ExpertACCA · Question 02 · Audit Completion and Reporting
SECTION B: ADVISORY REPORT
You are an audit manager at Zenith LLP, responsible for the audit of CloudNova Co, a rapidly growing Software as a Service (SaaS) provider. The audit is for the year ended 31 December 202X. The fieldwork is nearly complete, and you are reviewing the audit files prior to drafting the auditor's report. CloudNova is planning an Initial Public Offering (IPO) in late 202Y.
You have identified two significant matters during your review:
Matter 1: Capitalized Development Costs
CloudNova has capitalized $8.5m of development costs relating to a new AI-driven analytics module. The module was officially launched to customers on 1 November 202X. However, management has not commenced amortization of these costs, arguing that the software is still undergoing 'minor bug fixes' and the useful life cannot yet be reliably estimated. Total total assets are $45m and profit before tax is $12m.
Matter 2: Going Concern and Subsequent Events
On 15 February 202Y, CloudNova's largest customer, representing 35% of recurring revenue, filed for bankruptcy. Consequently, CloudNova's cash flow forecasts show a severe cash deficit by August 202Y. Management has disclosed the customer's bankruptcy as a non-adjusting subsequent event in the notes to the financial statements but insists the company remains a going concern because they are 'confident' the upcoming IPO will raise sufficient capital. No adjustments have been made to the financial statements regarding the going concern basis.
REQUIREMENTS:
(a) In respect of Matter 1 (Capitalized Development Costs):
(i) Evaluate the matters you should consider before concluding on the accounting treatment. (5 marks)
(ii) Describe the audit evidence you would expect to find in the audit file to support your evaluation. (5 marks)
(b) In respect of Matter 2 (Going Concern and Subsequent Events):
Evaluate the implications for the completion of the audit and assess the impact on the auditor's report if management refuses to amend the financial statements or disclosures. (15 marks)
SECTION B: ADVISORY REPORT
You are an audit manager at Zenith LLP, responsible for the audit of CloudNova Co, a rapidly growing Software as a Service (SaaS) provider. The audit is for the year ended 31 December 202X. The fieldwork is nearly complete, and you are reviewing the audit files prior to drafting the auditor's report. CloudNova is planning an Initial Public Offering (IPO) in late 202Y.
You have identified two significant matters during your review:
Matter 1: Capitalized Development Costs
CloudNova has capitalized $8.5m of development costs relating to a new AI-driven analytics module. The module was officially launched to customers on 1 November 202X. However, management has not commenced amortization of these costs, arguing that the software is still undergoing 'minor bug fixes' and the useful life cannot yet be reliably estimated. Total total assets are $45m and profit before tax is $12m.
Matter 2: Going Concern and Subsequent Events
On 15 February 202Y, CloudNova's largest customer, representing 35% of recurring revenue, filed for bankruptcy. Consequently, CloudNova's cash flow forecasts show a severe cash deficit by August 202Y. Management has disclosed the customer's bankruptcy as a non-adjusting subsequent event in the notes to the financial statements but insists the company remains a going concern because they are 'confident' the upcoming IPO will raise sufficient capital. No adjustments have been made to the financial statements regarding the going concern basis.
REQUIREMENTS:
(a) In respect of Matter 1 (Capitalized Development Costs):
(i) Evaluate the matters you should consider before concluding on the accounting treatment. (5 marks)
(ii) Describe the audit evidence you would expect to find in the audit file to support your evaluation. (5 marks)
(b) In respect of Matter 2 (Going Concern and Subsequent Events):
Evaluate the implications for the completion of the audit and assess the impact on the auditor's report if management refuses to amend the financial statements or disclosures. (15 marks)
How to approach this question
Full Answer
Common mistakes
Practice the full ACCA AAA — Advanced Audit and Assurance Practice Exam 1
3 questions · hints · full answers · grading