Question 3 Consider each of the following independent and material situations. In each case: . the financial report date is 31 December 2019, . the field work was completed on 12 February 2020: . the directors declaration and the audit report were signed on 19 February 2020, and . the completed financial report accompanied by the signed audit report were mailed to shareholders on 18 March 2020 A. You are an auditor pf AB Limited (AB), a company specialising in industrial property development. On 10 January 2019, AB purchased property and entered into a contract to develop a shopping complex and then sell the developed real estate to an unrelated third party for a cost-plus' settlement price. Following the sale on 20% October 2019, an economic recession resulted in the rentals and occupancy rates being well below forecasts, prepared by your client. On 10 January 2020, the purchaser threatened to sue for damages, alleging they relied on your client AB's forecasts when entering into the contract. The amount of damages being claimed is highly material to your client. You have obtained an opinion from a well-known Senior Counsel (SC) who concludes that damages are likely to be payable. B. You are the auditor of Australian Paper Limited (APL). A division of APL prints and publishes books about celebrities. A large print run of a scandal packed book titled "The Secret Life of Brickley Cooper' was produced in January 2020. As of 31" December 2019, stocks of raw materials were around one-third higher than usual, as the division purchased extra materials in order to produce this book. On 20 March 2020. Brickley Cooper was killed in tragic circumstances while rescuing a young child from a burning house. APL pulped the book on 25 March 2020, after receiving advice that selling the book following Brickley Cooper's tragic and heroic death would result in a severe public backlash. C. You are the auditor of GISCO Limited (GISCO), a professional services client. On 5th February 2020. GISCO settled and paid a personal injury claim to a former employee as a result of an accident that occurred in December 2016. GISCO had not previously recorded a liability for the claim. Question 3 continued D. You are an auditor of JK limited (JK), a major public company involved in the property development industry. Prior to signing your audit report you sought a letter of comfort from JK's bankers that the bank would continue to support JK by providing finance over the coming year. The bank agrees that it would continue to provide finance. It was your view that without such support JK had severe cash flow problems and the financial report would need to be modified with respect to a going concern assumption. On 10th March 2020, the company's bankers wrote to you advising that the company had breached its loan covenant with the bank in February 2020 and that the loan facility was now due and payable and would not be renewed. E. You are the auditor of Absolute Wonder Limited (AWL). AWL holds investments in several companies listed on the Hong Kong stock exchange. On 10th February 2020, the exchange's value plummets by 30 per cent. Required For each of the events A to E: 1. Outline the required treatment in the financial report, if any, Justify your answer. (5 X 2 Marks = 10 Marks) 2. Determine whether additional audit evidence needs to be obtained. If so, describe the nature of the audit evidence to be obtained and the audit procedures used to obtain it. (5 X 2 Marks = 10 Marks) 3. If no action is taken by management, determine the most appropriate audit opinion to be issued. (5 X 2 Marks = 10 Marks) Question 3 Consider each of the following independent and material situations. In each case: . the financial report date is 31 December 2019, . the field work was completed on 12 February 2020: . the directors declaration and the audit report were signed on 19 February 2020, and . the completed financial report accompanied by the signed audit report were mailed to shareholders on 18 March 2020 A. You are an auditor pf AB Limited (AB), a company specialising in industrial property development. On 10 January 2019, AB purchased property and entered into a contract to develop a shopping complex and then sell the developed real estate to an unrelated third party for a cost-plus' settlement price. Following the sale on 20% October 2019, an economic recession resulted in the rentals and occupancy rates being well below forecasts, prepared by your client. On 10 January 2020, the purchaser threatened to sue for damages, alleging they relied on your client AB's forecasts when entering into the contract. The amount of damages being claimed is highly material to your client. You have obtained an opinion from a well-known Senior Counsel (SC) who concludes that damages are likely to be payable. B. You are the auditor of Australian Paper Limited (APL). A division of APL prints and publishes books about celebrities. A large print run of a scandal packed book titled "The Secret Life of Brickley Cooper' was produced in January 2020. As of 31" December 2019, stocks of raw materials were around one-third higher than usual, as the division purchased extra materials in order to produce this book. On 20 March 2020. Brickley Cooper was killed in tragic circumstances while rescuing a young child from a burning house. APL pulped the book on 25 March 2020, after receiving advice that selling the book following Brickley Cooper's tragic and heroic death would result in a severe public backlash. C. You are the auditor of GISCO Limited (GISCO), a professional services client. On 5th February 2020. GISCO settled and paid a personal injury claim to a former employee as a result of an accident that occurred in December 2016. GISCO had not previously recorded a liability for the claim. Question 3 continued D. You are an auditor of JK limited (JK), a major public company involved in the property development industry. Prior to signing your audit report you sought a letter of comfort from JK's bankers that the bank would continue to support JK by providing finance over the coming year. The bank agrees that it would continue to provide finance. It was your view that without such support JK had severe cash flow problems and the financial report would need to be modified with respect to a going concern assumption. On 10th March 2020, the company's bankers wrote to you advising that the company had breached its loan covenant with the bank in February 2020 and that the loan facility was now due and payable and would not be renewed. E. You are the auditor of Absolute Wonder Limited (AWL). AWL holds investments in several companies listed on the Hong Kong stock exchange. On 10th February 2020, the exchange's value plummets by 30 per cent. Required For each of the events A to E: 1. Outline the required treatment in the financial report, if any, Justify your answer. (5 X 2 Marks = 10 Marks) 2. Determine whether additional audit evidence needs to be obtained. If so, describe the nature of the audit evidence to be obtained and the audit procedures used to obtain it. (5 X 2 Marks = 10 Marks) 3. If no action is taken by management, determine the most appropriate audit opinion to be issued. (5 X 2 Marks = 10 Marks)