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Appropriateness of Going Concern |
Mitigating Factors |
Intense competition in the Market |
One of the main concerns for the management of the company is the level of competition in the market which can affect the profits and therefore, it is imperative that a proper strategy is developed so that the competitive pressure can be managed (Minutti?Meza 2013). The management of the company is looking to follow a low cost strategy so that low fare can be charged from the clients so that more customers can be attracted. |
Appropriate Flow of cash |
The senior officials of Komsu Air Limited have been able to maintain its working capital which is a sign that the cash flows are positive and this is a good sign for the business. The management needs to consolidate such a factor and further ensure liquidity is maintained by implementing proper costs control practices in the business. |
Asset position of the Business |
One of the main mitigating factors which can be suggested to the management of Komsu Air Limited for improving further the asset position is to follow a wealth maximization principle and invest in developing better quality of products so that both tangible and intangible assets can be created and portrayed in the financial reports. |
Recall and Refunds of air conditioning system |
The business follows contract basis of sales and on the basis of the same entire revenue generation for the business is dependent. The business needs to look to further improve the quality of its products and implement an innovative system so that more customers can be attained (Sundgren and Svanström 2013). At present, the business faces an issue which is related to bad quality of its air conditioning system for which the client has asked for a refund. This situation needs to be improved as the same can hamper the reputation of the business in a drastic manner. The management needs to impose proper quality control measures. |
The change which has been made in the computerized system has to be documented and this would be the first thing that the auditor would verify. The auditor would also weigh the changes and identify the benefits which are related to the same so that the change can be justified (Sultana, Singh and Van der Zahn 2015). In addition to this, the auditor would also require confirmation from those charged with governance as to whether they authorized the change and whether the same would done under supervised environment or not. Finally, the auditor would also confirm whether some tests of accuracy has been done on the system or not.
In order to assess the efficiency and effectiveness of the new inventory control system, the auditor would be conducting test of controls. The auditor would be looking for the results to prove that the system is accurate and it can effectively keep track of the flow of inventory in and out of the process. The months which would be considered would be the busiest months the entire period so that a true estimation can be gained regarding the flow of inventory of the business and proper track can be maintained for the same. In this manner, the auditor would be able to form a judgement on the effectiveness of the new system.
The auditor always needs to refer to complete set of data for the entire period so that a proper opinion can be formulated regarding the effectiveness of the governance system of the business. The auditor just cannot consider 6 months and on the basis of the same take decisions for the end period as well. This is because the auditor cannot guarantee that the management of the company would work with the same level of efficiency and effectiveness. This is one of the reasons that the auditor needs to apply the audit procedures considering the results for the entire period. . The auditor in such circumstances can rely on sampling techniques for forming an opinion but cannot consider the first six months for forming an opinion on the internal control of the business. The decision regarding nature, timing, or extent of audit procedures and test of control depends on the judgement of the auditor (Mock and Fukukawa 2016). The auditor needs to refer to all the transactions and estimates of the year so that a proper judgement can be passed on the effectiveness of internal control system of the business.
(a) Key account balance at risk:
|
(b) Key assertion at risk: |
(c) Explanation: |
d) Substantive test of detail/ Audit Process |
Account Receivable |
The key assertions which is at risk is assertion of cut off and assertion of occurrence |
The account receivable for the business has fallen significantly as one of the main suppliers of the company is facing difficulties. In such a scenario, there is a risk that the debtor’s amount might be overstated so that appropriate results can be demonstrated (Houmes, Foley and Cebula 2013). The auditor needs to ensure that the balances are fairly represented in the financial statements |
The auditor would be applying verification of the account balances so that it can be established that the asset relates to that particular period. In addition to this, the auditor would also be applying external confirmation procedures so that confirmation can be obtained from the debtors director regarding the balances which is portrayed. The auditor of the business would be reviewing each and every transaction especially the credit sales made by the business so that accuracy can be established for all transactions (Titera 2013). The auditor in such a scenario can also apply sampling techniques so that proper population can be considered for collecting audit evidences for the business. |
Debt Capital |
The key assertion which is at risk is assertion of valuation and assertion of existence |
The debt capital of the business forms an important part of the capital structure of the business and therefore it is imperative that the same shows appropriate valuation. The management also needs to check if the debt represented actually exists in reality or the same has been cooked up. |
The debt capital of the business needs to be verified by the auditor by applying substantive procedure of verification. The auditor, in this scenario would also apply external confirmation from the bank to confirm the actual debt which is outstanding for the business at the end of the period. The auditor would also check the line of credit and its limit which is offered by the business and ensure that the same is fairly represented in the financial statements of the business. The management of the company would also check the repayment schedule for the debts so that the valuation of the same and existence of it can be verified. It is the responsibility of the auditor to properly assess if the information which is represented in the annual accounts are showing true and fair view of the financial situation of the business. |
Key audit matters are important transactions of a business which as per the judgement of the auditor is quite significant from the perspective of the auditor. Therefore, it is a requirement that the auditor points out such transactions in his report so that proper level of transparency is maintained. The key audit matters are often considered to be very important and this is the area where there is a likely of being misstatement. As per the provision of ASA 701, the auditor needs to identify key audit matters for the business and appropriately include the same as an extension of the auditor’s report. Therefore, it can be said that the auditor needs to include the same so that the investors are well aware of the risky aspects or transaction and on the basis of the same informed decisions can be taken by the investors. It is further imperative that the Key audit matters are included in the financial reports by the management and the same also needs to be published as per the requirements of ASA 701. With appropriate reporting of key audit matters, the company is able to maintain transparency and a level of accuracy while reporting key transactions of the business.
Subsequent Event |
Type |
Treatment |
issue shares in a private placement on 15 August |
Non- Adjusting event |
The management of the company does not require to make changes in the financial statements as the event is to be taking place in the next period. The senior management of the company can inform the shareholders that such new shares would be issued in the AGM of the company |
Purchase of a 60 per cent stake in another company |
Adjusting Event |
The management of the company must include in the notes to accounts the decision of merger or takeover of another company so that the investors are also well aware of the changes which are to be brought about in the operations of the business. This is a major change and therefore, it is imperative that the management include the same in proper notes to accounts regarding the event. The shareholders are required to have relevant information regarding the same so that they can appropriate make decisions regarding investments. |
Issuance of Writs against the company |
Adjusting Event |
The management of the company needs to create proper provisions in the books of accounts regarding any losses which the business might face. In addition to this, the management also needs to include proper notes in the accounts section so that a level of transparency is maintained in the reporting framework of the business. The case shows that the claimants have proof and therefore, the likeness of suffering a loss increases. |
Previously considered Doubtful debts have been recovered by the business which requires adjustments |
Adjusting Event |
The management of the company needs to make necessary changes in the books of accounts and ensure that the financial statement are showing true and fair view of the situation and therefore changes are required to be made. The recovery of doubtful debts would enhance the revenue of the business and directly impact the profits and therefore changes are imperative. |
Issues |
Audit Opinion |
Explanation |
Substantiating vouchers or receipts for more than 55 per cent of its expenses not recorded
|
The audit opinion which the auditor would be issuing qualified report. |
The auditor would issue a qualified report as the management has not recorded properly the expenses and also not maintained proper notes to accounts for the same. This would represent in misrepresentation of information. The expenses of the business forms a major part of the profit and losses statement and therefore any misstatement in the same would impact the profits of the business directly. |
Overvaluation of Unsold Property. |
The audit opinion which the auditor would be issuing qualified report as the nature of the misstatement is material |
The auditor would be issuing a qualified report as unsold properties are important segments of the assets any misrepresentation in the same would impact the financial position of the business and mislead the investors of the company. The auditor also needs to check provisions for depreciation and impairments if any applicable on the same. |
Overvaluation of properties |
The auditor in such a case would issue unqualified report considering the amendments made by the management |
The auditor would be issuing a unqualified report as the management has agreed to make changes in the reporting process and ensure that the material misstatement is kept at a minimum. |
Fall in the value of Currency |
A unqualified report would be issued by the auditor as the crisis is due to the circumstances and not due to the conceptual framework of the business. |
The auditor would be issuing unqualified report as the management of the company has proper reported all aspects in the books of accounts but it is due to circumstances that some misrepresentations have been identified which cannot be amended. The fluctuation in currency value poses a serious threat to the revenue and also to the reporting framework. In such times, proper measures should be taken so that transparency is maintained. |
Houmes, R., Foley, M. and Cebula, R.J., 2013. Audit quality and overvalued equity. Accounting Research Journal.
Kaawaase, T.K., Assad, M.J., Kitindi, E.G. and Nkundabanyanga, S.K., 2016. Audit quality differences amongst audit firms in a developing economy. Journal of Accounting in Emerging Economies.
Minutti?Meza, M., 2013. Does auditor industry specialization improve audit quality?. Journal of Accounting Research, 51(4), pp.779-817.
Mock, T.J. and Fukukawa, H., 2016. Auditors' risk assessments: The effects of elicitation approach and assertion framing. Behavioral Research in Accounting, 28(2), pp.75-84.
Mock, T.J., Bédard, J., Coram, P.J., Davis, S.M., Espahbodi, R. and Warne, R.C., 2013. The audit reporting model: Current research synthesis and implications. AUDITING: A Journal of Practice, 32(Supplement 1), pp.323-351.
Sultana, N., Singh, H. and Van der Zahn, J.L.M., 2015. Audit committee characteristics and audit report lag. International Journal of Auditing, 19(2), pp.72-87.
Sundgren, S. and Svanström, T., 2013. Audit office size, audit quality and audit pricing: evidence from small-and medium-sized enterprises. Accounting and Business Research, 43(1), pp.31-55.
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of Information Systems, 27(1), pp.325-331.
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