Question
Prem Singh, a registered auditor, has completed the audit of the financial report of Brassedoff Developers Ltd (BDL) for the year ended 30 June 2022.
Prem Singh, a registered auditor, has completed the audit of the financial report of Brassedoff Developers Ltd (BDL) for the year ended 30 June 2022. BDL is a small-to-medium-sized private company. Apart from the issues noted below, Prem has no concerns with the financial statements. i. COVID trading conditions over the last year, including ongoing supply chain issues, have had their impact on the company's finances. BDL's revenues and cashflows are significantly lower than last year and its current liabilities now exceed total assets by $150,000. The budget for the coming year indicates additional financing will be required to keep the business operational. Fortunately, the mother of BDL's owner has agreed to step in and provide any necessary finance if and when required next year. This has been fully discussed in Note 3 to the financial statements. Prem is satisfied that the mother has the financial means to meet any resulting financial commitments. ii. During the year, BDL changed its method of accounting for long-term construction contracts. It properly reflected the effects of the change in the current year's financial report and restated the previous year's statements. Prem is satisfied with BDL's justification for making the change. The change is discussed in Note 24 to the financial
statements. The net impact of the change on reported profit this year, or in future years, is
likely to be negligible.
iii. Prem was unable to perform normal accounts receivable confirmation procedures, but he
used alternative procedures to satisfy himself as to the validity of the receivables.
iv. BDL is the defendant in a litigation case in which the outcome is highly uncertain. If the
case is settled in favour of the plaintiff, BDL will be required to pay a substantial amount
of cash that may require the sale of certain non-current assets. The litigation and possible
effects have been properly disclosed in Note 26 to the financial statements.
REQUIRED:
Based on the requirements of relevant New Zealand auditing standards, discuss the implications
of each of the above four issues for the audit report. Where you believe the wording of the
standard audit report will need to be amended, draft the relevant paragraph(s) and identify the
section of the audit report in which it ought to appear.
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