Question 1

CASE SCENARIO: CyberShield Solutions
CyberShield Solutions provides cybersecurity consulting and monitoring services. You are the audit manager for the year ended 28 February 20X8. The audit is nearing completion, and the auditor's report is due to be signed on 15 May 20X8.

On 10 April 20X8, CyberShield announced that its own internal servers had been breached by hackers in January 20X8, compromising sensitive data of several major clients. Consequently, on 25 April 20X8, their largest client, 'MegaBank', which accounts for 40% of CyberShield's revenue, filed a $10 million lawsuit for negligence and immediately terminated their contract.

CyberShield's management has refused to adjust the financial statements for the lawsuit, arguing it happened after the year-end. They have only provided a brief disclosure in the notes. Furthermore, management insists the company is a going concern, despite the loss of MegaBank, stating they plan to win new clients to replace the lost revenue.

REQUIREMENTS:
(a) Explain whether the lawsuit filed by MegaBank is an adjusting or non-adjusting subsequent event, and describe the audit procedures you should perform regarding the lawsuit. (8 marks)
(b) Identify the indicators that CyberShield may not be a going concern, and describe the audit procedures you should perform to assess the going concern status. (7 marks)
(c) Assuming management refuses to make any adjustments for the lawsuit and you conclude that the going concern basis is appropriate but a material uncertainty exists (which is not adequately disclosed), describe the impact on the auditor's report. (5 marks)

Accepted Answer

Break the question down. Part (a): Apply IAS 10 rules (did the condition exist at year-end?). Part (b): Look at the scenario for bad news (loss of client, lawsuit) and explain how to test management's survival plan. Part (c): Combine the issues. Uncorrected errors + missing disclosures = Misstatement. Decide if it's material or pervasive, and state the exact paragraphs in the audit report that will change.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Classifying the lawsuit as non-adjusting because it was filed in April. Failing to realize that if going concern disclosures are inadequate, you modify the opinion (Qualified/Adverse) rather than adding a MURGC paragraph.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA AA — Audit and Assurance Practice Exam 6

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