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There was this last question of 5 marks in exam which asked that-
Management decided to close one of the unprofitable units and make staff redundant. Year end is 31dec 2018. Management announced the closure on 28 dec and also informed the client. Management is of the view that closure will take place in april 2019. Provision amount was 7.8% of profits.Question asked that management has decided to include provision for redundancy in current year’s FS (2018).
EXPLAIN THE IMPACT ON AUDIT REPORT.i concluded that report will be modified with emphasis of matter paragraph giving reference to provision amount. And opinion will remain unmodified.
Is it right ?Based on what you have written – yes. A provision can only be recognised if management has:
(a) a detailed formal plan (i.e. identifying the part of the business, location(s), employees affected and when) and
(b) raised a “valid expectation in those affected”
i.e. a constructive obligation arises.
So assuming that management’s announcement before the y/e included employees, the accounting treatment appears correct.
An EoM would be appropriate to draw users’ attention to the fact that the reported profit includes costs that will be incurred after the reporting date.
An EoM does not modify the opinion.Also there was this ques ..
Which two of the following will the auditors perform as part of the completion and review process
1. Check materiality level whether its still appropriate
2.test of details for subsequent events
3.perform analytical procedures to find discrepancies
The forth option i domt remember..
I have selected 2 &3
Correct ?It was actually a case question where ..there was a misstatement that amounted 3.4 % something of profits and 0.7 % something for revenue …so i thought 1st option could also be the answer.. what do you think ?
Yes ..the forth option was – amend audit plan to reflect the actual audit procedures performed ..so this was definitely not the answer ? Was it ?
I agree – not the 4th option. If you look at the syllabus, subsequent events definitely falls within review but also analytical procedures must be carried out in the overall review of financial statements. The auditor will also consider the materiality of uncorrected misstatements – but I don’t think that is the same as checking whether materiality used in the conduct of the audit is still appropriate – it’s a bit late in the process to decide that you should have carried out the audit to detect misstatements at a lower materiality threshold.
I think I would have gone with 2 and 3 – especially if 1 was relavant to another question.
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