Seminar 5 - Audit Planning & Risk Assessment (Missing Q3)

School: Nanyang Technological University - Course: ACC 2104 - Subject: Accounting

Question 1. Part A: Consider the following material and independent issuesthat arose during the audit of different audit clients for the year ended 30 June 2022. Identify the appropriate type of audit opinion that should be issued by the auditors and explain the rationale for your decision. (a)Recent industrial action has seen trade unions win a pay increase of 4% for all their members. Under the terms of the agreement dated 14 July 2022, the pay increase will be backdated to 1 January 2022. Management have agreed to the pay increase, however, they have not made any adjustments to the 30 June 2022 financial statements. Modified Opinion Since the pay increase of 4% is for all members (could be immaterial as well) of the trade union and not just one, the increase in amount is likely to be material. It is also said that management has not made any adjustments to the 30 June 2022 financial statements, making this a misstatement. With that, there is a material misstatement. Pervasive → If the material misstatement represents a substantial portion of the financial statements, is not confined to specific elements or accounts of items in the FS or affects the users' understanding of the FS → Adverse Opinion Non-Pervasive → If the material misstatement does not represent a significant portion of the financial statements, is confined to specific elements or accounts in the FS or it impacts users' understanding of the FS minimally → Qualified Opinion (b)You are the auditor of Sustainable Future Ltd (SF) for the year ended 30 June 2022. While completing your audit and finalizing your auditor's report, you discover that the company has incorrectly stated in the chairperson's review of operations that SF has complied with environmental guidelines regarding carbon emissions. Non- compliance with these guidelines was investigated during the audit and it was noted that SF's emissions were significantly above compliance standards. However, as there is currently no financial implication for non-compliance, no further action was taken. You believe, however, that the statement in the annual report will affect the perception of readers of the annual report regarding the company's entitlement to future environmental incentives. This information is likely to affect SF's share price. What action would you take in regard to this situation and what would be the implications for the auditor's report? Unmodified Opinion

Actions taken could include raising findings on non-compliance to the Chairman and having discussions with the management regarding the removal of the part in the Chairman's reviews where it claims that the company did comply with environmental guidelines. If the management refuses to remove the statement regarding compliance with environmental guidelines, edit the "Other Information" paragraph. Since financial statements are used by investors to derive information about a company's financial performance in order to make informed decisions for investment purposes, the edited "Other Information" paragraph would diminish the trust some investors and shareholders have in the company, potentially tanking the share price.