ExpertACCA · Question 18 · Review and Reporting
CASE SCENARIO: CyberShield Solutions
CyberShield Solutions provides cybersecurity consulting and monitoring services. You are the audit manager for the year ended 28 February 20X8. The audit is nearing completion, and the auditor's report is due to be signed on 15 May 20X8.
On 10 April 20X8, CyberShield announced that its own internal servers had been breached by hackers in January 20X8, compromising sensitive data of several major clients. Consequently, on 25 April 20X8, their largest client, 'MegaBank', which accounts for 40% of CyberShield's revenue, filed a $10 million lawsuit for negligence and immediately terminated their contract.
CyberShield's management has refused to adjust the financial statements for the lawsuit, arguing it happened after the year-end. They have only provided a brief disclosure in the notes. Furthermore, management insists the company is a going concern, despite the loss of MegaBank, stating they plan to win new clients to replace the lost revenue.
REQUIREMENTS:
(a) Explain whether the lawsuit filed by MegaBank is an adjusting or non-adjusting subsequent event, and describe the audit procedures you should perform regarding the lawsuit. (8 marks)
(b) Identify the indicators that CyberShield may not be a going concern, and describe the audit procedures you should perform to assess the going concern status. (7 marks)
(c) Assuming management refuses to make any adjustments for the lawsuit and you conclude that the going concern basis is appropriate but a material uncertainty exists (which is not adequately disclosed), describe the impact on the auditor's report. (5 marks)
CASE SCENARIO: CyberShield Solutions
CyberShield Solutions provides cybersecurity consulting and monitoring services. You are the audit manager for the year ended 28 February 20X8. The audit is nearing completion, and the auditor's report is due to be signed on 15 May 20X8.
On 10 April 20X8, CyberShield announced that its own internal servers had been breached by hackers in January 20X8, compromising sensitive data of several major clients. Consequently, on 25 April 20X8, their largest client, 'MegaBank', which accounts for 40% of CyberShield's revenue, filed a $10 million lawsuit for negligence and immediately terminated their contract.
CyberShield's management has refused to adjust the financial statements for the lawsuit, arguing it happened after the year-end. They have only provided a brief disclosure in the notes. Furthermore, management insists the company is a going concern, despite the loss of MegaBank, stating they plan to win new clients to replace the lost revenue.
REQUIREMENTS:
(a) Explain whether the lawsuit filed by MegaBank is an adjusting or non-adjusting subsequent event, and describe the audit procedures you should perform regarding the lawsuit. (8 marks)
(b) Identify the indicators that CyberShield may not be a going concern, and describe the audit procedures you should perform to assess the going concern status. (7 marks)
(c) Assuming management refuses to make any adjustments for the lawsuit and you conclude that the going concern basis is appropriate but a material uncertainty exists (which is not adequately disclosed), describe the impact on the auditor's report. (5 marks)
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