Zenith Co: subsequent events, going concern and the audit opinion

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• The customer's liquidation on 12 May is an adjusting event, because it gives evidence of a condition that existed at the year end (the customer was already in financial difficulty in January).
• An allowance (or write off) of up to $900,000 is needed, which is three times materiality, so it is material.
• The lawsuit relates to the recall in February 20X6, so the obligation arises from a past event before the year end, which may suggest an adjusting event and a provision if an outflow is probable and can be estimated.
• If an outflow is only possible, a contingent liability is disclosed instead, and a provision is not made, but it is not appropriate to say nothing, since $1,200,000 is four times materiality.
• The auditor should obtain legal advice or a letter from the lawyers, and discuss the likelihood of success with management.
• The auditor should perform a subsequent events review up to the date of signing, including reading minutes and inquiring about the current position of both matters.
• If management refuses to adjust or disclose, the auditor must consider the effect on the audit opinion.

Marks counted: 0 of 7

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Obtain management's assessment and the cash flow and profit forecasts for at least 12 months from the year end, and assess the assumptions and their reasonableness against past performance.
• Review the bank correspondence and the status of the refinancing negotiations, and obtain written confirmation of any agreed facility.
• Analyse the loan agreement for the repayment terms and any covenants, and check compliance.
• Review the events after the year end that may have an effect, including the customer liquidation and the lawsuit.
• Consider the support of any related parties or parent, and whether it is in writing and the party has the ability to provide it.
• Request written representations from management about its plans and the going concern assessment, as one form of evidence.
• Assess the adequacy of the disclosure of the material uncertainty in the financial statements.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• (a) The unadjusted debt of $900,000 is a material misstatement, and the omitted disclosure and provision of $1,200,000 is a further material misstatement.
• The auditor considers whether the effects are pervasive. If the misstatements are confined to specific items, a qualified opinion ('except for') is appropriate. If they are so significant that the financial statements as a whole are misleading, an adverse opinion is given.
• On the facts given, two material misstatements together, with a possible going concern issue, make an adverse opinion arguable, but a qualified opinion would be given if the effects are not pervasive. A reasoned conclusion is needed.
• (b) The going concern basis may be appropriate with a material uncertainty, but there is no disclosure, so there is a material misstatement of the disclosures.
• If the going concern basis is appropriate, but the disclosure is not adequate, a qualified or adverse opinion is given, depending on how pervasive it is, and the basis for opinion section explains the reason.
• If the uncertainty were properly disclosed, the opinion would be unmodified, with a section headed material uncertainty related to going concern.
• The report must have a basis for opinion section that describes the matter and quantifies the effect where possible.

Marks counted: 0 of 7