ACCA F8 - Audit and Assurance Revision Kit 2016

(a)
(b)
(c)
Procedures to undertake in relation to the uncorrected misstatement
– The extent of the potential misstatement should be considered and therefore a large sample of
inventory items should be tested to identify the possible size of the misstatement.
– The potential misstatement should be discussed with Clarinet Co’s management in order to
understand why these issues are occurring.
– The misstatement should be compared to materiality to assess if the error is material individually. If
not, then it should be added to other errors noted during the audit to assess if in aggregate the
uncorrected errors are now material.
– If material, the auditors should ask the directors to adjust the inventory balances to correct the
misstatements identified in the 2014 year end.
– Request a written representation from the directors about the uncorrected misstatements including
the inventory errors.
– Consider the implication for the audit report if the inventory errors are material and the directors
refuses to make adjustments.
Going concern indicators
• A new competitor, Drums, has entered the market and gained considerable market share from
Clarinet, including one of the company’s larger customers. There is a risk that this sizeable loss of
market share will result in a significant loss of future revenues, as well as reducing future cash flows.
• A number of Clarinet’s specialist developers have left the company to join Drums, leaving a skills gap
that is difficult to replace. Clarinet’s business is driven by specialist skills and innovation. If the
developers cannot be adequately replaced, this will have a negative impact on Drum’s ability to keep
pace with its competitors. At a time when the company is looking to develop new products, skilled
staff is especially crucial. An inability to distinguish itself from the competition is likely to contribute
to a further erosion of Clarinet’s revenue.
• Clarinet’s main supplier has ceased to trade. If Clarinet is unable to source the specialist equipment
elsewhere, this will have a direct impact on Clarinet’s ability to continue to trade. Even if other
suppliers can be found, this may be at higher prices and on less beneficial terms, increasing
Clarinet’s cost of sales and further reducing future cash flows.
• Clarinet’s shareholders have declined to invest further in new product development. Clarinet’s
shareholders may be concerned that investment in the company has become too risky, or may not
provide adequate returns. This may indicate doubts in relation to the company’s ability to generate
healthy profits in the future, or possible liquidity problems. The failure to obtain equity funding would
force Clarinet to either abandon/delay its plans to develop new products, or seek debt funding for the
project. Opting for the latter would increase the company’s finance costs, further reducing profit, and
worsen its liquidity position.
• Clarinet’s overdraft has increased significantly over the year, and is due to be renewed next month.
This suggests liquidity problems. If the bank does not renew the overdraft, and the company fails to
obtain alternative finance, it may not be able to continue to trade.
• Clarinet’s cash flow forecast shows a significantly worsening position over the next 12 months. This
will put a further strain on the company’s cash flows and liquidity. The company’s ability to generate
more cash and revenue is dependent upon their ability to bring new products to market, but product
development requires a high level of investment and Clarinet may not have sufficient cash to survive
until the new products are launched.
Audit procedures to assess going concern
• Review Clarinet’s cash flow forecast. Evaluate the underlying data and assumptions to assess
whether they are reasonable, and discuss the assumptions with management.
• Considering whether any additional facts or information have become available since the date
management made its assessment, and determine the impact such information would have on the
cash flow forecast.
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