The following is an amended version of a question contained in the ACCA December 1994 Paper 6, Audit Framework.

Your firm audits the following two companies, and you have been asked to consider the form of modified or unmodified audit report which should be given.

Gamston Burgers plc has a loss making branch and it has included fixed assets relating to this branch at £710 000, after deducting a provision for permanent diminution in value of £250 000. The directors believe that if operating changes are made and economic conditions improve, there is a reasonable probability of the branch trading satisfactorily, which will result in the current value of tangible fixed assets exceeding £710 000. However, under the current circumstances, the directors consider the extent of any permanent diminution in value to be uncertain. You have obtained all the evidence you would have reasonably expected to be available. If trading conditions do not improve, your audit investigations have concluded that the branch will have to close. If the branch closes, the tangible fixed assets will be worthless, as the property is leased and the cost of moving any tangible fixed assets will be more than their net realizable value. If the tangible fixed assets are worthless, you have concluded that the effect will be material, but it will not result in the financial statements being misleading.

Keyworth Supermarket Limited sells food to the general public and customers pay in cash or by card. Your audit tests reveal that controls over cash takings and the custody of stock are weak, and you have not been able to obtain sufficient evidence to quantify the effect of any misappropriation of stock or cash takings. You have concluded that:

(i) if the uncertainty relates to all the company’s sales, it could result in the financial statements being misleading

(ii) if the uncertainty relates to only the sale of fresh fruit and vegetables, which comprise 10 per cent of the company’s sales, it will have a material effect on the financial statements but it will not result in a material and pervasive effect on the financial statements.

Required:

(a) List and briefly describe the contents of an unmodified audit report.

(b) Consider and describe the form of an unmodified or modified audit report you would give in each of the following situations:
• On Gamston Burgers plc’s financial statements if you agree with the directors’
statements about the uncertainty relating to the value of the tangible fixed assets of the branch.
• On Gamston Burgers plc’s financial statements if you have come to the conclusion that trading conditions will not improve and the company will have to close the branch. Thus the tangible fixed assets will be worthless.
• On Keyworth Supermarket Limited’s financial statements if the uncertainty about the misappropriation of stock and cash takings relates to all the company’s sales.
• On Keyworth Supermarket Limited’s financial statements if the uncertainty about the misappropriation of stock and cash takings relates only to the sale of fresh fruit and vegetables which comprise 10 per cent of the company’s sales.