NATIONAL UNIVERSITY OF SINGAPORE NUS BUSINESS SCHOOL ACC 3701 –

ASSURANCE AND ATTESTATION Academic Year 2018/2019 Semester 1

Case Set 7: Audit Finalisation, Subsequent Events & Going Concern

Question 1

You are an audit manager in Eagle Eyes Chartered Accountants, and you are in-charge of the
audit of Avatar, a company listed on the Main Board of the Singapore Exchange, for the year
ended 31 December 2017.

Your team had performed field work at Avatar in October 2017, and for 2 weeks in late
January 2018. Profit before tax for the group after audit adjustments amounted to $100
million and total shareholders’ equity amounted to $500 million. The audit partner is about to
sign the audit report in a week’s time, on 27 February 2018. You have become aware of the
following events:

(a) On 2 February 2018, an earthquake damaged Avatar’s plant in Taiwan, causing damages
estimated to be $10 million.

(b) On 5 February 2018, Avatar announces a public offer for all outstanding shares of
Nanosmart Technologies Limited, listed on the Singapore Exchange.

(c) On 10 February 2018, a shipment of coltan, a rare mineral used for the manufacturing of
electronic capacitors in mobile phones, arrived from eastern Democratic Republic of the
Congo. According to Mr Lim, Avatar’s finance manager, this shipment with invoiced
value of $20 million, was ordered in November 2017 and was purchased, on FOB
shipping point. No entry had been previously made for this transaction.

Shipping point can inspct contracts agreements,

want to know
Exact date of shipment (bill of lading)
Value (purchase invoice)

Why is this big shipment omitted? Why is it important to know what is the cause of this
omission. One time or recurring? Recurring can be due to systematic error due to
deficiency in controls  likely to appear in other area as well.

(d) On 15 February 2018, the court awarded to an employee damages of $10,000 for
personal injury claim arising from five years of exposure to hazardous chemical waste
products created during the manufacturing of a line of electronic capacitors.

(e) Announcement by top management on 10 February 2018, of 3 months’ bonus for the
financial year ended 31 December 2017. The company has been paying bonus every year
over the past decade.

(f) Avatar’s legal advisor, Loon & Loon, told you over the phone today that Avatar is
currently involved in one unresolved lawsuit. The lawyer is of the opinion that Avatar is
likely to win the suit and win damages of $2 million.
Required:

(1) For each of the events above, describe in detail:

(i) What changes, if required, are needed to be made to the financial statements already
drafted (together with reasons for proposing any change); and
(ii) How you would deal with the situation, including any audit procedures you intend to
carry out.
(2) On 20 February 2018, the Court of Appeal overturned the earlier court decision in event
(d) and instead awarded damages of $2 million to the employee. The CFO also then
disclosed that he realised 1,000 other employees have also submitted claims relating to
exposure to chemical waste, with total claims amounting to $1 billion. Explain briefly
what impact would this have on the audit report you would issue?

(3) Suppose it is now 2021. In 2019, another audit firm, Veri-Zun Audit LLP, had taken over
the audit of Avatar. You have just read news reports about the arrest of Avatar’s CEO and
CFO for committing a fraud and the resulting assets stolen amounted to $10 million in
2017. The audit of 2017 and 2018 financial statements had not uncovered any
irregularities and audit reports issued for those financial statements were unqualified.
Explain what you would do in these circumstances.

Question 2
Westland Group Ltd

In the December 31 2017 audit of the financial statements of Westland Group, you found
several issues that you think may indicate possible adjustments to the company’s books. The
balance sheet and income statement materiality for the audit of Westland financial statements
is $75,000. The issues are listed below:

1. The company’s financial statements did not include an accrual for bonuses earned by
senior management in 2017 but payable in March 2018. The aggregate bonus amount
was $125,000.

2. Equipment originally costing $725,000 that was fully depreciated with a remaining
residual value of $60,000 was sold for $85,000 on December 29, 2017. The purchaser
agreed to pay for the equipment by January 15, 2018.

3. Based on close examination of the client’s aged accounts receivable trial balance and
correspondence files with customers, the auditor determined that management’s
provision for bad debts is overstated by $44,000.

4. Expenses totalling $52,000 associated with the maintenance of equipment were

inappropriately debited to the equipment account.

5. Marketing expenses of $43,000 were incorrectly classified as cost of goods

sold. Required:

(a) Determine the adjustments that you believe must be made for Westland’s financial
statements to be fairly presented. You may prepare an audit schedule using the following
format:

POSSIBLE ADJUSTMENTS – DR (CR)

Non-
Description A/c dr. Total Current Current Non- Income Expense
A/c cr. amount current liabilities current
assets assets liabilities
(b) What is your conclusion about the financial statements if the audit findings are not
corrected by Westland management before you issue the audit report?

Question 3:
Adapted from SACQ Assurance Foundation exam

OM Pte Ltd (OM) is a tool supplier that supplies the marine sector. Its customers include
shipyards and vessel operators. The company's year-end is 31 March 20x7.

Revenue for 20x7 was lower than that for 20x6, because of the general slowdown in the
marine sector. The following ratios were calculated using the trial balance figures as part of
the analytical procedures during the audit planning stage. The trial balance figures are
preliminary, as year-end procedures, such as impairment analysis, have not yet been
performed.

31 March 20x7 31 March 20x6

Receivables turnover (in days) 100 60
Inventory turnover (in days) 120 90
Quick ratio 0.8 1.1

Other information obtained during planning meeting:

The Cash and Cash Equivalents balance at 31 March 20x7 was $8 million (20x6: $32
million). There was a $40 million bond payable to various individual bondholders and some
corporate bondholders, and $20 million of the bond is repayable on 30 September 20x7. The
management of OM is seeking a repayment extension from these bondholders.

OM obtains its main supplies under a distribution agreement that stipulates an annual
minimum volume commitment. If OM buys below the minimum volume, the supplier has the
right to terminate the distribution agreement and cease supplying to OM by giving one
month’s notice.

OM's management has appointed an estate agent to sell its head office building to raise cash.
If the sale is successful, OM will move its head office function to a rented office.

Required:

(a) Identify FOUR indicators that OM Pte Ltd is facing significant uncertainty affecting its
ability to continue as a going concern. For each indicator, explain how it affects the
going concern assumption for the company.

(b) Describe the audit procedures to verify the validity of the going concern assumption for
OM Pte Ltd.

(c) In accordance with Singapore Financial Reporting Standard (SFRS) 1 Presentation of

Financial Statements, describe how the going concern issue should be addressed in the
financial statements if OM Pte Ltd is a going concern, but faces material going concern
uncertainty.
(d) Assuming OM Pte Ltd is a going concern, but faces material uncertainty related to the
going concern assumption, describe the impact of this situation on the audit opinion and
the audit report if:

(i) OM Pte Ltd’s financial statements are prepared in accordance with Singapore
Financial Reporting Standard (SFRS) 1 Presentation of Financial Statements; and

(ii) OM Pte Ltd’s financial statements are not prepared in accordance with Singapore
Financial Reporting Standard (SFRS) 1 Presentation of Financial Statements.

Question 4:

Guarantee of interest payments/ Contingent Liability

Novel has guaranteed the payment of interest on the 10-year bonds of Newman Pte Ltd, an
associate company. Outstanding bonds of Newman Pte Ltd amounted to S$5 million with
interest payable at 5% per annum, due on 1 June and 1 December of each year. The bonds
were issued by Newman Pte Ltd on 1 December, 2014 and all interest payments have been
met by the company with an exception of the payment due on 1 December, 2016. It is very
likely that Newman will default on the interest payment so Novel states that it will pay the
defaulted interest to the bondholders on 15 January, 2017 but has not updated its accounting
records in relation to this matter.

Required:

For the audit of Guarantee of Interest Payments,

(i) Describe THREE audit procedures you would perform.

(ii) Describe the nature of the adjusting entries or disclosure, if any, you would make.