ExpertACCA · Question 2 · Advanced Audit and Assurance
SECTION B - ADVISORY REPORT
You are an audit manager at L&M. You are reviewing the audit files of VerdiCrop Co, an unlisted agri-tech company specializing in indoor vertical farming, for the year ended 30 September 202X. The audit is nearly complete, and the auditor's report is due to be signed next week.
Materiality for the financial statements as a whole has been set at $1.2m.
The following two matters have been brought to your attention by the audit senior:
Matter 1: Crop Failure
On 15 November 202X, a newly discovered, highly contagious plant pathogen infiltrated VerdiCrop's main vertical farming facility, destroying 60% of their total crop inventory. Management has included a disclosure note describing this as a non-adjusting event after the reporting period. However, management has refused to perform a revised going concern assessment, stating that they have filed a $10m claim with their insurance provider which will cover the losses. The audit senior has noted that the insurance provider is currently disputing the claim, arguing that this specific novel pathogen is excluded from the policy.
Matter 2: Equipment Obsolescence
VerdiCrop's specialized hydroponic equipment is carried in the statement of financial position at $15m. During the year, a major competitor patented a vastly superior, energy-efficient hydroponic technology, rendering VerdiCrop's equipment technologically obsolete. The audit team believes the equipment is impaired and its recoverable amount is only $8m. Management refuses to write down the asset, arguing that their value-in-use model justifies the $15m carrying amount. The audit team has reviewed the model and found it relies on highly optimistic, unsubstantiated revenue growth rates of 25% per annum.
Requirements:
(a) Comment on the matters to be considered and state the audit evidence you would expect to find in the audit file in respect of the crop failure and the going concern assumption. (12 marks)
(b) Discuss the implications for the auditor's report if management refuses to adjust the financial statements in relation to the hydroponic equipment, and refuses to perform a revised going concern assessment regarding the crop failure. (13 marks)
SECTION B - ADVISORY REPORT
You are an audit manager at L&M. You are reviewing the audit files of VerdiCrop Co, an unlisted agri-tech company specializing in indoor vertical farming, for the year ended 30 September 202X. The audit is nearly complete, and the auditor's report is due to be signed next week.
Materiality for the financial statements as a whole has been set at $1.2m.
The following two matters have been brought to your attention by the audit senior:
Matter 1: Crop Failure
On 15 November 202X, a newly discovered, highly contagious plant pathogen infiltrated VerdiCrop's main vertical farming facility, destroying 60% of their total crop inventory. Management has included a disclosure note describing this as a non-adjusting event after the reporting period. However, management has refused to perform a revised going concern assessment, stating that they have filed a $10m claim with their insurance provider which will cover the losses. The audit senior has noted that the insurance provider is currently disputing the claim, arguing that this specific novel pathogen is excluded from the policy.
Matter 2: Equipment Obsolescence
VerdiCrop's specialized hydroponic equipment is carried in the statement of financial position at $15m. During the year, a major competitor patented a vastly superior, energy-efficient hydroponic technology, rendering VerdiCrop's equipment technologically obsolete. The audit team believes the equipment is impaired and its recoverable amount is only $8m. Management refuses to write down the asset, arguing that their value-in-use model justifies the $15m carrying amount. The audit team has reviewed the model and found it relies on highly optimistic, unsubstantiated revenue growth rates of 25% per annum.
Requirements:
(a) Comment on the matters to be considered and state the audit evidence you would expect to find in the audit file in respect of the crop failure and the going concern assumption. (12 marks)
(b) Discuss the implications for the auditor's report if management refuses to adjust the financial statements in relation to the hydroponic equipment, and refuses to perform a revised going concern assessment regarding the crop failure. (13 marks)
How to approach this question
Full Answer
Common mistakes
Practice the full ACCA AAA — Advanced Audit and Assurance Practice Exam 5
3 questions · hints · full answers · grading