matters to discuss with management

Question 1

loan to key member of senior management of client is not disclosed in FS notes. loan is not material

Answer 1

-RP transaction as its between company and KMP
-material not by value but RP transactions are material by nature.
its likely that loan is being provided on favorable terms
-amount of loan, name of person and amount outstanding at the end of yr must be disclosed

must request them to adjust

Question 2

impact on audit opinion if management refuses to disclose

Answer 2

auditor will conclude FS are materially misstated due to lack of appropriate disclosure

it is material but not pervasive to FS as a whole

QUALIFIED opinion. stating that “except for matters identified, FS are fairly presented”

Question 3

provision for refunds from customers was reduced during the year from 7% to 4% even though refund levels are the same. mgmnt says new machines improvement but no evidence that new machine will reduce refund level

the amount by which provision is reduced is material to PnL not SOFP

Answer 3

-matter of judgement but
-change in rate must be supported by reasonable evidence, but audit team has not found any evidence of change in circumstances

-high risk area because release of provisions is a known earnings management technique by management. apply professional skepticism.
-ask management for evidence that machine will reduce refunds level. if not available, ask them to adjust to the old provision.

Question 4

what is management refuse to adjust provision

Answer 4

conclusion: FS materially misstated
-not pervasive to FS as a whole
-qualified opinion, “except for”..