In respect of each of the situations outlined below, reach a conclusion on whether or not you would modify your audit report. Give reasons for your conclusion and describe the effect on your audit report. The year end in each scenario is 30 September 2021.

The total marks will be split equally between each part.

Required:

(A) Crocodile.com

Crocodile.com is a web based company that sells flowers and gift online. The year end audit is almost complete and the statements are due to be signed shortly. Year end revenue is 9.5m and profit before tax and interest is 2.3m.

A key customer with a year end receivables balance of 300,000 has notified Crocodile.com in November 2021 that they are experiencing cash flow difficulties and are unable to make any payments in the near future.

The finance director has told the audit partner that the outstanding balance will be written off as an irrecoverable debt next year in the 2022 Financial Statements.

(B) Peter and Wendy Ltd

In November 2021 the government tax authorities started an enquiry into all aspects of the tax affairs of the company.

Until the enquiry is completed it is not possible to estimate with any reasonable degree of certainty any ultimate liability which may fall upon the company. Consequently, no liability in respect of this matter has been included in the financial statements. The directors have included a note to the accounts explaining the situation.

(C) Homes for Dogs

Homes For Dogs (HFD) is a charity with several dog rescue centresaround the country. They received a government cash grant of 250,000 in August 2021 to help with the purchase on non-currentassets which have estimated useful economic lives of between five and ten years. The 250,000 has been credited directly to the profit and loss account for the year ended 30 September 2021.

This treatment is not in accordance with the accounting standard on accounting for government grants nor the specific requirements of the grant allocation. Current accounting guidance requires this grant to be credited to profit and loss over the useful economic lives of the assets to which the grant relates.

The Director of Finance insists on continuing with the current treatment even though it is incorrect.

The year end profit for HFD for the year ended 30 September 2021 is 500,000.

(D) Hook Ltd

The statement of financial position at 30 September 2021 includes non-current assets at cost of 3.2m. This is a new property which has been constructed by the company during the year and the total includes capitalised project management fees of 250,000.

The project management fees have been calculated using the Director of Finances estimate of time taken by project managers who were involved with management of the construction work. This estimate has not been supported by time records or any detailed evidence to support the calculations. No satisfactory audit procedures have been undertaken to confirm that the project management labour costs have been appropriately calculated or capitalised.

The pre-tax profit of Hook Ltd for the year ended 30 September is 780,000.