【正确答案】The total estimated profit of $5 million which has been recognised in the statement of profit or loss represents 22·2% of profit for the year and is therefore material. The construction contract should be accounted for in accordance with IAS 11 Construction Contracts which states that when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. Darren Co has recognised 100% of the contract profit even though the contract is not yet complete. The contract activity period is 15 months, and by the year end the contract activity has been ongoing for seven months only. Therefore the profit which has been recognised appears to be overstated, and it seems to have been recognised too early. The audit firm should clarify Darren Co’s accounting policy on construction contracts and confirm the method which is used to determine the stage of completion of contracts at the reporting date. IAS 11 allows for a variety of methods to be used, for example, based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, or on surveys of work performed. Further evidence should be obtained to determine the stage of completion of this contract at the reporting date, to enable the appropriate amount of revenue, costs and profit which should be recognised to be determined. Further procedures should be performed, including: – The contract terms should be scrutinised for any terms relating to the completion of stages of the contract which may trigger the recognition of contract revenue. – Surveys of work performed by 31 January 2015 should be reviewed to estimate the stage of completion at the reporting date. – Correspondence with the customer should be read to confirm that the contract is progressing in a satisfactory way. Further audit evidence is required, but based on the time period in months as a rough guide, it appears that the contract is 7/15 complete, and therefore profit in the region of $2·3 million ($5 million x 7/15) can be recognised, and that profit is overstated by $2·7 million. The overstatement is material at 12% of profit before tax. If any necessary adjustment is not made, then profit is overstated by a material amount. This gives rise to a material misstatement, and the audit opinion should be modified. A qualified ‘except for’ opinion should be given, and the Basis for Qualified Opinion paragraph should explain the reason for the qualification, including a quantification of the misstatement. This is only one contract, and Darren Co typically works on three contracts at a time. Therefore further audit work may be needed in respect of any other contracts which are currently being carried out. If the same accounting treatment has been applied to other contracts, the misstatement may be even greater, and could potentially result in an adverse opinion if the accumulated misstatements were considered by the auditor to be both material and pervasive to the financial statements. In addition, Darren Co may have been using an inappropriate accounting treatment in previous years, and therefore there may be misstatements in the opening balances. This should be discussed with management to determine how contracts have been accounted for historically. Any errors which may be discovered should be corrected retrospectively, leading to further adjustments to the financial statements.

【正确答案】The amount claimed by Newbuild Co is material to the financial statements, representing 10·8% of total assets and 178% of profit before tax. It is also likely to be considered material by nature, as the possible payment is much larger than the amount of cash recognised in the financial statements at the year end. The implications for the going concern status of Darren Co should be considered. The matter should be discussed with management to obtain an understanding of how Darren Co could meet any necessary cash payment. Due to the potential for such a sizeable cash payment, management should confirm that should the amount become payable, the company has adequate resources to fund the cash outflow, for example, through the existence of lending facilities. The correct accounting treatment seems to have been applied. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if an amount is possible, rather than probable to be paid, then it is treated as a contingent liability, and a note to the accounts should be provided to describe the nature of the situation, an estimate of the possible financial effect and an indication of any uncertainties. To ensure that IAS 37 has been complied with, the auditor should review the contents of the note for completeness and accuracy. Events after the reporting date should also be considered, for example, legal correspondence should be reviewed, to confirm that the probability of payment has not changed by the time of the audit report being signed. Due to the size of the potential cash outflow, the auditor should consider including an Emphasis of Matter paragraph in the audit report. The purpose of this paragraph is to communicate a matter which is fundamental to the users’ understanding of the financial statements. ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report provides examples of situations which may give rise to the inclusion of an Emphasis of Matter paragraph, including uncertainty relating to the future outcome of exceptional litigation or regulatory action. The Emphasis of Matter paragraph should include a clear reference to the matter being emphasised and to the note to the financial statements where the matter is disclosed. The paragraph should also make it clear that the audit opinion is not modified in respect of this matter.

【正确答案】The key performance indicators (KPIs) included in an integrated report are by definition ‘other information’ according to ISA 720 The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements.Other information is defined as financial and non-financial information which is included, either by law, regulation or custom,in a document containing audited financial statements and the auditor’s report. According to ISA 720, the auditor is required to read the other information to identify material inconsistencies, if any, with the audited financial statements. There appears to be an inconsistency because the KPI states that profit before tax has increased by 20%, but the increase shown in the financial statements is 12·5%. The auditor must use professional judgement to determine if this is a material inconsistency. Assuming that this is deemed to be a material inconsistency, the auditor should consider whether the financial statements or the other information should be amended. The audit completion procedures, including final analytical review and review of all working papers will determine whether the profit before tax figures as stated in the financial statements need to be amended. From the discussion above, it is likely that some adjustment to profit before tax will be needed regardless of the inconsistent KPI. It is most likely that the KPI included in the integrated report should be changed in agreement with the movement in profit shown in the adjusted financial statements, and management should be asked to make the necessary change to the KPI. If management refuses to do this, and the material inconsistency remains, the auditor should include an Other Matter paragraph in the audit report to describe the material inconsistency. The Other Matter paragraph should be placed immediately after the Opinion paragraph and the Emphasis of Matter paragraph. The auditor may also seek legal advice if management refuses to amend the KPI to remove the material inconsistency. All of the matters affecting the auditor’s report should be discussed with those charged with governance.