ExpertHard20 marksExtended Response
ACCA · Question 18 · Audit Evidence and Reporting
SECTION B - CONSTRUCTED RESPONSE
CyberShield Solutions is a cybersecurity software firm. You are the audit senior for the year ended 31 December 20X6.
- Intangible Assets: The company has capitalized $4.5m of development costs relating to a new AI-driven firewall software. The software is currently in the late stages of testing and is expected to launch next year.
- Provisions: In November 20X6, a major client sued CyberShield for $2m, claiming a flaw in an older software version led to a data breach. CyberShield's lawyers believe it is probable the company will lose the case. The directors have disclosed this as a contingent liability but refuse to recognize a provision, arguing the exact amount is uncertain.
Requirements:
(a) Describe substantive procedures the auditor should perform to obtain sufficient appropriate audit evidence regarding the capitalized development costs. (10 marks)
(b) Describe substantive procedures regarding the legal claim. (6 marks)
(c) Discuss the implications for the auditor's report if the directors refuse to recognize a provision for the legal claim, assuming the $2m amount is material but not pervasive. (4 marks)
SECTION B - CONSTRUCTED RESPONSE
CyberShield Solutions is a cybersecurity software firm. You are the audit senior for the year ended 31 December 20X6.
- Intangible Assets: The company has capitalized $4.5m of development costs relating to a new AI-driven firewall software. The software is currently in the late stages of testing and is expected to launch next year.
- Provisions: In November 20X6, a major client sued CyberShield for $2m, claiming a flaw in an older software version led to a data breach. CyberShield's lawyers believe it is probable the company will lose the case. The directors have disclosed this as a contingent liability but refuse to recognize a provision, arguing the exact amount is uncertain.
Requirements:
(a) Describe substantive procedures the auditor should perform to obtain sufficient appropriate audit evidence regarding the capitalized development costs. (10 marks)
(b) Describe substantive procedures regarding the legal claim. (6 marks)
(c) Discuss the implications for the auditor's report if the directors refuse to recognize a provision for the legal claim, assuming the $2m amount is material but not pervasive. (4 marks)
How to approach this question
For (a), structure procedures around the PIRATE criteria for IAS 38 (Probable economic benefits, Intention to complete, Reliable measurement, Adequate resources, Technical feasibility, Expected profitability). For (b), focus on gathering evidence about the likelihood and amount of the legal claim. For (c), identify the accounting rule broken, the materiality level, the type of modified opinion, and the specific paragraphs affected in the report.
Full Answer
This question integrates Audit Evidence (Syllabus D) and Reporting (Syllabus E). Auditing intangibles requires verifying strict capitalization criteria under IAS 38. Auditing provisions requires assessing probability under IAS 37, heavily relying on legal correspondence. The reporting section tests the ability to apply materiality to determine the correct modification of the audit opinion.
Common mistakes
In (a), suggesting physical verification of software. In (c), suggesting an adverse opinion (which is only for pervasive misstatements) or an emphasis of matter (which is not used for misstatements).
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