Question 1

SECTION B - ADVISORY REPORT

You are an audit manager in Harvest Partners. You are reviewing the audit files for CropGenix Co, a listed agricultural technology company, for the year ended 31 March 202X. The audit fieldwork is almost complete, and the auditor's report is due to be signed next week. Profit before tax is $14 million and total assets are $180 million.

The audit senior has left the following notes on the file for your review:

Matter 1: Biological Assets
CropGenix owns extensive plantations of a genetically modified soybean crop. Under IAS 41 Agriculture, these are measured at fair value less costs to sell. During the year, a severe regional drought affected the plantations. Management has recognized the biological assets at $35 million. However, the audit team noted that management's valuation model uses highly optimistic forward pricing for soybeans and ignores the reduced yield caused by the drought. The audit team's independent valuation expert estimates the fair value less costs to sell at $29 million. Management has refused to adjust the financial statements, stating their pricing assumptions are valid.

Matter 2: Pending Litigation
In February 202X, a consortium of farmers filed a lawsuit against CropGenix for $8 million, claiming that a specific batch of seeds supplied by the company was defective and caused total crop failure. Management has disclosed this as a contingent liability in the notes to the financial statements. However, audit correspondence obtained from CropGenix's external legal counsel states that it is 'highly probable' the company will lose the case and have to pay the full $8 million in damages.

Requirements:
(a) For each of the two matters described above, evaluate the issue and describe the audit evidence you would expect to find on the audit file. (15 marks)
(b) Assuming management refuses to make any adjustments to the financial statements regarding the pending litigation (Matter 2), discuss the implications for the auditor's report. (10 marks)

Accepted Answer

For part (a), calculate materiality for both issues using the PBT and Total Assets figures provided. State the accounting rule (IAS 41, IAS 37), explain how management has breached it, and list specific documents you would find on the audit file. For part (b), explicitly state the materiality, conclude on whether it is pervasive, name the exact type of audit opinion required, and describe how the auditor's report will be physically altered.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Failing to calculate materiality is a guaranteed loss of marks. Another common error is concluding that an $8m misstatement on a $14m profit is 'pervasive' and suggesting an Adverse opinion. While highly material to profit, a single provision is rarely pervasive to the entire financial statements.

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Full Answer

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