Completion, Review and Reporting

SECTION B: ADVISORY REPORT You are an audit manager at Cura Audit Partners. You are currently reviewing the audit files for NovaGen Therapeutics Co (NovaGen), a late-stage biotechnology company, for the year ended 30 September 20X6. The audit is nearing completion, and the auditor's report is due to be signed next week. The audit senior has left the following two unresolved matters for your attention: Matter 1: Capitalized Research & Development (R&D) NovaGen has capitalized $8 million of development costs relating to a new drug, 'NeuroVax', intended to treat neurodegenerative diseases. The total assets of NovaGen are $45 million, and profit before tax is $5 million. In August 20X6, Phase 3 clinical trials for NeuroVax yielded mixed results, failing to meet two of the five primary efficacy endpoints required by the medical regulator. The medical director believes they can adjust the formula and conduct a supplementary trial, but this will delay potential market launch by at least two years. Management has refused to impair the $8 million capitalized balance, arguing the drug will eventually be profitable. Matter 2: Going Concern and Subsequent Event In November 20X6, 'PharmaGlobal', a major pharmaceutical partner that had committed to funding 50% of NovaGen's ongoing operational costs for the next three years, abruptly withdrew from their joint funding agreement due to their own internal restructuring. NovaGen's updated cash flow forecast shows a severe cash deficit by May 20X7 unless alternative funding is secured. Management has added a brief note to the financial statements mentioning the loss of the partner but states they are 'confident in securing alternative funding'. They have prepared the financial statements on a going concern basis and refuse to expand the disclosure to explicitly state that a material uncertainty exists. Required: (a) In respect of Matter 1 (Capitalized R&D), comment on the matters you should consider, and explain the audit evidence you would expect to find on the audit file. (10 marks) (b) In respect of Matter 2 (Going Concern), evaluate the implications for the auditor's report if management refuses to amend the financial statements or expand the disclosures. (15 marks)

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)

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)