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Exam 3: Unit 21-32

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Question 21

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Explain in not more than 500 words why the auditors would not consider a hurricane landing on the main office building and totally destroying it after the year end to be a non adjusting event?

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Adjusting and non adjusting events are d...

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Question 22

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Sniffit & Koff plc 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. Sniffit & Koff plc 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. To make matters worse, in the past the company has not invested sufficiently in new product development and so has been trying to remedy this by recruiting suitably trained scientific staff, but this has proved more difficult than anticipated. In addition to recruiting staff the company also needed to invest R12m 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 Consequently, some of Sniffit & Koff's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. As a result of the above the company's overdraft balance has grown substantially. The directors have produced a cash flow forecast and this shows a significantly worsening position over the coming 12 months. The directors have informed you that the bank overdraft facility is due for renewal next month, but they are confident that it will be renewed. They also strongly believe that the new products which are being developed will be ready to market soon and hence trading levels will improve and therefore that the company is a going concern. Therefore they do not intend to make any disclosures in the accounts regarding going concern. Identify any potential indicators that the company is not a going concern and outline the procedures the auditors should carry out in this situation.

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Indicators are
-Decline in demand
-Depen...

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Question 23

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An external auditor is required to carry out a final review to ensure their conclusions are supported by sufficient reliable evidence Select whether each of the statements below is true or false in connection with the final audit review

	True	False
a) Auditors should carry out analytical review procedures on the financial statements
b) The audit report should include a disclaimer to the effect that the auditor’s report is purely for the shareholders
c) Where audits are particularly complex or large the files should be subject to a hot review by a second audit partner before being signed off
d) All weaknesses in internal controls should be reported to management in a letter of weakness even if they have been reported in previous years

The audit of Bouncy Co is nearly complete and the financial statements and the audit report are due to be signed next week. However, the following additional information has just been presented to the auditor. The company's yearend was 30 September 2X17. The springs in a new type of mattress have been found to be defective making the mattress unsafe for use. There have been no sales of this mattress; it was due to be marketed in the next few weeks. The company's insurers estimate that inventory to the value of R1,750,000 has been affected. The insurers also estimate that the mattresses are now only worth R1,225,000. No claim can be made against the supplier of springs as this company is in liquidation with no prospect of any amounts being paid to third parties. The insurers will not pay Bouncy for the fall in value of the inventory as the company was underinsured. All of this inventory was in the finished goods store at the end of the year and no movements of inventory have been recorded post year-end. What actions should the auditors take and what will be the effect on the accounts for the year ended 30 September 2X17?

You are an audit manager with Spottit & Hope. One of your clients, Bolington Limited, has recently asked your firm to perform a limited review of the financial statements. During your review, you discovered a cash payment of $50,000. You have asked the company for details of this payment, and the directors have told you that it was an agency fee, and they cannot tell you any more details as the company would lose its competitive advantage. Profit before tax is $2m. Your audit supervisor is happy with this explanation, and has proposed a draft review report with the following opinion paragraph: 'Based on our review nothing has come to our attention which indicates that the financial statements do not give a true and fair view'. Discuss the validity or otherwise of the suggested opinion, and discuss the appropriateness of alternative opinions and suggest suitable wording for the opinion you consider to be most appropriate.

Use the information in the following paragraph to answer question You are a member of the audit team for the audit of Learnersinnit plc, a private provider of high quality educational services. The team have just completed the interim audit for the current year. You performed the work on the salaries system where you have noted the following issues: The company currently has over three hundred teaching and office staff, organised into several different departments. The staff are paid on a fixed scale with annual increments agreed by the board. The Salaries Department prepares one month's payroll from the names on the previous payroll, adding or deleting names as instructed by the personnel department. Details of increased pay rates resulting from promotion are also supplied by the Personnel Department. Sometimes, however, the Personnel Department is so busy that they forget to telephone the Salaries Department with details of staff changes or promotions. To correct these oversights, there is sometimes an extra payroll run to prepare additional payments where necessary. The payroll is prepared by either of the two Salaries Department staff, depending on whoever is available. The payroll calculations are usually checked for accuracy by the other employee in the department, unless one of them is absent through illness or is on holiday. The Personnel Department manager corrects any payroll errors identified on her own computer, which is part of the same computer network, and then signs the payroll electronically to indicate overall approval. She does not have time to authorise any additional runs which are necessary, however, as these are usually required urgently. Payments are made to staff by credit transfer directly to their bank accounts. Payments to statutory authorities, pension funds etc of the amounts deducted from employees plus the employers contributions are also paid by credit transfer within the required timescales. -Describe TWO different ways in which fraud could be carried out in the above salaries system.

The Chairman's Report of Pudding plc states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1·6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct. The audit senior has noted that an unmodified audit report should be given as the audit opinion does not extend to the other reports. Is the audit senior correct?

Chugalug Ltd has three subsidiary companies and is engaged in a joint venture with an Italian company called Intervole. It has an agreement with one of its major suppliers whereby they share information so they can arrange for materials deliveries on a 'just-in-time' basis. The wife of the managing director , who runs her own furnishings business, won a tender to supply and fit tables and chairs to the conference area in the head office. Chugalug is also part of a business consortium which shares good practice and lobbies the local Member of Parliament to make representations to the government on their behalf. This is operated through the local Chamber of Commerce. Chugalug owns shares in a rival company, Gluggit plc which it shows as an investment in its Statement of Financial position. a) What is meant by a 'related party' b) Which of the involvements of Chugalug shown above a not involvements with related party

Management representations are a source of audit evidence. These representations may be oral or written, and may be obtained either on an informal or formal basis. The auditors will include information obtained in this manner in their audit working papers where it forms part of the total audit evidence. Discuss the implications for the auditor of a small company, if the directors refuse to sign the Letter of Representation.

Discuss the difference between a review engagement and a statutory year-end audit.