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Chapter 28
Case Study
Draw up a list of audit procedures Tickitt & Run, the auditors of
Bangi, should carry out in connection with Chemola
(Note these are indicative – there may be others)
Tickitt & Run will have to consider (and evidence):
How should the matters connected with Chemola appear in Bangi’s
own accounts?
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Examination question
(a) ‘Support letters’
As audit evidence:
ŶFormal confirmation of the support will be sought in the form of a letter of
support or ‘comfort letter’ confirming the parent company’s intention to keep
the subsidiary in operational existence (or otherwise meet its obligations as
they fall due).
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(b) Matters to be considered
Tutorial note: In broad terms these include the assessments of materiality,
what the draft auditor’s report and note disclosures mean, the implications
for the consolidated financial statements of the Capri Group and Moltisant’s
auditor’s report thereon.
Materiality
ŶCapri (Overseas) constitutes 30·6% of Capri Group’s profit before taxation
and 20% of the Group’s total assets (2X10 – 30·9% and 22·1% respectively)
Draft auditor’s report
ŶThe meaning of the basis of opinion paragraph (extract) is unclear in the
following respects:
– there is no reference to non-compliance with relevant IASs (IAS 17 ‘Leases’
and IAS 12 ‘Income Taxes’);
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ŶThat the opinion paragraph is unqualified implies that Marcel concurs with
the accounting treatments. (As the matter is material, at least in relation to
the finance leases, Marcel would have to qualify their opinion if they
disagreed with it.)
ŶThe note disclosures appear inadequate because, for example:
– it is unclear whether all lease payments relate to finance leases
or whether some are operating lease payments (which may
have been correctly accounted for);
ŶAlthough unclear, Marcel’s basis of opinion paragraph (extract) gives a
reason for non-compliance which is not included in the notes. This cannot
therefore be an emphasis of matter paragraph if it is ‘making good’ a lack of
disclosure in the financial statements of Capri (Overseas).
ŶConsistency or otherwise of the treatment/disclosure of finance-leased
assets and non-provision for deferred taxation with the previous year – both
in the financial statements of Capri (Overseas) and in Marcel’s auditor’s
report thereon. If the same situation arose in the prior year, Marcel’s current
year report should draw attention to the fact that this was previously
reported.
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the subsidiary’s financial statements (at least for consolidation purposes). In
this case Marcel’s’ auditor’s report should be redrafted as unmodified and
Moltisant’s auditor’s report would similarly be unmodified (in this respect).
ŶAlternatively, an adjustment can be made on consolidation of the Capri
Group’s consolidated financial statements. Moltisant’s auditor’s report would
then be unmodified.
Tutorial note: In some jurisdictions a principal auditor is permitted to base
the audit opinion on the financial statements taken as a whole solely upon
the report of another auditor, in which case such disclosure should be made
and the magnitude of the portion of the financial statements audited by the
other auditor indicated.
(ACCA)
Examination question