Question 1

CASE 3: AEROFORGE HEAVY INDUSTRIES

AeroForge Heavy Industries manufactures industrial turbines. The manufacturing process takes 8 months per turbine. At year-end, there is significant Work-in-Progress (WIP). AeroForge provides a 5-year warranty on all turbines. During the year, a major customer sued AeroForge for $2m due to a turbine failure; AeroForge's lawyers believe a payout is 'possible' but not 'probable'. AeroForge revalued its manufacturing plant this year, resulting in a $5m revaluation surplus.

QUESTION:
Assume that shortly before the audit report is signed, new evidence emerges proving that AeroForge will definitely lose the $2m lawsuit. Management refuses to adjust the financial statements to include a provision. The $2m is material but NOT pervasive to the financial statements.

What type of audit opinion should be issued?

Accepted Answer

Use the audit reporting matrix. 1. Is there a misstatement or a lack of evidence? (Misstatement). 2. Is it material? (Yes). 3. Is it pervasive? (No). Material + Not Pervasive Misstatement = Qualified Opinion.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Choosing an adverse opinion (Option C) without noting that the scenario explicitly states the issue is NOT pervasive.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA AA — Audit and Assurance Practice Exam 4

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