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Hi I would like to ask for your help in identifying the risks of the scenarios below :
i. Tredegar Ltd’s year end is 31st December 2013. Since the year end the company has
been approached by a competitor Anglesey Ltd which is considering a takeover bid.
Anglesey Ltd has informed the Board of Tredegar Ltd that they will review the audited
accounts before deciding on the takeover bid.
ii. Goitre Ltd’s year end is also 31st March 2014. During the year the Finance Director of 8
years was asked to leave the company following a scandal concerning the company’s
tax affairs. You are aware that the Finance Director is suing the company for unfair
dismissal. The Finance Director has yet to be replaced.
iii. Coity Ltd’s year end is 31st January 2014. The company has recently upgraded its
accounting software and IT systems. The new systems were installed in August 2013
and the company was running both the old and the new systems in parallel until
December 2013. The company has invested £1.4 million in the new system and has
financed this through a short term loan with the bank.for part 1 what is the associated risk of acquisition of a company? for part 3 is the risk having a short term loan not being able to repay in due time for a large sum of money?
Thank you.I can really only advise on what is correct for ACCA exams. Perhaps this is what you are looking for https://lgslib.files.wordpress.com/2015/11/examiners-commentaries-201432.pdf
From an ACCA perspective, i would increase audit risk in relation to the audit of Tredegar because Anglesey is seeking to rely on the audit opinion. However, if the audit is nearing completion there is little that the auditor can do about this other than take extra precautions to reduce professional liability (but this would be an AAA topic, not examinable in AA).
iii essentially yes – going concern risk is increased because non-current assets should not be financed with short-term liabilities.Why is Anglesey seeking to rely on the audit opinion increase audit risk? So the risk in this case lies with the audit opinion not with the fact that the competitor is going to take over the company and that the company is not thriving?
Please refer to our notes – on page 56 – audit risk is the risk that the auditor gives an inappropriate opinion. The “threat” of takeover increases the risk of misstatement – for example, management may omit some disclosure or misstate amounts (fraudulent financial reporting) for any number of reasons – e.g. to inflate the offer price. The auditor cannot revisit the entire audit in the light of an uncertain event after the reporting date so this increases the risk that the audit opinion is inappropriate. There are many reasons why one company may wish to takeover another – it doesn’t mean that the target company is not thriving – it could mean quite the opposite – but this is not a topic for AA.
Frederick is planning to expand his company by opening three new stores during july 2001 and in order to finance this, in march 2001 the company obtained a $3m bank loan. this is repayable in arrears over five years in quarterly instalments, in preparation for the expansion, the company is looking to stream line operations in the warehouses and is planning to make 60 staffs redundant after the year end, No decision has been made as to when this will be announced, but it is likely to be in May 200.
What are the audit Risk and Responses
It is not my role to write answers to questions – if you have this question in a revision kit you presumably have the answers also.
Thank You, I do not have the question in a revision kit, i think i know the answers but i wanted to see it from another school of thought, but either way, thanks for your time
You could ask a fellow student in the AA forum rather than this ask the tutor forum:
https://opentuition.com/forum/acca-forums/acca-aa-audit-and-assurance-forums/
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