JonArc & Co - Requirement (a)

Required: (a) State the additional audit procedures and actions you should now take in respect of the above matter.

(6 marks)

Note of caution!!
This is not a normal audit procedures question asking for typical audit tests. You need to make sure you understand what stage of the audit you are at and consider what sorts of procedures/actions are now relevant.

You need to provide examples of procedures relevant to the scenario. In order to achieve the marks available you must be specific about exactly what you are going to do and why. Imagine that you are explaining procedures to an audit novice who is going to carry them out. If you said "check the invoices" they wouldnt know what invoices to "check" and they wouldnt know what they were "checking" them for. A better instruction would be "inspect a sample of sales invoices and confirm that the price quoted is the price recorded on the sales ledger to ensure that accounting records are accurate."

JonArc & Co - Requirement (a)

"You are the audit manager in JonArc & Co. One of your new clients this year is Galartha Co, a company having net assets of 15 million. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Accounting Standards suggest that depreciation should be provided." The fact that the audit work has been completed is a vital clue: you have finished your main audit procedures and you are now reviewing the working files with a view to signing the audit report. Therefore the procedures you are asked to consider are not audit tests, you have already done these! Re-auditing buildings is not relevant: you have already done this and repeating those tests will be a waste of time and resources.

What you are asked to consider is what you, the audit manager, now have to do faced with the fact that directors have not followed accounting regulations. This is typical of the completion stage of an audit. What you must consider is how to resolve this issue before putting ink to paper on the audit report. A review of the completion/reporting chapters of your complete text will certainly be of assistance on this question.

International Accounting Standards

The nature of the standards is irrelevant to the question: they could be UK, US or International. The key information is that, according to the relevant standards, the directors should have provided for depreciation but they have chosen not to.

JonArc & Co - Requirement (b)

Requirement: (b) Explain the meaning and purpose of each of the above extracts in your draft audit report.

meaning
What does the extract mean in plain English? Imagine you are trying to explain the extract to someone with no knowledge of auditing.

purpose
Why is the extract in the audit report? What service does it provide? What value does it add? Remember who the likely readers of the audit report are and what information/assurances they are seeking.

Tackling part (b)

JonArc & Co - scenario analysis of part (b)

1. 'We conducted our audit in accordance with International Standards on Auditing. Those Standards require ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the finan free of material misstatement (remaining words are the same as a normal unmodified report).

Notes
Why are standards (auditing and ethical) important to modern auditing? Try and recall why these were adopted in the first place.

2. As discussed in Note 15 to the financial statements, no depreciation has been provided in the financial sta practice, in our opinion, is not in accordance with International Accounting Standards.

Notes
Who needs to know this information and what benefit does it provide them with?

3. The provision for the year ended 31 September 2007, should be 420,000 based on the straight-line meth using an annual rate of 5% for the buildings.

Notes

What is the benefit of providing such specific information? Try and imagine a readers position if you didn details.

JonArc & Co - scenario analysis of part (b)

4. Accordingly, the non-current assets should be reduced by accumulated depreciation of 1,200,000 and the profit for the year and accumulated reserve should be decreased by 420,000 and 1,200,000, respectively.

Notes
Again, consider the position of the reader if this information was not provided by the auditor.
5. In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and fair view ... (remaining words are the same as for an unmodified opinion paragraph).

Notes
This is the most straightforward element of the report. However, make sure you explain the purpose of the key wording, i.e. "except for," and how this changes the nature of the opinion for the reader.
The extracts have been numbered to help you refer to them in your answer.

JonArc & Co - Requirement (c)

Requirement: (c) State the effect on your audit report of the following alternative situations: i. ii.

Depreciation had not been provided on any non-current asset for a number of years, the effect of which if cor would be to turn an accumulated profit into a significant accumulated loss. JonArc & Co were appointed auditors after the end of the financial year of Galartha Co. Consequently, the au could not attend the year-end inventory count. Inventory is material to the financial statements.

Note: you are not required to draft any audit reports.

(4 marks)
iii.

Technical assistance
If the auditor concludes that the financial statements are free from material misstatement then they issue a standard (unmodified) "true and fair" opinion. There are two reasons why the auditor would modify their opinion: 1. There is a material misstatement in the accounts; or 2. The auditor is unable to gather sufficient appropriate evidence. Once the reason for modification is established the auditor must consider whether the issue is either:

a. Material but restricted to a small area of the accounts, meaning that the remainder of the accounts are true a ("except for"); or b. Pervasive, which means that the accounts as a whole are unreliable ("adverse" or "disclaimer").