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 It is 15 August 202X. You are an audit manager responsible for the audit of AeroGrid Utilities Co, a listed company operating offshore wind farms and regional power grids. The audit for the year ended 30 June 202X is nearing completion. The draft financial statements recognize profit before tax of $18 million and total assets of $320 million. You are reviewing the audit working papers and have noted the following two unresolved matters: Matter 1: Storm Damage and Impairment In May 202X, a severe cyclone caused significant structural damage to 'Grid-Alpha', one of AeroGrid's oldest offshore wind farms. The carrying amount of Grid-Alpha in the draft financial statements is $45 million. Management has performed an impairment review and concluded that no impairment is necessary, arguing that the turbines can be repaired and will continue to generate cash flows for another 10 years. The audit senior has noted that the repair estimates provided by management seem unusually low compared to industry averages. Matter 2: Going Concern and Government Subsidies Historically, 30% of AeroGrid's revenue has come from a government 'Green Feed-in Tariff' subsidy. On 10 August 202X, the government abruptly announced the immediate termination of this subsidy program due to national budget cuts. Management has prepared a revised cash flow forecast showing that the company will maintain positive cash flow for the next 12 months, but only if they secure a $20 million emergency bank loan, which is currently under negotiation. Management has included a brief note in the financial statements stating that 'the loss of subsidies may impact future margins', but they have not explicitly disclosed a material uncertainty related to going concern. Requirements: (a) In respect of Matter 1 (Storm Damage), comment on the matters you should consider and describe the audit evidence you should expect to find in your review of the audit working papers. (12 marks) (b) In respect of Matter 2 (Going Concern), evaluate the implications for the auditor's report if management refuses to amend the disclosures regarding the going concern status of the company. (13 marks)