Audit Evidence and Reporting

SECTION B - CONSTRUCTED RESPONSE CyberShield Solutions is a cybersecurity software firm. You are the audit senior for the year ended 31 December 20X6. 1. Intangible Assets: The company has capitalized $4.5m of development costs relating to a new AI-driven firewall software. The software is currently in the late stages of testing and is expected to launch next year. 2. Provisions: In November 20X6, a major client sued CyberShield for $2m, claiming a flaw in an older software version led to a data breach. CyberShield's lawyers believe it is probable the company will lose the case. The directors have disclosed this as a contingent liability but refuse to recognize a provision, arguing the exact amount is uncertain. Requirements: (a) Describe substantive procedures the auditor should perform to obtain sufficient appropriate audit evidence regarding the capitalized development costs. (10 marks) (b) Describe substantive procedures regarding the legal claim. (6 marks) (c) Discuss the implications for the auditor's report if the directors refuse to recognize a provision for the legal claim, assuming the $2m amount is material but not pervasive. (4 marks)