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Audit reporting revision question 2 (NBAA, C2,NOV 2018)

You are the audit manager for three clients of your audit firm and you are reviewing audit files and draft audit reports submitted by your subordinates on your request. Extracts of the proposed audit opinions for the three clients are as given below:

Tegeta Ltd

Consistent losses that the company has been incurring for the past four years plus its serious liquidity problems do cast doubt on the going concern assumption made by management in the preparation of the company’s financial statements.

Management has however assured the auditors that the parent company is ready and has given assurance that they will provide financial assistance to Tegeta Ltd to cover its short term working capital. To substantiate this, the parent company has issued a letter of comfort to the auditors. You are sure that the company will continue to trade only if the assistance promised is materialized. The directors have disclosed this fact in the financial statements in their director’s report. The audit senior has recommended that a qualified opinion should be issued.

Maringo Ltd

The year-end of Maringo Ltd is 30th September. Maringo Ltd planned to conduct a physical inventory count on 30th September 2018. However, the warehouse caught fire which was caused by an electrical fault in the warehouse. The fire destroyed 40% of the inventory together with all the inventory records  and therefore making it difficult for the company to reliably determine the value of the remaining stock as there were no record to rely upon. They could however estimate stock values based on selling prices and profit margins for each line of inventory.
The audit senior stated that he was unable to obtain any reliable evidence on the  value of inventory which he considered material to the financial statements. The audit senior has recommended that a qualified audit opinion should be issued with an emphasis of matter paragraph.

Makuti Ltd

The year-end of Makuti Ltd is 31st December. In mid-February before the finalization of the audit, one of the major customers of Makuti Ltd known as Mikonge Ltd went into liquidation. At a meeting with all creditors of Mikonge  Ltd, the liquidator announced that all creditors would only get 20% of the amount that Mikonge Ltd owes them. Makuti Ltd refused to amend the receivables figure arguing that as at the end of the period, Mikonge Ltd was in good stand and capable to pay Makuti Ltd the  amount outstanding.
The audit senior agreed with the accounting treatment of Makuti Ltd and recommended that an unmodified audit opinion be issued.
Comment on the suitability of each of the recommended audit opinions above by clearly stating the arguments for or against the recommendations.

1 thought on “Audit reporting revision question 2 (NBAA, C2,NOV 2018)”

  1. Pingback: Auditor's responsibility for subsequent events (ISA 560) - ACCOUNTING CLASS

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