You are the audit senior on the audit of FeelGood Limited, which provides co-working office spaces to individuals as well as to small and medium-size businesses. FeelGood Limited is profit oriented, and has a big management team, including CEO, CFO, CMO and CIO. The company is owned by three individuals who are not related to management. The business model of the FeelGood Limited is the following: the company is looking for the properties in the business areas of large cities within the country. Then, it concludes the leasehold agreements with the landlords for operating lease of usually 25 years. FeelGood Limited makes refurbishments of the properties, and capitalises them to the balance sheet. Once the refurbishments are complete, FeelGood Limited announces the opening of the new property, carries out the extensive advertising campaign, and opens the doors to the clients. Each client, regardless whether it is individual who needs office desk, or the company, which needs more space for its employees, concludes the agreement with FeelGood Limited for one year, and pays the membership fee in advance. The business has been successful in the past and it has the promising future, as was presented in the previous year strategic report of the FeelGood Limited, with the significant growth in members in existing properties, as well as the upcoming properties. You are completing the audit of FeelGood Limited for the year ended 31 Dec 20x7, and the audit partner is about to finalise his review of completion section and sign the audit report.

1. During the review of the financial information and financial results for the period of 3 months post year end, you noticed that a significant and material bad debt provision has been debited to P&L. The management explained that one of the major customers was under investigation from government authorities before year end, and during January 20x8, this major client declared bankruptcy, and therefore the 100% bad debt provision has been booked in January 20X8. What will be the effect of this event on the financial statements?

A. No effect on financial statements, as the event has occurred after year end.

B. The event has to be disclosed in the notes to financial statements, but no adjustments are needed.

C. The event has to be disclosed in the notes to financial statements, and the provision has to be booked in December 20x7.

D. The emphasis of matter about the post balance sheet event has to be included in the audit report, but no additional notes are needed.

E. The event has to be disclosed in the financial statements, and emphasis of matter paragraph should be included in the audit report.

2. During the audit of FeelGood Limited, you noted recurring immaterial purchase transactions from the individual who had the same surname as the chairman of the board. It turned out that this individual was wife of the chairman, however, it was not disclosed in the list of related parties that was obtained at the beginning of audit. You followed up about this matter with the management to make sure that the list of related parties is complete, however, the management declined to provide any further information or updated lists on this matter, saying that she was the only exception. How this situation can affect the audit report, given that no other material or significant issues were identified during the audit?

A. No effect on the audit report the unmodified audit report will be issued, as related parties and the transactions do not impact the opinion.

B. Qualified audit opinion will be issued, as the audit team was unable to obtain sufficient and appropriate audit evidence with regards to related parties.

C. Adverse audit opinion will be issued.

D. Disclaimer of opinion will be included in the audit report.

E. Emphasis of matter will be included emphasising about the matter arose.

3. You are drafting the representation letter that will be sent to the management shortly for their review and their sign-off. What information is typically included in the representation letter:

i. That management is not aware of any other legal obligations that has not been disclosed.

ii. That management thinks that the unadjusted audit differences are immaterial to the financial statements, and therefore, decided to leave unadjusted.

iii. That directors of FeelGood Limied believe that the company will be continuing as going concern.

iv. The management of FeelGood Limited confirms that they will appoint the company to which they issue representation letter as auditor for the next financial year.

A. i.; ii. and iii.

B. i. and iii.

C. i.; iii. and iv.

D. i. and ii.

E. All statements are included in representation letter.

4. It was noted during the audit that one of the landlords of one of the properties asked to vacate the property this will not affect profitability of FeelGood Limited as the property was relatively small and recently opened. The landlord also started a suit against FeelGood Limited with the indemnity claim. The landlord was against any refurbishments to be made to the property, and even though FeelGood Limited has made a dilapidation provision in its financial statements, the landlord is suing for much greater amount including all legal fees. This is material to financial statements, and the lawyers of FeelGood Limited consider the obligation possible. How will this situation affect the financial statements?

A. There will be no effect on the financial statements.

B. Further provision in excess of the dilapidation provision is required, and it has to be disclosed in the notes to the financial statements, as the obligation is possible.

C. The emphasis of matter should be included in the audit report regarding the possible provision.

D. The separate disclosure is not required, however, the provision should be booked.

E. Only the disclosure in the notes is required regarding the legal case, as obligation is possible.

5. You are performing reassessment of the audit risks at the end of audit. From the information given in scenario above, which of the below is UNLIKELY to be considered as the audit risk?

A. Risk of management override of controls

B. Overstatement of revenue due to fraud.

C. Incorrect capitalisation of leasehold improvements.

D. Going concern risk

E. Lease accounting