Completing the Audit Discussion Case
it is Tuesday March 29th and you are to meet with the audit manager this afternoon to discuss five issues. some of which were identified through the 'audit completion checklist'.
A. In June 2016, J1 received a letter from the CRA, assessing the company's fiscal 2015 corporate tax return as filed. In October 2016, JI received a letter from the CRA questioning the company's treatment of two material transactions on the 2013 corporate return. The CRA is asking for more information, and JI is uncertain about the potential exposure.
B. The minutes to the November and December 2016 meetings of the Board of Directors, discuss the possible sale of one of JI's divisions. On March 23rd 2017, the B of D voted to accept an offer of $4.5 million for the division. The sale is expected to complete by the end of July 2017. The division to be sold usually contributes about 12% of JI's pre-tax income, and comprises about 16% of the company's net assets.
C. The company provided the audit manager with a copy of a contract signed on February 8th, 2017 with one of the company's major suppliers. The contract sets the price at which JI will purchase goods from the supplier over the next 2 years, and provides a schedule of expected order delivery dates and volumes. The terms of the contract reflect current market prices, and this contract replaces an existing contract which expired at the end of February 2017.
D. The manager mentions that she had read in the newspaper this morning that Angel Inc., a major customer of JI, has just filed for bankruptcy. Angel suffered an explosion at its plant in April 2016, and announced today that its operations were drastically underinsured, and it could not afford to rebuild. Previously, Angel had always paid JI on time, and the audit working papers had considered the $180,000 of accounts receivable from Angel at Dec 31, 2016 to be fully collectible.
E. This year's schedule of audit differences shows a total $45,000 overstatement of net income (a $25,000 identified error, and a $20,000 projected overstatement, as the result of sampling procedures). This was due to end-of-year expense accruals being understated. Materiality is $100,000. Last year the schedule of audit differences indicated a $30,000 understatement of net income. Last year the end-of-year expense accruals had been overstated.
REQUIRED:
1. For each of the five issues above, explain the impact on the financial statements and/or the audit report.
For each, you might consider:
- doing nothing
- doing more audit work
- asking the client to make changes to their financial statements
- providing something other than a 'clean' audit opinion
What date would you suggest the audit partner use for the report? E.g
March '15, 2017 - the date the audit team left
March 24, 2017 - the date of the engagement partner's review of the files
March 31, 2017 - the date the 2nd partner will review the file.
In general, do you think the auditor would prefer to date the report earlier? Or later? What date would you ask management to use on their representation letter?