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I’m having trouble figuring out what does the examiner wants from discussing “implication” in a question.
Example taken from JUNE 2015 Question 5 Nidge Co and Darren
Extract from question:
(a) Darren Co is working on a major contract relating to the construction of a bridge for Flyover Co. Work started in July 2014, and it is estimated that the contract will be completed in September 2015. The contract price is $20 million, and it is estimated that a profit of $5 million will be made on completion of the contract. The full amount of this profit has been included in the statement of profit or loss for the year ended 31 January 2015.
Darren Co’s management believes that this accounting treatment is appropriate given that the contract was signed during the financial year, and no problems have arisen in the work carried out so far.Required:
Discuss the implications of the matters described above on the completion of the audit and on the auditor’s report, recommending any further actions which should be taken by the auditor.Do I have to state what is the issue, the materiality, the mistatement(s), and effect on the audit report and opinion?
Implications = impact of the accounting stds on the FS and effect on the auditor’s report
Akm, please stay away from answering questions on this forum
The title of the forum gives you a clue as to its intended use – it’s called “Ask ACCA Tutor” and, to my knowledge, you don’t qualify for that role
You are welcome to answer questions in the general forum and you are equally welcome to post your own questions on this forum
Just please don’t answer other students’ questions
Ok?
Chun Yee, where a question is asking for implications, the examiner is asking you to consider how the client’s actions and accounting treatment coincide with the official accounting standards
The implications of Darren’s treatment of the Flyover contract is that the results for the year are seriously overstated, the financial statements contain a material misstatement and the auditors have no choice but to qualify their opinion on the grounds of incorrect accounting treatment giving rise to a material disagreement
You ask about the issue, the materiality, the misstatement, the effect of the audit report and on the audit opinion
Mention of all of those would sensibly be included within an answer – we’re 6 months in to a 14 month contractso on an empirical basis it’s unlikely that more than half the profit has been earned in the accounting year to 31 January
Further implications would be the need to ask the board to amend the financial statements. Dependent upon their reaction, the auditor is facing giving a qualified opinion (it’s unlikely to be pervasive) with the wording of “except for”
The audit committee should also be informed and the matter could also be the subject of a KAM paragraph
But further than this is the worry that this is not the only contract that Darren is involved with either this year or in previous years so there’s a distinct possibility that comparative figures may need adjusting.
This will only be determined following discussion with the board
Is this a new audit for our firm? If not, do we need to check on our PII?
Is this a standard policy that has been adopted by Darren and, if so, is there (or rather, there is!) a need to consider the competence of Darren’s CFO
We can’t tell from the extract that you have posted whether Darren is publicly quoted but with contracts with values of $20 million there seems to be a good chance that it is.
The board would need to consider making an announcement to the stock exchange as soon as the extent of the breach of accounting standards was confirmed and quantified
That could possibly be avoided if the board still had the time and the inclination to amend the figures
But, of course, the extent of your answer depends 100% on the number of marks available and therefore the time available for writing this lot out – a 20 mark part question is only worth 36 minutes of which 10 minutes is needed for reading the requirement, reading the question, planning an answer (with 20 separate markable points) and re-reading the requirement
Does that answer it for you?
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