F8 SCENARIO QUESTION DISCUSSIONS – Q5, Pilot Paper. Topic: Audit Review and Reports.

This is a discussion relating to Q5, on the Pilot Paper. I am working from the UK paper but both the UK and INT papers are similar. For a link to the international paper, go here:

https://www.accaglobal.com/pubs/students/acca/exams/f8/past_papers/int/f8int_2006_dec_ppq.pdf

Question 5 tests knowledge and application of Audit Reviews and Reports.

All three requirements of the question can be answered in columnar format, if you wish:

– ADDITIONAL AUDIT PROCEDURES in the first column
– IMPACT ON FINANCIAL STATEMENTS in the second column
– IMPACT ON AUDIT REPORT in the third column

The way the question is structured, you will need 4 AUDIT PROCEDURES, 3 EXAMPLES OF HOW THE FINANCIAL STATEMENTS WILL BE IMPACTED, and 3 EXAMPLES OF IMPACT ON THE AUDIT REPORT.

While there are no easy marks in the question, if you take each situation in turn and answer each of the requirements, then you should be able to score well.
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Now let’s look at the scenario.

The first thing to note, in paragraph one, is that Eastvale’s financial year ends in July 31st.

Then, in paragraph 2, we notice that it’s four months since the year end at Eastvale. And while the annual audit is almost complete, the report is not yet signed.

Four months since year end? That makes it the end of November. And as we see in paragraph 3, both of the significant events occurred in late November.

Now to analyse the events in conjunction with each question.

FIRE IN THE WAREHOUSE

(i) THE ADDITIONAL AUDIT PROCEDURES
– First we need to discuss with management when the fire happened, and what exactly happened.
– Then we need to estimate the value of the stock destroyed in the fire. How much is 60% of this stock worth to Eastvale?
– Then we can check the company’s insurance to make sure they are covered for such a loss.
– With so much stock gone, discuss whether or not Eastvale can continue as a going concern.
– Get written letters of representation from management to confirm Eastvale’s GC status.

(ii) IMPACT ON FINANCIAL STATEMENTS
– The fire is non-adjusting as it happened AFTER the period end. Thus, so long as Eastvale is still a GC, NO ADJUSTMENT TO THE FINANCIAL STATEMENTS is necessary.
– But as the impact of the event is likely to be material, it should be disclosed in the Financial Statements.

(iii) IMPACT ON AUDIT REPORT
– The matter could be highlighted in an EMPHASIS OF MATTER PARAGRAPH to bring it to to everyone’s attention.

BATCH OF CHEESE

(i) THE ADDITIONAL AUDIT PROCEDURES
– Look at legal correspondence relating to the claim against Eastvale.
– Hold discussions with solicitors
– Look at press reports about food poisoning. From this you can assess the impact on Eastvale
– Then hold discussions with the directors. All of this is to find out the amount of the claim, the impact of the claim and the likely outcome of the claim
– Obtain a written mgt representation letter to confirm Eastvale’s GC status at this stage, as in the case of the warehouse fire.

(ii) IMPACT ON FINANCIAL STATEMENTS
– Again, this event happened after year end, so it is non-adjusting. But mention it in a note to the Financial Statements.

(iii) IMPACT ON AUDIT REPORT
– The audit report WILL BE MODIFIED – but only if the directors believe the company will remain as a going concern when the auditors do not. If this is the case, then an ADVERSE OPINION on the financial statements will be included.

Otherwise, include an emphasis of matter paragraph to bring the matter to everyone’s attention.

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Hope this helps.

Si80