Question 1

SECTION B: ADVISORY REPORT

You are an audit manager at Zenith LLP, responsible for the audit of CloudNova Co, a rapidly growing Software as a Service (SaaS) provider. The audit is for the year ended 31 December 202X. The fieldwork is nearly complete, and you are reviewing the audit files prior to drafting the auditor's report. CloudNova is planning an Initial Public Offering (IPO) in late 202Y.

You have identified two significant matters during your review:

Matter 1: Capitalized Development Costs
CloudNova has capitalized $8.5m of development costs relating to a new AI-driven analytics module. The module was officially launched to customers on 1 November 202X. However, management has not commenced amortization of these costs, arguing that the software is still undergoing 'minor bug fixes' and the useful life cannot yet be reliably estimated. Total total assets are $45m and profit before tax is $12m.

Matter 2: Going Concern and Subsequent Events
On 15 February 202Y, CloudNova's largest customer, representing 35% of recurring revenue, filed for bankruptcy. Consequently, CloudNova's cash flow forecasts show a severe cash deficit by August 202Y. Management has disclosed the customer's bankruptcy as a non-adjusting subsequent event in the notes to the financial statements but insists the company remains a going concern because they are 'confident' the upcoming IPO will raise sufficient capital. No adjustments have been made to the financial statements regarding the going concern basis.

REQUIREMENTS:
(a) In respect of Matter 1 (Capitalized Development Costs):
(i) Evaluate the matters you should consider before concluding on the accounting treatment. (5 marks)
(ii) Describe the audit evidence you would expect to find in the audit file to support your evaluation. (5 marks)

(b) In respect of Matter 2 (Going Concern and Subsequent Events):
Evaluate the implications for the completion of the audit and assess the impact on the auditor's report if management refuses to amend the financial statements or disclosures. (15 marks)

Accepted Answer

For part (a), calculate materiality first. Then apply IAS 38 rules regarding when amortization should start. For evidence, think about what documents prove the software was 'available for use'. For part (b), recognize the interaction between IAS 10 (Subsequent Events) and ISA 570 (Going Concern). Evaluate the feasibility of management's mitigation plan (the IPO). Finally, structure the reporting impact logically: what happens if they disclose properly? What if they don't? What if the basis of preparation is wrong?

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

1. Failing to calculate materiality for Matter 1.
2. Stating that the auditor should issue an 'Emphasis of Matter' paragraph for the going concern issue (ISA 570 was revised; it must be a 'Material Uncertainty Related to Going Concern' section).
3. Accepting management's assertion that the IPO will fix the cash flow without suggesting the auditor needs to verify the feasibility of the IPO.

How to approach this question

Full Answer

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