade Co has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined.

You are the audit manager responsible for the audit of Medimade Co's financial statements for the year ended 31 March 20X7.

In addition to recruiting staff, Medimade Co needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimade Co's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery.

QUESTION

The audit is completed. The auditor's report and the financial statements have been signed but not yet issued.

The finance director of Medimade Co has just informed the audit team that he has been informed by the bank that the overdraft facility will not be renewed. Medimade Co currently does not have any other source of finance.

What actions, if any, should you now take in order to meet the auditor's responsibilities under ISA 560 Subsequent Events?

The following scenario relates to questions 1–5.

Scenario

Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Medimade Co has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined.

You are the audit manager responsible for the audit of Medimade Co's financial statements for the year ended 31 March 20X7.

In addition to recruiting staff, Medimade Co needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimade Co's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery.

QUESTION

The directors have now agreed to include going concern disclosures, while continuing to use the going concern basis of accounting.

You agree with Medimade Co's management that the going concern basis of accounting is appropriate under the circumstances. You have reviewed the draft disclosures and believe they are correct and adequate.

Indicate which form of audit opinion would be appropriate and how the going concern issue would be disclosed in the auditor's report.

The following scenario relates to questions 1–5.

Scenario

Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Medimade Co has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined.

You are the audit manager responsible for the audit of Medimade Co's financial statements for the year ended 31 March 20X7.

In addition to recruiting staff, Medimade Co needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimade Co's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery.

QUESTION

It is May 20X7. The directors have informed you that the bank overdraft facility is due for renewal next month, after the auditor's report is signed. They are confident that it will be renewed.

Which of the following audit procedures would be most effective in assessing whether or not Medimade is a going concern?

The following scenario relates to questions 1–5.

Scenario

Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Medimade Co has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined.

You are the audit manager responsible for the audit of Medimade Co's financial statements for the year ended 31 March 20X7.

In addition to recruiting staff, Medimade Co needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimade Co's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery.

QUESTION

Which TWO of the following statements describe the most direct impact the withdrawal of supplier credit has on Medimade Co's use of the going concern basis of accounting?

The following scenario relates to questions 1–5.

Scenario

Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Medimade Co has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined.

You are the audit manager responsible for the audit of Medimade Co's financial statements for the year ended 31 March 20X7.

In addition to recruiting staff, Medimade Co needed to invest $2m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Medimade Co's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery.

QUESTION

Which TWO of the following statements are correct with regards to the going concern basis of accounting?