You are the audit manager of David & Goliath (DG) and you are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The audit seniors have raised the following issues:
Summit Ltd (Summit)
Summit is a large provider of marketing services to the tourist industry. Summit’s year end is 31 December; however, subsequent to year-end the company’s sales ledger has been corrupted by a computer virus. Summit’s finance director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables and there are no backups available for the sales ledger. All other accounting records are unaffected. Summit’s revenue is $15.6m, its receivables are $3.4m and profit before tax is $2m.
Green Ltd (Green)
Green is a large stationery company that has experienced difficult trading conditions and as a result it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork and it shows a significant net cash outflow. Management are confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the audit senior is highly sceptical about this. The prior year financial statements showed a profit before tax of $1.2m; however, the current year loss before tax is $4.4m with owners’ equity close to zero and the forecast net cash outflow for the next 12 months is $5.2m.
REQUIRED
Discuss the impact on the financial statements and of the audit of each issue, including an assessment of whether it is material.
For each issue, design two (2) procedures that the audit team should undertake at the completion stage to try to resolve the issue.
For each issue, describe the impact on the auditor’s report if the issue remains unresolved. Justify your answer.