ACCA F8 - Audit and Assurance Revision Kit 2016

Audit procedures to be performed
(c)
Obtain a schedule to confirm the cost value of the defective batch of £0.85m and documentary proof
of the scrap value of £0.1m.
Discuss with management whether this is the only defective batch or whether there are likely to be
other batches affected.
Review quality control reports to assess the likelihood of other batches being affected and discuss
results of testing with technical team members at Panda.
Event 2: Explosion
An explosion shortly after the year-end has resulted in damage to inventory and property, plant and
equipment. The amount of inventory and property, plant and equipment damaged is estimated to be £0.9m.
It has no scrap value. Inventory and property, plant and equipment are therefore overstated by £0.9m. This
represents 16.1% of profit before tax and 1.6% of revenue, and is therefore material. The explosion
represents a non-adjusting event in accordance with IAS 10 Events after the reporting date. It therefore does
not require adjustment in the financial statements but should be disclosed as it is material.
Audit procedures to be performed
Obtain a schedule of the inventory and property, plant and equipment damaged in the explosion to
verify the value of £0.9m.
Visit the site where the explosion took place to assess damage.
Discuss with directors the need to make disclosure in the financial statements and review any draft
disclosure note drafted.
Inspect insurance agreement to assess whether any claim can be made on the insurance.
Effect on auditor’s report of the explosion
The directors should make disclosures in the financial statements about the explosion and the effect on
inventory and property, plant and equipment. This is because the amount involved is material and affects the
value of opening inventory and property, plant and equipment in the following financial year.
If the directors refuse to make the disclosure, then the auditors would modify the opinion on the financial
statements on the basis of a material misstatement. The opinion would be qualified ‘except for’ as the matter
is material but unlikely to be pervasive.
A ‘Basis for qualified opinion’ paragraph would be included in the auditor’s report, describing the auditor’s
reason for modifying the opinion and the effect of the explosion on the opening balances in the financial
statements for the following financial year. The ‘Basis for qualified opinion’ would be placed immediately
after the Opinion paragraph.
96 Rose
Text references. Chapters 4, 11, 15 and 16.
Top tips. Part (a) on the fundamental principles is a straightforward requirement, but (b) requires application of
knowledge to three issues.
In (b) it is important to note that you are being asked to ‘describe’ procedures rather than ’list them’ so you need to
include enough detail on each to obtain a full mark. Remember to stay focused on the procedures and avoid being
tempted to engage in a discussion of accounting issues, especially in relation to the reorganisation provision.
Easy marks. These were available in (a) for stating and explaining the fundamental principles.
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