Question 1

SECTION B: ADVISORY REPORT

It is 15 August 20X6. You are an audit manager at D&T LLP. You are currently reviewing the audit completion working papers for Ceres AgriTech Co (Ceres), a listed agriculture and biotechnology firm. The financial year ended on 31 May 20X6. The draft financial statements recognize profit before tax of $15m and total assets of $120m.

During your review, the audit senior has brought the following two unresolved matters to your attention:

Matter 1: Biological Assets Valuation
Ceres owns large tracts of land where it cultivates genetically modified (GM) crops, classified as biological assets under IAS 41. In April 20X6, a severe, unseasonal drought affected the region. Management has written down the fair value of the biological assets by $1m (approximately 5% of total crop value), arguing that their proprietary GM crops are highly drought-resistant. However, the audit team obtained a report from an independent agronomist, commissioned by the local government, which estimates that crop yields in the region will fall by at least 30% due to the drought. If the agronomist's estimate is applied, the biological assets would need to be written down by a further $5m.

Matter 2: Going Concern and Loan Covenant
Ceres has a $40m long-term loan with AgriBank. A key covenant of this loan requires Ceres to maintain an interest cover ratio of 4:1. Due to the drought and subsequent drop in projected revenue, Ceres breached this covenant on 31 May 20X6. According to the loan agreement, a breach makes the loan immediately repayable on demand. Management has left the loan classified as a non-current liability, stating they have a "strong, long-term partnership" with AgriBank and are confident the bank will issue a waiver. As of today, no formal waiver has been received. Management has refused to make any disclosures regarding the breach or any going concern uncertainties.

Requirements:

(a) Evaluate the matters to be considered and the audit evidence you would expect to find in the working papers regarding the valuation of the biological assets. (10 marks)
(b) Assess the implications of the loan covenant breach on the going concern status of Ceres, and recommend the further audit procedures required. (8 marks)
(c) Assuming management refuses to adjust the financial statements or provide additional disclosures for BOTH matters, discuss the implications for the auditor's report. (7 marks)

Accepted Answer

Step 1: For part (a), calculate materiality first. Then discuss the rules of IAS 41. List specific documents you want to see in the audit file. Step 2: For part (b), recognize that a breached covenant at year-end forces debt into current liabilities. Discuss the cash flow impact. Step 3: For part (c), combine the errors. Are they material? Yes. Are they pervasive? Yes, because going concern is fundamental. Conclude on the type of modified opinion required.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Candidates often suggest a 'Material Uncertainty Related to Going Concern' (MURGC) paragraph in part (c). However, a MURGC paragraph is only used when management HAS adequately disclosed the issue. Since management refuses to disclose it, it becomes a misstatement, leading to a modified opinion (Qualified or Adverse).

How to approach this question

Full Answer

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