1. The following items of subsequent events are unrelated. For each of the following items, you are to indicate the required accounting treatment of the event. Assume that the external auditor has completed the field work and is preparing the auditor's report on the client's financial statements for the year ended 30 June 2013.
a. A large account receivable from a customer, ABC Company (material to the financial statement presentation) was considered fully collectible at 30 June 2013. ABC suffered a plant explosion on 28 July 2013. Because ABC was uninsured, it is unlikely that the account will be collected.
b. The court ruled in favour of the client company on 26 August 2013 for a lawsuit from a customer that involved alleged breach of contract in 2012. The client had provided for the full amount of the potential liability for the claim. The customer will not appeal the court's ruling.
c. On 15 August 2013, the client applied to the Securities Commission for the issuance of 20 million new ordinary shares of RM1.00 each. The proposed new issue represents 10% of the issued and paid-up share capital of the company as at 30 June 2013.
d. On 22 August 2013, Cheng & Co., a major investment adviser, issued an unfavourable report on the client company's long-term prospects. The share price of the company subsequently declined by 30 percent.
e. At its 5 July 2013 meeting, the board of directors decided to increase substantially the advertising budget for the coming year and authorised a change in advertising agencies.
f. On 30 July 2013, the company entered into a conditional sale and purchase agreement to acquire a 30% equity interest in ASF Designs Sdn Bhd at a consideration of RM1.9 million to be satisfied by cash payment.
2. Items listed below represent a series of unrelated statements, questions, excerpts and comments taken from various parts of an auditor's audit documentation.
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Sources
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a.
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During our audit we discovered evidence of the company's failure to safeguard inventory from loss, damage and misappropriation.
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b.
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To the best of our knowledge and belief, there have been no irregularities involving management or employees.
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c.
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Was the difference of opinion on the accrued pension liabilities that existed between the auditors and the actuarial specialist resolved in accordance with the firm's policy and appropriately documented.
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d.
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Our audit was designed to provide reasonable assurance of detecting misstatements as a whole. Consequently our auditor will not necessary detect all misstatement that exist due to error, fraudulent financial reporting or misappropriation of assets.
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e.
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There have been no communications from regulatory agencies concerning non-compliance with or deficiencies in financial reporting practices.
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f.
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An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statements.
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g.
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It is our opinion that the possible liability to the company in this preceding is nominal is amount.
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h.
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As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended 31 December 2012, and is currently in default under substantially all of its debt agreements. The company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These matters indicate a material uncertainty which may cast substantial doubt on the company's ability to continue as going concern.
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i.
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At the date of this report, the directors are not aware of any circumstances which would render any amount stated in the financial statements misleading.
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j.
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When payment is due on a supplier invoice, the accounts payable programme generates a cash disbursement report. Items that are approved for payments are entered into the cash disbursement program, and a cheque is printed.
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k.
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We are not aware of any professional reason that your firm should not accept the proposed appointment for ABC Sdn Bhd.
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l.
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Indicate in the space provided below whether this information agrees with your records. If there are exceptions, please provide any information that will assist the auditor in reconciling the difference.
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m.
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Blank cheques are maintained in an unlocked cabinet along with the cheque-signing machine. Blank cheques and the cheque-signing machine should be locked in separate locations to prevent the embezzlement of funds.
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n.
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The company has insufficient expertise and controls over the selection and application of accounting policies that are in conformity with approved accounting standards.
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o.
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The timetable set by management to complete our audit was unreasonable considering the failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information.
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p.
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Several employees have disabled the antivirus detection software on their PCs because the software slows the processing of data and occasionally brings false alarms. The company should obtain antivirus software that runs continuously at all system entry points and that cannot be disabled by unauthorised personnel.
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q.
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Please provide the auditors with the list of all claims and lawsuits in process at (date), including all threatened or impending litigation and other contingent liabilities of which you have knowledge as legal counsel of the company.
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r.
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The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
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s.
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In planning the sampling application, was appropriate consideration given to the relationship of the sample to the assertion and to preliminary judgements about materiality levels?
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Below is a list of the likely sources of the statements, questions, excerpts and comments. Select for each item, the most likely source. A source may be selected once, more than once or not at all.
List of Sources:
A. Auditor's communications to those charged with governance.
B. The directors' report under Section 169 of the Companies Act 1965.
C. Audit inquiry letter to legal counsel.
D. Lawyer's response to audit inquiry letter.
E. The auditor's report.
F. Letter to management or those charged with governance on material weakness in internal control.
G. Director's statement on internal control.
H. Auditor's engagement letter.
I. Conformation request to the banks.
J. Accounts receivable confirmation request.
K. Documentation and questionnaire on internal control.
L. Explanatory paragraph of an auditor's report.
M. Engagement partner's review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessor auditor's communication with successor auditor.
3. Your firm is the auditors for Excel Sdn Bhd, a large construction company. During the audit for the year ended 31 December 2006, you were informed by the managing director that the company has recently lost a major government contract. You know that Excel's projections include a major share of the work from this contract. The company has been experiencing some cash flow difficulties, although not unusual in this industry. Management has recently fully extended their bank credit facility in order to pay day to day expenses. The audit partner is concerned that the company may be facing going concern problem, but the managing director maintains that they intend to cut back future capital expenditure to alleviate the going concern issue.
Required:
a. Identify five indicators of a financial nature that may raise doubt on an entity's ability to continue as a going concern.
b. In addition to the plan of action mentioned by the managing director, what are other possible mitigating factors that may help a company to alleviate its going concern problem?
c. What evidence should the auditor obtain with respect to management's plan about the various mitigating factors identified in part (b)?