Sycamore & Co. (September 2022 - Q3) : A. Audit Procedures To Be Performed On The Forecasts & Projections

Sycamore & Co.
[September 2022 – Q3]

A. Audit Procedures to be performed on the Forecasts & Projections
The following audit procedures can aid in the examination of the forecasts and the report on the
forecasts to be provided to the bank:
Discuss with management the assumptions made in the preparation of the forecasts &
projects, and their rationale behind each of the significant assumptions.
Obtain the documentation containing the assumptions and computations of the amounts &
figures in the forecast from management. Inspect the nature of these assumptions and
computations to confirm its validity.
Obtain the forecasts and prospective financial information prepared in the prior periods and
enquire with management the reasons for any significant variance in current forecasts.
Review the calculations made for Revenue & Income figures and check to confirm if the
forecasted figure is in line with the current economic conditions, through the use of variance
analysis & sensitivity analysis. (Juniper Co. has lost many key customers so the revenue &
profitability should have declined).
Enquire with management if impairment of the non-current assets has been computed and
included in forecasts. Obtain the accounting records in regards to the non-current asset and
the impairment calculations and cast to confirm its mathematical accuracy.
B. Ethical & Professional Issues – Attending Client Meeting with Bank

The management request for Sycamore & Co. to attend the meeting with the bank can lead to an
advocacy threat to Auditor Objectivity. As the Audit team is aware that Juniper Co. will not be able
to go ahead with the business restructuring without the finance from the loan, it is likely that the
Audit Firm/members promotes or supports Juniper Co. and justifies the reasonableness of the
forecasts in a bid to ensure the approval of the loan. This would compromise the objectivity & the
professional behaviour of the Auditor.
It could also be the case that the audit firm could be seen as supporting the client’s position by the
bank, despite the engagement team members not actively promoting the interests of Juniper Co.
This puts the audit firm at risk of Auditor Liability and increases the probability of Sycamore & Co.
being caught up in a lawsuit the bank may charge on Juniper Co. for non-payment of loan in the
future.
There may be a self-interest threat created as well, which could lead to the Audit firm attending the
meeting to ensure that Juniper Co. continues to remain an audit client in the future as well. The
degree of this threat will depend on the revenue earned from Juniper Co. as a percentage of Total
Audit Client fees.
Furthermore, the Audit Firm could be seen as assuming management responsibility for the forecasts
& projections by attending the meeting with the bank. The IESBA Code of Conduct & Ethics clearly
prohibits Audit firms from accepting any management responsibilities for the Audit Client.
The audit firm must weigh in the risks of attending the meeting on auditor objectivity &
independence and on the audit firm before taking a decision. If the threats cannot be reduced to an
acceptable level, the audit firm must politely decline the request.
C. Quality Management & Professional Issues

Sale of Operating Division
The refusal of management to provide written representations confirming their intent to sell the
operating division hampers the audit team’s ability to secure sufficient and appropriate audit
evidence.
It is the responsibility of Auditor to obtain reasonable assurance that the Financial Statements are
free from material misstatements. A lack of audit evidence due to the absence of information on the
sale agreement must lead to a modified audit opinion in case this sale is materially significant and
pervasive in nature. However, the audit report and opinion remains unmodified in regards to this
matter.
The audit team should take this opportunity to attempt to obtain further evidence and discuss with
management the auditor responsibility to collect sufficient & appropriate evidence by assuring the
management that the audit team understands the need for client confidentiality. The management
must be assured that the written representations and the details of the sale agreement will not be
made public, and they will only be used as part of Audit Documentation.
As per ISA 230 Audit Documentation, the auditor should prepare, on a timely basis, audit
documentation that provides a sufficient and appropriate record of the basis for the audit report. As
there is no information provided by management, the audit team should have performed additional
audit procedures on related areas to address the matter. However, no further actions were taken in
regards to this matter. This indicates poor professional due care & competence by the audit team.
The management refusal to provide information could indicate a lack of management integrity
which could lead to the need for greater professional scepticism to be exercised as this could mean
information provided in respect to other areas of material significance to the financial statements
could be misleading, incomplete or inaccurate as well.
Settlement of Claim made by Customer
The settlement made is highly material representing 25% of Poplar Co.’s profit.
As per IAS 10 Events after the reporting period, an Adjusting event is the event that arises after the
end of the reporting period, but there was evidence of conditions that existed at the end of the
reporting period. The financial statements should be adjusted for adjusting events.
This settlement was made on 5 April 20X5 while the auditor report was signed on 28 March 20X5
and the financial statements of Poplar Co. were issued on 12 April 20X5. Hence, keeping in line with
IAS 10, the settlement amount has to be recognised as a provision as opposed to a contingency
liability or a disclosure note of a contingent liability.
The audit team has not taken any actions in this matter indicating the non-fulfilment of auditor
responsibilities and the quality of the audit work and audit report can be seen as compromised.
The audit report remains unmodified in this matter whereas the settlement being recognised as a
contingent liability instead of provision should have led to a modified opinion on the Auditor’s
report. As a result, the auditor’s report does not present an accurate & complete view on whether
the Poplar Co. financial statements are free of errors or any material misstatements.
In addition, the audit team has not performed any additional audit procedures in this matter
indicating poor quality audit work.

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Sycamore & Co.

[September 2022 – Q3]

B. Ethical & Professional Issues – Attending Client Meeting with Bank

C. Quality Management & Professional Issues

Settlement of Claim made by Customer

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