Answer the following questions
Question 1A.Discuss the main components of the audit expectation gap in the capital markets.(10 marks)
B.During the audit of LDF Co’s bad debtprovision, the auditor discovered that £500,000 of costs included in the provision did not meet the criteria for inclusion based on the applicable accounting standards.The management of LDF suggested that no adjustment is required as the provision is a matter of judgement and the current provision is deemed reasonable by the management.Requirement:
1.Discuss the differences between the modified and unmodified audit reports.(10 marks)
2.Discuss the above issue and describe the impact of this issue on the auditor’s report, if any, should this issue remain unresolved.(10 marks)Total 30 marks
Question 2A.“It is the auditors’responsibility to gather sufficient appropriate evidence to reach their opinion”.Discuss the above statement by explaining the differences between the evidence’s sufficiency and appropriateness. Your answer should include a discussion of TWO types of audit evidence. (10 marks)
B.You are an audit manager of Earl & Co and are planning the audit of Darjeeling Co for the year ending 30 September 2020. The company develops and manufactures specialist paint products and has been a client of your firm for several years.
During the year Darjeeling Co has spent $0·9m, which is included within intangible assets, on the development of new product lines, some of which are in the early stages of their development cycle. Additionally, as the company is looking to expand production, during the year it purchased and installed a new manufacturing line. All costs, incurred in the purchase and installation of that asset, have been included within property, plant and equipment. In order to finance the development projects and the new manufacturing line, the company issued $4m of irredeemable preference shares.
Developing new products and expanding production is important as the company intends to undertake a stock exchange listing in the next 12 months. The company started a number of initiatives during the year in order to boost revenue. It offered extended credit terms to its customers on the condition that their sales order quantities were increased. In addition, Darjeeling Co made an announcement in October 2019of its ‘price promise’: that it would match the prices of any competitor for similar products purchased. Customers who are able to prove that they could purchase the products cheaper elsewhere are asked to claim the difference from Darjeeling Co, within one month of the date of purchase of goods, via its website
