Question 1 (12 marks)

Consider each of the following independent and material situations. In each case:

• the financial report date is 30 June 2019;
• the field work was completed on 12 August 2019;
• the Directors' Declaration and the Audit report were signed on 19 August 2019;
• the completed financial report accompanied by the signed Audit report were mailed to the shareholders on 18 September 2019.

1. You are an auditor of KK Limited (KK), a company specialising in industrial property development.On 10 August 2019, you become aware that a major overseas investor has informed the management of KK of their intention to withdraw their investment in a proposed major development. Based on its discussions with the investor and previously pledged funds from them, KK has incurred substantial costs in feasibility studies, structural engineering reports and architectural plans. A significant portion of these costs have been capitalised. The management is dependent on finding a new investor to be able to meet these expenses and to continue with the project.
2. You are an auditor of Grey Limited (GREY), a manufacturing client. GREY has plans to upgrade its manufacturing process and plans to finance this by a sale of property which is superfluous to is needs, situated next to its head office. The property has been subdivided for the purposes of the sale and placed on the market in June 2019. On 25 July, the state government approved a plan for the construction of an express freeway. The plan will result in the appropriation of a portion of the property owned by GREY and subdivided for the purpose of sale. Construction of the freeway will begin in late 2019. No estimate of the compensation payment is available.
3. You are an auditor of WDE limited (WDE). WDE is a major public company involved in the property development industry. Prior to signing your audit report, you sought a letter of comfort from the company's bankers that the bank would continue to support the company by providing finance over the coming year. The bank agreed that it would continue to provide finance. It was your view that without such support the company had severe cash flow problems and the financial report would need to be modified with respect to a going concern assumption. On 15 September 2019, the company's bankers wrote to you advising that the company had breached its loan covenant with the bank in August 2019 and that the loan facility was now due and payable and would not be renewed.

Required:

1. For each of the events described above (i-iii), select the appropriate action from the list below, and justify your response.
2. Adjust the 30 June 2019 financial report.
3. Disclose the information in the notes to the 30 June 2019 financial report.
4. Request that the client recall the 30 June 2019 financial report for revision.
5. No action is required.(3*3= 9 marks)
6. If no action is taken by management for each of the events described above (i-iii), determine the most appropriate audit opinion to be issued.(3*1= 3 marks)

You may wish to present your answer in the form of a table as follows:

Situation

(1)

Appropriate action

(3 situations*1= 3 marks)

(1)

Justification

(3 situations*2 = 6 marks)

2

Appropriate audit opinion

(3 situations*1= 3 marks)

(i)

(ii)

(iii)