To: Super-E Inc.

Re: Assessment

Overall financial statement level risk

Factors that impact the risk of material misstatement at the overall financial statement level
(OFSL) are as follow,
 Internal department has been understaffed for much of the year, which has the potential to
result in increased errors as the current employees are behind on tasks, which may result
in attention to detail errors. This increases OFSL risk.
 This is the first year auditing SI, however, the previous auditor’s file for SI, has suggested
that there were limited errors identified in previous years. This decreases OFSL risk.
 The CEO is very focused on increasing profitability, share price and earnings per share
and tends to reward decisions made with these measures in mind. Employees that focus
on rewards/compensation may operate/make decisions or could potentially manipulate
financial statements appear more favourable. This increases OFSL risk.

Recommendation: As per the above assessment, the risk of material misstatement at the OFSL is
high.

Financial reporting issues

Investments
Issue: The CFO would like any unrealized gain or loss on the share portfolio to not impact net
income and is wanting to know if his is an option once the appropriate accounting treatment is
defined.
Analysis: As per IFRS 9,
Passive investments in financial assets refer to investments that are made for the purpose of
earning a return on the investment until cash is needed at a future date.

Passive investments include short-term investments of idle cash and longer-term investments to
fund future expansion or longer-term goals.

Passive investments fall into three categories of financial assets:

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 • fair value through profit or loss
• amortized cost
• fair value through other comprehensive income

Fair value through profit or loss (FVTPL) includes the following:

1. Assets not qualified to be classified at amortized cost or at fair value through
other comprehensive income (FVTOCI)
2. Assets classified as held for trading. A held-for-trading asset is one that meets one
of the following criteria:
• It is acquired or incurred principally for the purpose of selling or
repurchasing it in the near term.
Criteria Met. Shares purchased for short-term increase in value/gain upcoming
year.
• On initial recognition, it is part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of a
recent actual pattern of short-term profit-taking.
Criteria Met. To be sold in the following year for gain.
• It is a derivative (except for a derivative that is a financial guarantee contract
or a designated and effective hedging instrument).
N/A
3. Assets that, upon initial recognition, are designated as FVTPL. An entity may use
this designation only when it significantly reduces a measurement or recognition
inconsistency

Amortized cost
This category includes financial assets held in order to collect contractual cash flows, when
the cash flows consist solely of principal and interest.
Criteria not met.

Fair value through other comprehensive income

This category includes:
• Equity investments designated as FVTOCI: This is only allowed for investments
that do not qualify as held for trading, which must be classified as FVTPL. This
classification is irrevocable and is made at the time of purchase.
Criteria not met, shares are held for trading.
• Debt instruments with cash flows that are solely payments of principal and
interest: The instrument is held for the purpose of collecting cash flows and to
sell the instrument.
Criteria not met.

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 Recommendation: From the above analysis, SI should report the investment portfolio under
FVTPL, since the investment met the criteria for held for trading.

Conclusion: As the investment is reported as FVTPL, recording unrealized gain/losses are to

flow though profit/loss, which will ultimately impact net income. A journal entry is necessary to
adjust for any gains/losses for year-end. (Please see exhibit).

Retirement of Bond

Issue: The bookkeeper has recorded a journal entry to retire bonds. The issue is, whether this is
the correct treatment of the transaction.
Handbook: As per IFRS 9, An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when, and only when, it is extinguished — ie
when the obligation specified in the contract is discharged or cancelled or expires.
An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability and
the recognition of a new financial liability. Similarly, a substantial modification of the terms of
an existing financial liability or a part of it (whether or not attributable to the financial difficulty
of the debtor) shall be accounted for as an extinguishment of the original financial liability and
the recognition of a new financial liability.
The difference between the carrying amount of a financial liability (or part of a financial
liability) extinguished or transferred to another party and the consideration paid, including any
non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.
Recommendation: As per IFRS 9, the journal entry on October 1 for the bond retirement should
be reversed, which will increase net income by $5,191,667. An adjusting entry (see exhibit)
should be recorded for the bond retirement and any gain/loss associated with the retirement.

Material misstatement at the assertion level

For the Financial reporting issues above, the risk of material misstatement transactions account
include,
 Complex transactions or calculations are difficult to account for and are, therefore,
susceptible to error. If we were to look specifically at Investments and Bonds, these
transactions would fall into the complex and perhaps a non-routine category which would
result in the risk of material misstatement to be moderate/ high do to the complex nature
of the transaction and if the subsequent/adjusting entry’s are not performed at year-end or

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 the initial the value recorded is incorrect would result in the asset being
overstated/understated. This increases the RMM at the assertion level
 If the correct accounting treatment is not used, the gains/losses for the investment may
not be recorded as per IFRS requirements. This increases the RMM at the assertion level.

Going concern

Issue: New information has been provided that casts doubt on SI ability to continue operating as
a going concern.
Analysis: As per CAS 570, The objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of management's use of the going concern basis of accounting in
the preparation of the financial statements;
(b) To conclude, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the
entity's ability to continue as a going concern; and
(c) To report in accordance with this CAS.

When performing risk assessment procedures as required by CAS 315, 3 the auditor shall
consider whether events or conditions exist that may cast significant doubt on the entity's
ability to continue as a going concern. In so doing, the auditor shall determine whether
management has already performed a preliminary assessment of the entity's ability to
continue as a going concern
(a) If such an assessment has been performed, the auditor shall discuss the assessment
with management and determine whether management has identified events or
conditions that, individually or collectively, may cast significant doubt on the entity's
ability to continue as a going concern and, if so, management's plans to address
them.
 Management has preformed an assessment of SI’s ability to operate, as a
going concern but did not include/consider the new information in the
assessment.
(b) If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of
accounting, and inquire of management whether events or conditions exist that,
individually or collectively, may cast significant doubt on the entity's ability to
continue as a going concern.
Going concern risks,
 Lawsuit foiled against SI by competition, which is likely to result in material damages.
This lawsuit payout will decrease net income.
 Due to the lawsuit, SI has incurred reputation damage. The reputation damage could
result in loss of customers, which would decrease sales and thus net income.

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  Share price has declined due to the lawsuit.
 Cash tied up in inventory that may not sell. This would result in loss of sales/loss of Net
Income.
 Account receivable collection has been slow which will potentially impact SI ability to
settle debts.
 The bank has been reluctant to extend operating line, which again could impact SI ability
to settle liabilities.

Additional Audit Procedures When Events or Conditions Are Identified

As per CAS 570, If events or conditions have been identified that may cast significant doubt
on the entity's ability to continue as a going concern, the auditor shall obtain sufficient
appropriate audit evidence to determine whether or not a material uncertainty exists related to
events or conditions that may cast significant doubt on the entity's ability to continue as a
going concern through performing additional audit procedures, including consideration of
mitigating factors. These procedures shall include:)
 (a) Where management has not yet performed an assessment of the entity's ability to
continue as a going concern, requesting management to make its assessment.
 (b) Evaluating management's plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation and
whether management's plans are feasible in the circumstances.
 (c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management's plans for future actions:
 (i) Evaluating the reliability of the underlying data generated to prepare the forecast;
and
 (ii) Determining whether there is adequate support for the assumptions underlying the
forecast.
 (d) Considering whether any additional facts or information have become available
since the date on which management made its assessment.
 (e) Requesting written representations from management and, where appropriate, those
charged with governance, regarding their plans for future actions and the feasibility of
these plans.

Recommendation: The auditor should review the risks and proceed with additional audit
procedures before concluded on the status of SI.

Audit report

I have preformed the additional audit work and in my opinion the going concern assumption is
not appropriate.

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 As management has disagreed with my opinion of going concern and prepared the financial
statements based on a going concern assumption, I will review the financial statements and
determine whether the financial statements are presented on a liquidation basis and whether there
is adequate disclosure for the users of the financial statements.
If the statements are presented appropriately, an unqualified opinion will be issue and will
include a section under the heading "Material Uncertainty Related to Going Concern" in the
audit report to:
• highlight the lack of the going-concern assumption
• highlight that the financial statements are prepared on a liquidation basis

If I considered the disclosure to be inadequate, I will issue an adverse opinion.

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