ACC302 – Auditing and Assurance Assessment 3: Case study
* According to AUS 702 Auditing Standard (paragraph 25-30), there are four main types of audit reports: unqualified opinion report, qualified opinion report, adverse opinion report, disclaimer opinion report.
1/ First, the mismatch between the re-evaluated useful lives of houses is not necessarily derailed from WorldCom.Social’s asset management policy. There are two scenarios that should be considered:
- When the company maintains and upgrades houses on the yearly basis, they may also have extended the useful lives of the assets that leads to the total useful lives of assets growing up to 50 years with the remaining useful lives equal or less than 30 years. Since the remaining useful lives of assets/ properties are equal or less than 30 years which satisfies the company’s asset management policy, this matter does not conclude an issue. Unqualified opinion report is issued.
- In case the remaining useful lives are above 30 years (up to 50 years in this case), asset management policy needs to be revised accordingly. Otherwise, qualified report on this particular area should be issued as the company may want to use subjective judgment for extending useful lives of assets to reduce current depreciation expense.
Second, when demolishing an asset/ property, the gains or losses arising from the derecognition has to be included in Income Statement. Gains/ losses are derived from the estimated economic value of the asset/ property in the foreseeable future if otherwise (assets/ properties remain in use). Writing off accumulated depreciation of the asset/ property is necessary. In this situation, since WorldCom.Social Ltd asset management policy are only applicable for assets/ properties which have maximum useful life of 30 years and the demolished house which was built in 1989 that implies the asset/ property has been more than 30 years in operation, the depreciation expense of this house should have ceased to exist on Income Statement and the accumulated depreciation which should equal to reported asset’s value should have remained the same as it was two years ago (assuming no upgrading/ extended of useful life of this asset). When demolishing the house, writing off the asset on Balance Sheet is required, there will be two different scenarios for gains/losses:
- Estimated economic value of the house in the foreseeable future is zero, no gains/ losses are recognized.
- Estimated economic value of the house in the foreseeable future is above zero, losses are recognized on Income Statement.
2/ Adverse opinion report should be issued in this case. This is because according to AASB 127, under paragraph 10 which lists four criterion that allows a parent to not consolidate its financial statements with their wholly-own subsidiaries, Enron Ltd and its subsidiary Kingsemi Co., Ltd do not satisfy any of them. In addition, paragraph 17 also presents clearly that “a subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other entities within the group”. Since Enron does not account its subsidiary in its consolidated reports but rather disclose on notes (even with detailed information) which leads to the information from consolidated reports as a whole distorted, adverse report should be issued.
In addition, even in case when Kingsemi Co., satisfies one of creation in paragraph 10 that allows Enron Ltd to report that subsidiary separately from its consolidated reports, the detailed information regarding intercompany transactions should not be disclosed and shall be eliminated in (AASB 127, paragraph 20).
3/ Although according to AASB 101, paragraph 23 and 24,a going concern of the business (ability of the business to continue operating) in the foreseeable future should be assessed by management and mentioned in financial statements, the unqualified audit opinion report should be reported in this case. This is because according to International Accounting Standards 1 (IAS), the foreseeable future that management shall look ahead for assessing their business’ going concern is 12 months since financial statements are released and under Mr Hugo’s estimate as well as confirmation from a reliable source (land surveyor), the vein presently mining will last at least 13 months at the least and 17 months at the most which implies the ability of Newmont Goldcorp Pty Ltd, to continue operating in more than 12 months. From this perspective, unqualified audit opinion report is released.
4/ According to AASB 118, paragraph 18, revenue is only recognized when there is probable economic benefits flowing to the entity. In this case, auditors have already been satisfied with the revenue recorded which implies the satisfaction of revenue recognition activity to accounting regulation.
Another aspect needs to be considered is the collectability of the revenue. Under AASB7, IFRS 9 and ISA 39, in order to account for the potential losses from the situation in which the company is unable to collect accounts receivable (revenues) from their customers, allowance should be established. Allowance is created by management when the company is expecting credit loss from its customers who are expected to be unable to pay off the debt. From this definition, there are two possible scenarios:
- First, CARE Australia has already taken into account internal control’s concern and established allowance for doubtful accounts. In this case, further investigation on whether the amount of allowance is fairly estimated and immaterial to financial results of the company or not. For the sake of the argument, assuming allowance is fairly accounted for, then unqualified audit opinion report is issued.
- Second, CARE Australia has not accounted for credit losses arising from doubtful accounts. In this case, auditors should make estimation for the allowance and evaluate whether such amount is material to financial results. If it has significant impact, qualified opinion report should be issued. Otherwise, unqualified opinion report is issued.