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5 (a) Explain the term ‘fraudulent financial reporting’, illustrating your explanation with examples. (4 marks)
You are the partner responsible for performing an engagement quality control review on the audit of Pluto Co, a listed company. You are currently reviewing the engagement partner’s proposed audit report on the financial statements of Pluto Co for the year ended 31 March 2009. During the year the company has undergone significant reorganisation, involving the discontinuance of two major business segments. Extracts of the proposed audit report are shown below:
Adverse opinion arising from disagreement about application of IAS 37 The directors have not recognised a provision in relation to redundancy costs associated with the reorganisation during the year. The reason is that they do not feel that a reliable estimate of the amount can be made, and so the recognition criteria of IAS 37 have not been met. We disagree with the directors as we feel that an estimate can be made. This matter is more fully explained in a note to the financial statements. We feel that this is a material misstatement as the profit for the year is overstated.
In our opinion, the financial statements do not show a true and fair view of the financial position of the company as of 31 March 2009, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Emphasis of matter paragraph The directors have decided not to disclose the Earnings per Share for 2009, as they feel that the figure is materially distorted by significant discontinued operations in the year. Our opinion is not qualified in respect of this matter.
Required:
(b) Critically appraise the proposed audit report of Pluto Co for the year ended 31 March 2009.
Note: you are NOT required to re-draft the extracts from the audit report. (9 marks)
(c) Explain the matters to be considered in deciding who is eligible to perform an engagement quality control review for a listed client. (4 marks)
(17 marks)as director feel releasable estimate could not be made in respect of redundancy costs,and as auditor could not indicate by how much amount provision is understated,profit over stated and liabilities understated,
I think director had placed limitation on the scope of audit since auditor should have made estimate of redundancy if auditor were provided by evidence,and indicated by that amount profit is over stated,liabilities understated
Am I right or wrong ?
I don’t see this as a limitation of scope! In my mind it’s a material disagreement, but not pervasive so should lead to an “except for” qualification
The question you should ask yourself is “Given that the rate of redundancy payments is statutorily defined, why are the directors not able to calculate ACCURATELY the amount to be paid?” and even if they don’t arrive at such a degree of precision, they should still be able to make a reasonable estimate
thank you sir,
also sir for different scenario I would also like to know will there be any hints and example of such hints that might indicate limitation of scope?
Where you could have expected sufficient appropriate audit evidence to be available, and it wasn’t or where you couldn’t have expected sufficient appropriate audit to be available, and it wasn’t!
For that first one, you may have thought that your earlier scenario was an example. But the directors COULD HAVE made the evidence available. It was there to be calculated and the auditor should have insisted that the directors should have at least made a reasonable estimate. By not doing so, the directors are failing to discharge their own duties and, provided the amounts involved appear to be material, the auditor is faced with a disagreement situation and a qualified opinion
Is that ok?
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