Hi. I have a doubt in musitastic co - audit risk qn.
The scenario is
In June 20X5, Musitastic Co received notification that the music licensing authority is investigating complaints that many of the music teachers had breached copyright regulations by photocopying printed music for use in their lessons. The directors have informed you that they do not intend to provide for or disclose any potential fines, as they believe that they have the required permissions and that Musitastic Co has no legal liability.
So it's an audit risk
Musitastic Co received notification that the music licensing authority is investigating complaints that many of the music teachers had breached copyright regulation.
So the audit risk explanation that I have written is
If it is probable that the fines are payable by Musitastic Co, a provision is required. If it is possible rather than probable, a contingent liability disclose would be necessary.
As the finance director did not provide for or disclose any potential fines, there is a risk over the compleness of any provisions or contingent liabilities. This could result in understatement of provisions and expenses and an overstatement of profit if a provision is required.
The auditors response that I have written is
Discuss with director the rationale for not recognising the provision or contingent liability.
Yang and Co should contact the lawyer of Musitastic Co to ascertain the outcome of the investigation.
Is this correct?