Notes: 1. Provide your responses to issue below by following the instructions at

Question

Notes: 1. Provide your responses to issue below by following the instructions at the end of the problem. 2. Submit in softcopy through instructor's email. 3. A chronological and logical arrangement of your responses will be rewarded. The Issue The audit of Crow C information technologies, for the year ended 30 June 2016 is nearly complete and the auditor's report is to be signed imminently. The following outstanding matters still require your consideration. The draft reported profit before tax and total assets for the year are S65 million (2015 S million) and S650 million (2015 $910 million) respectively. Crow Co is not a listed company Military research project During the year S7 million of expenses relating to a new military research project were recorded in the statement of profit or loss. The audit team was given brief summaries of the costs incurred but wher asked for further corroborating evidence; management stated that they had signed a confidentiality agreement with the military and were unable to provide any further details. The only additional information provided was that they anticipated the project to last for three years and that it may lead to a highly lucrative contract. Fire During the year a major catastrophe took place when a fire caused significant damage to the operations of the company, leading to production ceasing for several months. While operations have resumed, repairs are ongoing and it is anticipated that full production will not resume for at least another six months. Audit procedures revealed that the matter has been fully and satisfactorily reflected and disclosed in the financial statements and that it does not pose a significant risk to the going concern status of Crow Co. Instruction In respect of each of the matters described above, discuss the implications for the auditor's report and recommend any further actions necessary o, a designer and manufacturer of mobile (15 Marks)

Explanation / Answer

1. The instant case may result in a modified opinion. This is because the expense incurred is a material amount and the management is providing any records for verification. The contract being highly lucrative will not result the auditor in escaping from his work. He need to apply substantive audit procedures in order to get more information about the expenditure incurred for the contract and try to obtain corroborative audit evidence. If the auditor is unable to obtain sufficient and appropriate audit evidences and if the management is also in the contention of not to provide any information regarding the expenses, the auditor need to make relevant disclosures in his audit report and if required should give a modified opinion

2. A fire accident can result in the impairment of assets. The analysis of whether a disaster results in an impairment is often difficult after a disaster because there may be many uncertainties about the prospects of the assets. The auditor should consider the below implications and make necessary disclosures in his audit report.

The complete destruction of a long-lived asset that is not already fully depreciated would most likely result in a loss to the entity. In addition, for long-lived assets that have been damaged but will continue to be used, entities may be required to recognize impairment losses. U.S. GAAP on property, plant, and equipment and the impairment or disposal of long-lived assets in ASC 3601 requires entities to test a long-lived asset or group of assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

The impact of such catastrophe may trigger the need to test an entity’s finite-lived intangibles such as customer relationships, royalty, or franchise agreements for impairment. Entities should apply the recognition and measurement provisions in ASC 360.

It may lead to circumstances in which the utility of inventory on hand is impaired by damage, deterioration, obsolescence, changes in price levels, or other causes. Whether the impairment is caused by physical destruction or an adverse change in the utility of the inventory, entities should assess whether an inventory impairment or write-off is required in accordance with relevant standards, which address adjustments of inventory balances to the lower of cost or market.

Receivables from entities will also get affected and should be evaluated for collectability. Entities may incur additional write-offs of receivables deemed uncollectible or may be required to establish additional reserves on receivables.

Creditors are required to evaluate loans for collectability and assess whether a loan is impaired, which occurs when, on the basis of current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Assessing the extent to which insurance coverage exists may be challenging and require the assistance of an entity’s legal counsel. In determining the accounting for insurance recoveries, an entity should first perform an assessment like, Does the entity have insurance, and is the specific loss insured? The entity should consider whether “insurance” actually exists and whether the specific events are covered. For example, as discussed below, an entity may have finite insurance that does not necessarily transfer significant insurance risk such as Will there be disputes over the cause and extent of the damage? In determining the amount of expected insurance recoveries to recognize, an entity should consider the potential for disputes with the insurance company and its likelihood of prevailing and in accordance to that, the potential loss is to be recognized and required disclosures are to be made.

The auditor should consider all the above matters and in addition to above, he need to consider the subsequent events, evaluate the going concern assumption and should make necessary disclosures in his audit report.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.