Question

Audit reports are of utmost importance as they are highly visible and often the auditor’s onlymeans to communicate with the users of the financial statements. For publicly listed companies with financial years ending on or after 15 December 2016, there is a newrequirement for an inclusion of a section titled “Key Audit Matters”.

(a)Provide one example of “Key Audit Matters” that a company mayinclude with justifications as to why the auditor may choose to include that particular issue.

(b) For each independent situation below, discuss the situation and recommend the most appropriate audit report for the situation.

(i) During the audit of Best Bakery Equipment, you found that a material amount of inventory had been excluded from thecompany’s financial statements. After discussing the problemwith management, you are convinced that it was an unintentional oversight. Management appropriately corrected the error on the financial statements prior to the completion of your audit.

(ii) S.W. Woo Ltd. leases its manufacturing facility from a partnership controlled by the chief executive officer (CEO) and the major shareholder Mr Woo. Your review of the lease agreement indicates that the rental fees are in excess of rental fees for similar buildings in the area. The company refuses to disclose this related party transaction in the notes to the financial statements.

Answer 1

Ans.(a). Example of Key Audit Matter- The company has opted to value its property, plant and equipment at fair value.

This can be included as key audit matter as because there can be various methods to value its property, plant and equipment such as the cost model or revaluation model or the fair value model. Each of these models will have a different impact on the profits of the company.

Ans.(b).(i). During the audit of Best Bakery Equipment, we found that a material amount of inventory had been excluded from the company’s financial statements. After discussing the problem with management, we are convinced that it was an unintentional oversight. Management appropriately corrected the error on the financial statements prior to the completion of our audit. Therefore, it was not the intention of the company to defraud its users. Hence, as an auditor I would issue a unqualified report.

Ans.(b).(ii). S.W. Woo Ltd. leases its manufacturing facility from a partnership controlled by the chief executive officer (CEO) and the major shareholder Mr Woo. Our review of the lease agreement indicates that the rental fees are in excess of rental fees for similar buildings in the area. The company refuses to disclose this related party transaction in the notes to the financial statements. Therefore, here the company is omitting to disclose a material item which is necessary for the understanding of the users of its financial statements. Hence, as an auditor I would issue a adverse report.